New Jersey Life and Health State Practice Exam

What are the tax ramifications of health insurance premiums paid by a self-employed individual with an S corporation?

1. 50% of health insurance costs can be deducted

2. 100% of health insurance costs can be deducted from gross income

3. No deduction allowed

4. Health insurance premiums are considered taxable income

The correct answer is: 100% of health insurance costs can be deducted from gross income

A self-employed individual with an S corporation can indeed deduct 100% of their health insurance premiums from their gross income. This provision is designed to alleviate the financial burden of purchasing health insurance for self-employed individuals, recognizing the cost incurred in obtaining necessary health coverage. By allowing a full deduction, it encourages self-employed individuals to secure health insurance without the penalty of an increased tax burden. This deduction applies whether the premiums are paid directly or reimbursed under a plan established by the S corporation. It effectively reduces the taxable income of the individual, enabling better financial planning and the ability to allocate resources differently. This is particularly beneficial because it recognizes the unique financial challenges faced by those who are both employers and employees within an S corporation structure. Other options may misrepresent the actual benefits available. For instance, a partial deduction would not fully recognize the health insurance cost burden, and stating that no deduction is allowed or that health insurance premiums are considered taxable income could lead individuals to forgo essential insurance or mismanage their tax liabilities. The full deduction clarifies the goal of fostering health insurance accessibility for self-employed individuals.