For the 2025 U.S. federal tax year, a sole proprietor with $40,000 of net self-employment earnings pays $9,000 in premiums for a health insurance policy covering themselves and their spouse, and is not eligible to participate in any subsidized employer-sponsored health plan through either their own or their spouse's employment. Under IRC Section 162(l), how is this premium payment treated?
- It is deductible only as an itemized deduction on Schedule A, subject to the 7.5%-of-AGI floor that applies to medical expenses generally
- It is deducted against self-employment tax on Schedule SE, reducing the sole proprietor's net earnings from self-employment for purposes of computing SE tax
- It is deductible above the line in computing adjusted gross income, without regard to the AGI floor that applies to itemized medical expenses, but the deduction cannot exceed the sole proprietor's net earnings from the business under which the plan is established
- It is deductible above the line without any limitation tied to the business's net earnings, since IRC Section 162(l) treats the premiums the same as any other ordinary and necessary trade or business expense reported directly on Schedule C
Why C? And why not the others?
Correct answer: C. It is deductible above the line in computing adjusted gross income, without regard to the AGI floor that applies to itemized medical expenses, but the deduction cannot exceed the sole proprietor's net earnings from the business under which the plan is established
IRC Section 162(l) allows a qualifying self-employed individual to deduct 100% of the premiums paid for health insurance covering themselves, their spouse, and dependents as an above-the-line deduction in computing adjusted gross income, provided the individual (or their spouse) is not eligible to participate in a subsidized employer-sponsored health plan; the deduction is capped at the net earnings from self-employment generated by the specific business under which the plan is established, so it cannot create or increase a business loss. The option requiring the premiums to be claimed only as an itemized medical expense is wrong because Section 162(l) specifically removes this deduction from the itemized-deduction, AGI-floor regime and allows it above the line instead. The option treating the premiums as an offset against self-employment tax on Schedule SE is wrong because the deduction reduces adjusted gross income for income tax purposes but does not reduce net earnings from self-employment for computing SE tax. The option removing any limitation tied to business earnings is wrong because Section 162(l) expressly caps the deduction at the net profit of the business maintaining the plan, unlike an ordinary Schedule C expense that is not subject to such a cap.
Source: Instructions for Form 7206, Self-Employed Health Insurance Deduction (irs.gov)