A taxpayer operates a consulting business as a sole proprietorship. In the current year, the business had net income of $100,000. The taxpayer paid $6,000 for health insurance for themselves and their family. How is the health insurance payment treated for tax purposes?

Answer options:

Deductible on Schedule C, reducing self-employment tax.

Deductible as an adjustment to income (above-the-line) on Form 1040.

Deductible only as an itemized deduction subject to the 7.5% floor.

Not deductible.

How to approach this question

Identify the specific line item for Self-Employed Health Insurance (Adjustment to Income).

Full Answer

B.Deductible as an adjustment to income (above-the-line) on Form 1040.✓ Correct

Self-employed health insurance premiums are deductible as an 'adjustment to income' (above-the-line) on Form 1040. They are NOT deducted on Schedule C, so they do not reduce the self-employment tax liability. They are deducted to arrive at AGI.

Common mistakes

Putting the deduction on Schedule C (which would incorrectly lower SE tax).

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