Self Employeed Health Insurance Deduction

Sounds like it, if he has sufficient net income from self employment to cover the health insurance premiums.

Thank you for your reply.

I still wonder what the IRS means when they state "the insurance plan must be set up under the taxpayer?s business". This insurance is simply set up under the taxpayer's and his spouse's name as individuals.

The taxpayer is retired and has the following four medical policys.

1. Medicare deducted from taxpayer and spouses's social security check.
2. Medicare Part B supplement.
3. Prescription drug supplement.
4. Cancer policy that pays medical bills only in the case of cancer.

Would you think any or all four of these premiums would qualify for the self employeed health insurance deduction?

set up under the taxpayer?s business". This insurance is simply set up under the taxpayer's and his spouse's name as individuals.

employeed health insurance deduction?

The IRS answered the question regarding the words "established under the taxpayer's business" in an Office of Chief Counsel Memo in 2005. Here's the relevant quotation:

1) A sole proprietor who purchases health insurance in his or her individual name has established a plan providing medical care coverage with respect to his or her trade or business, and therefore may deduct the medical care insurance costs for himself, his spouse and dependents under I.R.C. ' 162(l) but only to the extent that the cost of the insurance does not exceed the earned income (as defined in I.R.C. ' 401(c)) derived by the sole proprietor from the specific trade or business with respect to which the insurance was purchased;

So, the mere buying of the insurance meets the requirement. This memo also provided a taxpayer unfavorable answer to another question. This was whether a self-employed individual could aggregate the profits and losses of two or more businesses to establish the net income ceiling up to which he or she could claim the deduction. The answer was "No."

Here's the quotation:

2) A self-employed individual may deduct the medical care insurance costs for the self-employed individual and his or her spouse and dependents under a health insurance plan established for his trade or business up to the net earnings of the specific trade or business with respect to which the plan is established, but a self-employed individual may not add the net profits from all his or her trades and businesses for purposes of determining the deduction limit under I.R.C. ' 162(l)(2)(A). However, if a self-employed individual has more than one trade or business, he or she may deduct the medical care insurance costs of the self-employed individual and his or her spouse and dependents under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business.

The last part of the above quote means that you can establish a health plan under one business and a dental plan under another business.

As to the rest of your questions:

The IRS has stated (I don't have the reference, but they published it in one of their Pubs) that Medicare B premiums can not be used by the self-employed as an above the line deduction. I suppose, the reason being that it is not an elective policy. Once you turn age 65 you are covered. I Have therefore concluded, that Medicare Part D premiums and Medicare Supplement Plans (both of which are elective health insurance) can be included in the deduction. I have to assume that Medicare Part C (Medicare Advantage Plans) which primarily replace Medicare A & B would not be deductible. I have not seen any data on whether Medicare Part C premiums that are in excess of Medicare Part B premiums could be included.

I forgot that you asked about a cancer policy. I would conclude that if the policy covered medical expenses such as lab, doctor, surgery, hospital, Rx and medical equipment it would qualify. If the policy contained any other type of non-medical type benefit such as loss of income or child care costs, I would say it does not qualify. If it had loss of income beenfits, it would probably qualify as disability insurance on Schedule C.

| The IRS has stated (I don't have the reference, but they published it in | one of their Pubs) that Medicare B premiums can not be used by the | self-employed as an above the line deduction. I suppose, the reason | being that it is not an elective policy. Once you turn age 65 you are | covered.

Is this something new? I thought Part B was optional, though it you don't opt in initially you may pay more later.

Dan Lanciani ddl@danlan.*com

Easy.

(1) You have two Schedule C businesses, say tax preparation and painting. Set up a health insurance plan to cover you between Jan-Jun for business 1, and Jul-Dec for business 2. After all, if you had 1 business and it didn't make enough profit, it would cover your health insurance only for a few months, and for the remaining months your health insurance premiums would be paid from your personal funds.

(2) You can set up a master Schedule C business that has each of your two businesses as subsidiaries. So the master company will have big profits. Not sure if this will work because maybe each business will have to file its own tax return or Schedule C.

(3) Just make your company into one. What's to stop you from creating one business that does both tax preparation and painting? A jack of all trades business.

I have a client that was 67 years old (as of 12/31/2010), working full time for a W-2 employer who provides excellent health insurance. I noticed he did not have any Medicare Insurance Premiums deducted on his SS-5.

This made me think that you can choose to opt into and pay for Medicare part B...or not.

for a W-2 employer who provides excellent health insurance.  I noticed he did not have any Medicare Insurance Premiums deducted on his SS-5.

B...or not.  

I personaly do not agree with this determination, Part B is Insurance, and your "plan" is to pay premiums without any limitation as to where the insurance came from except an employer. How many other "determinations" on this subject have been reversd ?

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for a W-2 employer who provides excellent health insurance. I noticed he did not have any Medicare Insurance Premiums deducted on his SS-5.

B...or not.

I think I may agree you. Here is what the 1040 instructions say:

Medicare Part B premiums can be used to figure the deduction. Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable be- cause you are a retired public safety officer cannot be used to figure the deduction. For more details, see Pub. 535.

Note that it po Medicare Part B premiums are not considered medical insurance premiums for purposes of the self-employed health insurance deduction. Take the deduction on Form 1040, line 29.

When in doubt, follow the instructions.

The IRS chief of Forms and Instructions and Pubs has clarified that the change to Form 1040 instructions line 29 was a last minute change to that instruction book -- The Last change before the last 2009 publication date, and was made at the specific request of IRS chief counsel's office, without much in the way of explanation.

And he further clarifies that health insurance in the name of the business, includes Medicare B since, for a sole proprietor, any difference between the individual and the business is disregarded. So he agrees with the change,

And to confuse just a liittle but, adds that if a taxpayer has more than one trade or business and thus more than one Schedule C, you cannot add the schedules C together, but must associate the Medicare B wih one business.

Finally based on his analysis that Medicare B qualifies as line 29 SE healthcare, he backs amending prior years returns where appropriate.

Assume this would also apply to a Medicare Supplement policy.

That was never an issue. It counts.