South Carolina Insurance Practice Exam

What is the tax implication for an S corporation owner regarding health insurance premiums paid for the tax year?

1. 50% of health insurance costs can be deducted

2. 100% of health insurance costs can be deducted

3. No deduction allowed

4. Health insurance is treated as dividend income

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

For an S corporation owner, the correct understanding is that 100% of health insurance costs can be deducted as long as certain conditions are met. In an S corporation setup, the health insurance premiums paid on behalf of the shareholders (who are also employees) are treated as wages on the shareholder's W-2 form. This means that the premiums are included in the shareholder's taxable income, but the S corporation gets to deduct the full amount of the premiums as a business expense. This full deduction is beneficial because it affects the overall tax liability of the owner—it allows for a complete offset against the income reported on their tax return. As a result, while the premiums are taxable to the owner, they also receive the deduction, leading to a situation where they effectively benefit from the health insurance premiums both through the tax deduction and potentially lower income taxes due to the increased deductible amount. Other options do not accurately represent the tax treatment of health insurance premiums for S corporation owners. For example, a 50% deduction is not applicable as the full 100% is allowed. Saying no deduction is allowed is also inaccurate because proper treatment enables a deduction. Finally, classifying health insurance as dividend income misrepresents the nature of these premiums given that they are treated