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Adjustments for the Self Employed

You can claim the following adjustments only if you are self employed. See Chapters 14 and 17 of the free tax course for a discussion of self employment and the tax consequences of being self employed.

One half of self employment tax

If you are self employed, you can deduct one half of the self employment tax you owe. As discussed in Chapter 17 of this free tax course, self employment tax is your social security and Medicare tax that you figure on Schedule SE, Self Employment Tax. On line6 of the short Schedule SE or line 13 of the long Schedule SE, you multiply the amount of your self employment tax by 50%. To claim this adjustment, enter the amount from line 6 or 13 of Schedule SE on line 27 of Form 1040. There is no limit to the amount you can deduct.

Self Employed Health Insurance Deduction

If you pay health insurance premiums for an insurance plan established under your business, you may be able to deduct the premiums you paid for yourself, your spouse, and your dependents as an adjustment to income. The adjustment is claimed on line 29 of Form 1040. To qualify for this deduction, you must have had net profit for the year in that business. You cannot figure this deduction using payments made for your business health insurance in any month that you (or your spouse) were eligible to particulate in an employer paid health plan, whether or not you participated.

You can include premiums for long term care insurance for yourself, your spouse, or your dependents when figuring this deduction. The amount you can include is limited by the lesser of the amount you pay or set amounts based on your age.

Keogh and Self Employed SEP and SIMPLE Plans

Keogh, SEP and SIMPLE Plans are retirement plans for small business owners. Each type of plan has different contribution and deduction rules. The amount you can deduct on line 28 of Form 1040 depends on the plan you have established. See Publication 560, Retirement Plans for Small Business, for more information.

The amount you can  deduct for this adjustment is limited to the smaller of 100% of the cost of the health insurance or your net profit form your business minus adjustments for half of your self employment tax and for self employed SEP, SIMPLE and other qualified plans. Any amount you cannot take as an adjustment to income on line 29 of Form 1040 is deductible as a medical expense deduction on Schedule A.


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