Discussion:Health insurance and SE tax

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Discussion Forum Index --> Basic Tax Questions --> Health insurance and SE tax


Discussion Forum Index --> Tax Questions --> Health insurance and SE tax

Dap19 (talk|edits) said:

25 January 2011
I read publication 535 regarding the self-employed health insurance deduction which states the insurance plan must be established or considered to be established under the business... I also noted that the policy can be in the name of the individual. Does the deduction for the health insurance in calculating self-employment tax follow the individual that is eligible for the health insurance deduction?

In the case of a new client both the taxpayer and the spouse having their own schedule C businesses. The health insurance policy is in the spouse's name, but the taxpayer is also covered under this policy. Both the taxpayer and spouse pay their respective portions of the premiums. Is only the spouse eligible for the deduction, both for the insurance and for the self-employment tax calculation? Or can both take the deduction for the amount of premiums they paid?

OCNumberz (talk|edits) said:

25 January 2011
Dap, are you talking two sole proprietors with separate businesses, married to each other, with the 'family' policy in only one's name? What is confusing is your mention of the SE tax. The health benefits do not go on Schedule C, and would not reduce the SE Tax. They'd be deducted on the front of the 1040 on Line 29.

The plan is established under the business requirement seems to be directed more towards a C Corp since they've lightened up on the S-Corp requirements. The S-Corp, as noted by the IRS, is considered to have 'established' a plan by either making premium payments on the policy OR the shareholder making the payments himself and having the S-Corp reimburse him. Many sole proprietors have family plans with husband/wives running their owns businesses, and I'd be surprised if the IRS would disallow this. I handled my own health insurance this way for many years. I'll be curious to see others' comments.

Dap19 (talk|edits) said:

25 January 2011
Yes, there are two sole proprietors, married to each other, with the family policy in the spouse's name. As far as the SE tax, it is my understanding that for 2010 the amount of the self-employed health insurance deduction is a deduction that is also taken into account in determining what number goes on line 3 of the schedule SE.

Growthguy2 (talk|edits) said:

25 January 2011
From the information below, I think the SE deduction follows the individual eligible for the health insurance deduction... which shouldn't matter unless they are filing separate returns or the insured spouse's Schedule C doesn't reflect enough income. I am pretty sure that the deduction for health insurance does not reduce employment earnings for Social Security Benefits.

Self-employed taxpayers are allowed an above-the-line deduction for 100% of the cost of providing medical, dental, and qualifying long-term care insurance for themselves and their families [IRC Sec. 162(l)]. (The amount is deducted on line 29 of Form 1040.) For 2010, the deduction is also allowed as an expense when calculating net earnings subject to self-employment (SE) tax [IRC Sec. 162(l)(4), as amended by the 2010 Small Business Act].

Law Change: Effective March 30, 2010, self-employed taxpayers are allowed to deduct 100% of the medical insurance costs paid for themselves, their spouse, their dependents, and any nondependent child under age 27 at the end of the year [IRC Sec. 162(l)(1), as amended by the 2010 Health Care Act]. Prior to the 2010 Health Care Act, medical insurance costs for nondependent children were not eligible for this deduction.

The following special rules apply to the deduction [IRC Sec. 162(l)(2)]:

1. Employer-subsidized Health Plan. The deduction applies only for calendar months when the self-employed taxpayer is not eligible to participate in a subsidized health plan maintained by any employer of either the taxpayer or the taxpayer's spouse.

Note: This rule applies separately to employer health plans that include long-term care coverage and ones that do not. Taxpayers eligible to participate in an employer plan that does not include long-term care coverage can deduct the applicable percentage of their own long-term care policy in computing AGI [IRC Sec. 162(l)(2)(B)].

2. Earned Income Limit. The deduction applies only if the medical insurance plan is established by the taxpayer's business and only to the extent of the taxpayer's earned income from that business (CCA 200524001).

Note: The medical insurance plan established with respect to the taxpayer's specific business can be purchased in the individual's name (CCA 200524001).

JR1 (talk|edits) said:

January 25, 2011
And indeed, for this year OCN, it does reduce SE tax.....

Trillium (talk|edits) said:

25 January 2011
For those questioning Dap's statement that SEHI reduces SE tax for 2010, please refer to item 4 on the summary of HR 5297, Small Business Jobs Act of 2010.

Dap19 (talk|edits) said:

25 January 2011
So if I am understanding correctly, the spouse is the one eligible for the total self-employed health insurance deduction (subject to income limitations) because the policy is in her name? And therefore she also gets the reduction in computing the self-employment tax. The taxpayer (husband) is not eligible even though he actually paid a portion of the premium.

Trillium (talk|edits) said:

25 January 2011
Take a look at the Schedule SE instructions, center of page SE-3, see if this helps you:

"For 2010, you can reduce your net self-employment income by the amount of your self-employed health insurance deduction entered on line 29 of Form 1040 or Form 1040NR. Be sure to subtract this amount after you combine lines 1a, 1b, and 2, and before entering the result on line 3. If both you and your spouse are taking a deduction for self-employed health insurance on lin 29 of a joint Form 1040, each of you subtracts on line 3 of your separate Schedule SE only the amount attributable to your own premiums." Particularly when read in conjunction with Sec. 162(l)...

Dap19 (talk|edits) said:

25 January 2011
Thanks, everyone, for your assistance.

OCNumberz (talk|edits) said:

26 January 2011
JR1/Trillium..

Wow, what a nice surprise! I certainly hadn't heard of that one...too busy studying for the EA, so I'm looking back to what has already happened for 2009 instead of ahead for what will happen for 2010! ;) I had heard we'd go from 12.4% to 10.4% for the Social Security portion of it, but had no idea that Health Premiums were involved.

Thanks for the good news! Since I'm living in 2009 for now, I guess it may be best if I keep my comments to myself for a while.  ; )

OCNumberz (talk|edits) said:

26 January 2011
Solomon said: 23 September 2010

"As of the 17th this provision is not law yet but goes to the House..."

Passed House today - supposed to be signed into law Monday.


I've had 4 months to forget about it, and it even benefits me personally!  :(

Szptax (talk|edits) said:

26 January 2011
Taxpayer is paying the reduced COBRA rate while unemployed and started a business in the latter part of the year. I didn't think he was entitled to a deduction for the health insurance on A or as a self employed for the period of self employment but I am checking with the board to see if i am correct. I can not find the cite.

JR1 (talk|edits) said:

January 26, 2011
No worries, OC, I'm still getting up to speed on the HIRE credit, and keep hearing about some health insurance tax credit, too....the pace is a bit too quick now for keeping up.

Death&Taxes (talk|edits) said:

26 January 2011
SZP: here is one old discussion, with the invaluable Riley chiming in

Discussion: Self-employed Health Deduction & COBRA

Szptax (talk|edits) said:

26 January 2011
Thanks D&T. I re-read that discussion, but it doesn't help with the situation of my client. Or maybe I'm too obtuse to see it. The client is participation in COBRA with the reduced 35% of the premium subsidy through the Health Insurance Premium Subsidy. My recollection, and I cannot find where/why I think this, is that it is not a sch A deduction or line 29 because of the subsidy. This didn't exist when that discussion occurred. They are taxed on the benefit, however if their AGI exceeded 125K single & 250K MFJ. Everything I find refers to how the employer should handle it and not the employee & their 1040.

Vetteman901 (talk|edits) said:

26 January 2011
Have your clients look at a Section 105 medical reimbursement plan. It saves a lot of maoney on SE tax.

http://www.tasconline.com/

OCNumberz (talk|edits) said:

26 January 2011
JR1, Yes, there is quite a bit to remember. I'm in TAX LIMBO...studying 2009 but everyone wants to talk about 2011! 2010 is old news! ; )


Dap19 seems to still have a question, as I do. These family policies that Blue Shield/Anthem offer are usually put in the name of the younger spouse, for premium savings. I'd take it no matter whose 'name' it's in, going with more a sense of fairness and intent of the law rather than any interpretation of the way the law is technically written. Anybody have a problem with this particular issue during an audit?

COGS (talk|edits) said:

26 January 2011
I saw a comment in the Kipplinger tax letter a few weeks ago saying that a sole proprietor's health insurance was not deductible on form SE. I am totally confused now.


Trillium (talk|edits) said:

27 January 2011
In Kiplinger's Jan 7 tax letter, page 1 was a recap of what will change for the 2011 tax year. Most of the changes related to the newly signed tax bill, but in addition there was a mention that SEHI would not be deductible for SE tax. Better wording might have been, "...would no longer be deductible in 2011," but in context it was okay.

Kevinh5 (talk|edits) said:

26 January 2011
try reading the form directions: http://www.irs.gov/pub/irs-pdf/i1040sse.pdf

COGS (talk|edits) said:

26 January 2011
Kevin, maybe I missed something, but those instructions did not seem on point. Anyhow, this is the latest from my CCH as of 1/05/11. Not sure what Kipplinger was saying.

Health Insurance Deduction In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their Social Security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claimed this deduction on Form 1040, Line 29. But in 2010, eligible taxpayers can also enter this amount on Schedule SE, Line 3, thus reducing net earnings from self-employment subject to the 15.3-percent Social Security self-employment tax. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child, under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer’s dependent.

Kevinh5 (talk|edits) said:

26 January 2011
Did you see the instructions for line 3 of Sch SE? I provided the link.

COGS (talk|edits) said:

26 January 2011
Ah, I see it. Thank you!!

BerkshireCPA (talk|edits) said:

26 January 2011
I see in the 1040 instructions for 2010 they say Med B premiums can be used to figure the deduction while the 2009 instructions said cannot be used to figure the deduction.

I thought they would have included this in the "What's new " section. Sort of a big change and might finally end the can we or can we not discussions.

Jeff-Ohio (talk|edits) said:

5 February 2011
One question - correct assumption that any health ins premium paid for a dependent prior to March 30, will need to reduce the premiums paid for the year for purposes of the deduction?

Yes or no will suffice.

Appreciated.

Jeff-Ohio (talk|edits) said:

5 February 2011
I have read the new law change and all of its components multiple times. No where can I find the word 'retroactive' to January 1.

Therefore, it appears to me we are going to have to ask for the premiums paid in detail and back our all premiums paid for dependents prior to 3/30/2010.

Agree?

Death&Taxes (talk|edits) said:

6 February 2011
Sec 162(l)(4)

"The deduction allowable by reason of this subsection shall not be taken into account in determining an individual's net earnings from self-employment (within the meaning of section 1402(a) ) for purposes of chapter 2 for taxable years beginning before January 1, 2010, or after December 31, 2010."

From RIA: "In 2010, P.L. 111-240, Sec. 2042(a), added “for taxable years beginning before January 1, 2010, or after December 31, 2010” before the period in para. (l)(4), effective for tax. yrs. begin. after 12/31/2009."

Jeff-Ohio (talk|edits) said:

7 February 2011
Premiums paid for coverage of an adult child, under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer’s dependent. Italic text

Any thought on the 3-30-2010 date?

Are we to reduce premiums paid for the first quarter since the law took effect 3-30?

Pretty serious issue, I think....

Death&Taxes (talk|edits) said:

7 February 2011
Why? Monthly or quarterly, I pay for my health insurance for the period that follows. In late March I pay for April. Maybe other insurers are different than mine, but I doubt that they are paying medical bills while waiting for the check to come in, if it does. If anything you might have to allocate two days of the first quarter or March to be non-taxable if you were taxing it previously.

Jeff-Ohio (talk|edits) said:

7 February 2011
My point was - a client comes in and says he spent $10,000 on health insurance this year for his entire family (wife and son age 25)

Don't you agree that the premiums paid for 'his adult child' during the first quarter needs to be backed out?

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