Medicare Premiums Count for Self-Employed Health Insurance Deduction
Eligible business owners are allowed to claim an above-the-line deduction, on Form 1040, for qualified health insurance premiums to cover the owner, the spouse, dependents, and under-age-27 children. Above-the-line treatment is favorable for taxpayers, because you can benefit from the deduction whether you itemize or not.
The write-off, which is called the self-employed health insurance deduction, is allowed to:
- Eligible sole proprietors (including single-member LLC owners who are treated as sole proprietors for tax purposes); Partners (including members of multi-member LLCs who are treated as partners for tax purposes); and More-than-2 percent S corporation shareholder-employees. (While S corporation shareholder-employees are not actually self employed, they are treated as such for purposes of the self-employed health insurance deduction.)
The deduction is not available to C corporation shareholder-employees.
Self-Employed Health Insurance Deduction Basics
There are two major reasons why the self-employed health insurance deduction is extra-beneficial.
1. The deduction dodges the dreaded 7.5 percent-of-adjusted-gross-income hurdle that must be cleared to claim an itemized deduction for medical expenses, including health premiums. Next year, the hurdle is scheduled to increase to 10 percent of AGI for most individuals. So itemized medical expense deductions will be just that much harder to snag, starting in 2013.
2. The deduction is an above-the-line write-off, which means it reduces your adjusted gross income (AGI) and lowers the odds that you'll get nailed by phase-out rules that can reduce or eliminate valuable tax breaks (such as tax credits for higher-education expenses).
Good News from the IRS
In a Chief Counsel Advice (CCA), the IRS finally admitted in an authoritative internal document that premiums for all four Medicare Parts can be counted as qualified health premiums for purposes of the self-employed health insurance deduction. (CCA 201228037)
Better late than never! The recent Chief Counsel Advice makes four key points, all of which are taxpayer-friendly.
Key Point No. 1: Premiums for All Four Medicare Parts Count. The new CCA explicitly states that premiums for all four Medicare Parts (Parts A, B, C, and D) can qualify for the self-employed health insurance deduction. This blanket statement applies to Medicare premiums to cover the self-employed individual, the spouse, dependents, and under-age-27 children--as long as the basic requirements for the deduction are satisfied. (See the right-hand box.)
Medicare Part A is commonly called hospital insurance. Most eligible individuals are automatically covered for Part A without having to pay premiums. However, some individuals who paid little or no Medicare taxes during their working years must pay premiums to get Part A coverage. For 2012, Part A premiums can be up to $451 per month (up to $5,412 for each covered person for the year).
Medicare Part B is commonly called medical insurance. Part B, together with Part A, comprises what is often called "original Medicare." Part B mainly covers doctors and outpatient services, and most people must pay monthly premiums for this coverage. For 2012, most individuals pay the standard Part B premium of $99.90 per month ($1,199 for each covered person for the year). For 2012, higher-income individuals can pay up to $319.70 per month (up to $3,836 for each covered person for the year). Part B premiums can be subtracted from the covered individual's Social Security benefits or paid in the same fashion as other bills.
Medicare Part C is for private Medicare Advantage health coverage. It supplements government-provided Part A and Part B coverage. Part C premiums vary depending on the plan.
Medicare Part D is for private prescription drug coverage. Premiums vary depending on the plan. Higher-income folks pay an "adjustment amount" in addition to their basic plan premiums. For 2012, the adjustment amount can be up to $66.40 per month (up to $797 for each covered person for the year).
Medigap Coverage is private supplemental insurance
similar to Part C coverage (if you have a Medigap policy, you don't need Part C coverage and vice versa). Medigap premiums vary depending on the plan. While Chief Counsel Advice 201228037 specifically says premiums for Medicare Parts A, B, C, and D coverage can qualify for the self-employed health insurance deduction, the recent guidance does not specifically mention Medigap premiums. If you pay Medigap premiums, consult with your tax adviser about whether they can be included in the self-employed health insurance deduction.
Key Point No. 2: Medicare Premiums for Spouses Count. The instructions to the 2011 version of Form 1040, Line 29 seemed to imply that a self-employed individual's spouse also had to be self-employed for the spouse's Medicare premiums to qualify for the self-employed health insurance deduction. The recent Chief Counsel Advice cancels that thought by specifically stating that the spouse's premiums can qualify. Period.
Key Point No. 3: Sole Proprietors, Partners, and More-Than-2 Percent S Corporation Shareholder-Employees Can All Take Advantage. The Chief Counsel Advice specifically confirms that eligible sole proprietors, partners, and more-than-2 percent S corporation shareholder-employees can all include Medicare premiums in the self-employed health insurance deduction. To reiterate what we said earlier, premiums for the self-employed individual (the proprietor, partner, or S corporation shareholder), the spouse, dependents, and under-age-27 children can all be counted, assuming all the requirements for the self-employed health insurance deduction are met.
More-than-2-percent S corporation shareholder-employees must follow a special procedure that involves running premiums through the corporation in order to claim the self-employed heath insurance deduction for those premiums. According to the Chief Counsel Advice, partners must follow a similar procedure.
Point No. 4: Amended Returns Are Allowed. Finally, the Chief Counsel Advice says that individuals who failed to claim self-employed health insurance deductions for Medicare premiums on Forms 1040 that have already been filed can file amended returns to claim tax refunds, as long as the statute of limitations has not run out on the return in question.
The new internal IRS guidance supplies good news for many senior business owners, because deductible Medicare premiums can easily amount to thousands of dollars a year. If both you and your spouse pay premiums, the amounts, and the taxes saved from deducting them, can be especially significant. Contact your tax adviser if you have questions or want more information.
Article provided by http://bizactions.com.
Requirements for Self-Employed Health Insurance Deduction in a Nutshell
If you are eligible, you can claim the beneficial self-employed health insurance deduction for health premiums, including Medicare premiums, to cover you and certain family members.
Eligibility Is Determined Month-by-Month
You can only claim the deduction for premiums paid for months during which you are ineligible to participate in any subsidized health plan offered by your employer (or your spouse's). For instance, say you did not participate in any employer-subsidized plan for the last nine months of 2011 because you quit your job to go into business for yourself as a sole proprietor. As long as you did not participate in any subsidized plan offered by your spouse's employer, you can deduct health premiums paid in the last nine months of 2011 (assuming no problem with the earned income limitation explained below).
Earned Income Limitation
The self-employed health insurance deduction cannot exceed the earned income from the self-employed business activity for which you establish the health plan coverage. For example, if you have a sole proprietorship with Schedule C net taxable income of $10,000, your deduction cannot exceed $10,000. If you have a farm with Schedule F net income of $8,000, your deduction cannot exceed $8,000. You get the idea. The IRS says qualifying health insurance can be in the name of your business or (more likely) in your own name. Medicare coverage will almost always be in the name of the beneficiary (the covered individual).