Lorenzo is self employed with an S corporation. He is unmarried and had a net profit for the year. What are the tax ramifications of his health insurance premiums paid for the year?

• A. 50% of his health insurance costs can be deducted
• B. 25% of his health insurance costs can be deducted
• C. 100% of his health insurance costs can be deducted from his gross income
• D. 0% can be deducted

Answer: (C)

The key idea is the self-employed health insurance deduction. If you’re self-employed and have net earnings from your business, you can deduct 100% of the health insurance premiums you paid for yourself, your spouse, and your dependents as an above-the-line deduction. This means the premium reduces your gross income to arrive at your adjusted gross income, even if you don’t itemize deductions.

In Lorenzo’s case, he has net profit from his self-employment, so he is eligible to deduct the full amount of his health insurance premiums for the year. This deduction lowers his gross income for tax purposes, which can also influence other tax calculations that use AGI.

The other options aren’t correct because there isn’t a 50% or 25% limit for this deduction, and with net profit, a 0% deduction would not apply. The important point is that the self-employed health insurance deduction, when there is net earnings, allows a full 100% deduction of the premiums paid.