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Since you are self employed during 2011 it would be to your advantage to take the health insurance deduction as an adjustment to income on line 29 of your 1040 as an adjustment to income as opposed to an itemized deduction on schedule A.
The $3500 you paid toward health insurance will reduce your gross income by this amount but will not reduce your self employment income, so for schedule SE you will not get the reduction in self employment income.
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since it does not decrease my SE income. I would be able to contribute more to my IRA-SEP?