Health insurance premiums are partially deductible, sometimes even 100% deductible if I recall correctly, at varying percentages over the next 10 years as different phase ins and phase outs of the tax laws occur. The deduction is right there on page 1 of your 1040. Line 30 for 2002. From HIPAA of 1996: "Tax deductions for premiums purchased by people who are self-employed would be gradually increased over a 10-year period--40% in 1997, 45% in 1998 through 2002, 50% in 2003, 60% in 2004, 70% in 2005, and 80% in 2006. " The Bush tax cut may have accelerated or increased these percentages. And you can't contribute to a 401k unless you have earned income. Sch. D income is not earned income. You could form an entity and pay yourself a salary if you want to convert capital gains into earned income. Or pay your spouse a salary out of your Sch. C sole proprietorship. See greencompany.com for some informative pages.
Foz, I went through the 1040 Form instructions and on page 33 they have a worksheet for calculating self-employed health insurance deduction. You have to have earned income to get this deduction and it was 70% for 2002. Thanks.
Aha. Thanks, chinook. That rings a bell that premiums are only deductible against earned income. That makes the strategy of hiring your spouse double effective (and providing her and her family with deductible health coverage). Or forming an entity and paying yourself a salary (to turn cap gains into earned income.