Maryland Life and Health Insurance License Practice Exam

Lorenzo, who is self-employed with an S corporation, pays health insurance premiums. What are the tax implications for him?

1. He can deduct 50% of his health insurance costs

2. He cannot deduct any of his health insurance costs

3. 100% of his health insurance costs can be deducted from his gross income

4. His insurance premiums are taxable income

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

Lorenzo, as a self-employed individual with an S corporation, can deduct 100% of his health insurance premiums from his gross income. This provision allows self-employed individuals to take a deduction for health insurance costs, including amounts paid for medical care, dental care, and long-term care insurance, among other eligible expenses. The deduction is available regardless of whether Lorenzo itemizes deductions or uses the standard deduction. This significant benefit serves to reduce his taxable income, providing a practical financial advantage. The IRS allows this full deduction to help self-employed individuals afford health care, which can often be a substantial expense. The other options present limitations or inaccuracies concerning the deductibility of health insurance costs that do not apply in Lorenzo's situation. The deduction amount being limited to only 50% or not at all does not reflect the actual tax treatment available to him as outlined under current tax laws. Since he can deduct all of his insurance premiums, this amounts to a considerable potential tax savings, further emphasizing why the correct understanding of these provisions is vital for those in similar self-employed positions.