If you're a sole proprietor, partner, or member of a limited liability company (LLC), you re considered self-employed for tax purposes. As such, you probably have to pay your own health insurance premiums. The good news is you can probably deduct them on page 1 of Form 1040, which is a favorable deal compared to what happens to everyone else who pays their own premiums. Here s the scoop on this self-employment tax break.

The general rule says individuals must combine their health insurance premiums with other out-of-pocket medical expenses. To the extent the total exceeds 7.5% of adjusted gross income (AGI), you can claim the excess as an itemized deduction. Unfortunately, the 7.5%-of-AGI hurdle can be difficult if not impossible to clear. And even if you do clear it, you get no tax savings unless you itemize.

Thankfully, eligible self-employed individuals are allowed to deduct their health insurance premiums, including payments for dental coverage, on page 1 of Form 1040 (on line 29 of the 2009 version of the form). The page 1 deduction reduces your taxable income (and your tax bill) whether you itemize or not. And you don t have to worry about the 7.5%-of-AGI hurdle. Finally, the page 1 deduction lowers your AGI, which lowers the odds that you ll fall victim to all those nasty phase-out rules that can reduce or eliminate valuable tax breaks (like the child tax credit, the two higher-education tax credits, and many other goodies).

Eligibility rules

If you re eligible, you can claim the beneficial page 1 deduction for heath premiums to cover you, your spouse, and your dependents. Here are the rules.

1. Eligibility Is Determined Month-by-Month
You can only claim the page 1 deduction for premiums paid for months during which you re ineligible to participate in any subsidized health plan offered by an employer of you or your spouse. For instance, say you did not participate in any employer-subsidized plan for the last nine months of the year because you quit your job to go into business for yourself as a sole proprietor. As long as you also did not participate in any subsidized plan offered by your spouse s employer, you re good to go for the page 1 deduction deal (assuming no problem with the earned income limitation explained next).

2. Earned Income Limitation
The page 1 health insurance deduction can t exceed the earned income from the self-employed business activity for which you establish the health coverage. For example, if you have a sole proprietorship with Schedule C net taxable income of $10,000, your page 1 deduction can t exceed $10,000. If you have a farm with Schedule F net income of $8,000, your page 1 deduction can t exceed $8,000. You get the idea.

The IRS says you can take out the health insurance in the name of your business or (more likely) in your own name. In the latter case, please put a piece of paper in your tax records file stating that you established the health coverage for a specific self-employed activity (for example, your Schedule C consulting operation).

Partners and S corporation shareholders can cash in too

If your business is a partnership and you pay your own health premiums, you can claim the page 1 deduction for those premiums. Ditto if you re employed by your own S corporation, own more than 2% of the company stock, and pay your own premiums (even though you re technically not self-employed in this case).

According to the IRS, you must furnish proof of the premiums you paid to the partnership or S corporation, and the entity must reimburse you. Then the partnership or S corporation must follow some tricky tax accounting procedures which we need not go into here. The important thing to know is that when all is said and done, you will have the right to claim the tax-saving page 1 deduction for your premium expenses.

Keep in mind, these scenarios are also subject to the month-by-month eligibility and earned income limitations described above.

Long-term-care premiums get the same tax-favored deal

As a bonus, you can also claim the page 1 self-employed health insurance deduction for qualified long-term-care (LTC) insurance premiums. However, you cannot deduct more than the age-based limits shown in the following table. To get the deduction limit for the applicable year, use the age of the covered person as of the end of that year.

The rule prohibiting participation in an employer-subsidized health plan is applied differently to LTC insurance premiums. For example, you as a self-employed person can claim the page 1 deduction for qualified LTC premiums (subject to the age-based limit) even though you re covered under a health plan through your regular job or your spouse s job as long as that plan doesn t include LTC coverage.