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I.R.C. § 162(l)(1)(A) allows an individual who is an employee within the meaning of I.R.C. § 401(c) to deduct amounts paid during the taxable year for insurance which constitutes “medical care” for the taxpayer and the taxpayer’s spouse and dependents. Subject to certain limits, self-employed individuals can deduct 100% of health insurance costs in determining adjusted gross income. This above-the-line deduction, reported on Schedule 1, IRS Form 1040, is generally available to sole proprietors, partners in a partnership, and more than 2% shareholders in an S corporation. Note: The SEHD is not an “ordinary and necessary business expense.” Rather, it is special deduction allowed to the self-employed. For this reason, the SEHD does not reduce a taxpayer’s SE income or SE tax liability. As will be seen below, sole proprietors and partners in partnerships must pay SE tax on their health insurance premiums. S corporation shareholders, however, are exempt from FICA for their premiums. The SEHD has several important limitations and requirements.
Insurance Which Constitutes Medical CareThe SEHD applies to health insurance costs equal to the amount paid “for insurance which constitutes medical care” for the owner, spouse, dependents, and any child who has not reached age 27 as of the end of the year, whether or not the child is a dependent. This includes medical, dental, Medicare, and qualifying long-term care insurance premiums for the self-employed, their spouses, and their dependents. Long-term care insurance contracts must meet certain consumer protection standards to be “qualified.” The deduction for long-term care premiums is limited to “eligible long-term care premiums,” indexed yearly for inflation. The 2021 eligible long-term care premiums are shown below: Eligible Long-Term Care Premiums (2021) (Source Rev. Proc. 2020-45)The SEHD applies only to insurance premiums. The SEHD can be taken for amounts required to be repaid when reconciling the APTC with the PTC. In that case, the SEHD is taken for the year of the coverage. The SEHD does not apply to out-of-pocket expenses that are not reimbursed by insurance. Nor does it apply to the cost to belong to a health sharing ministry or to purchase any health plan that—under current law—does not constitute insurance. This includes association plans like those offered in several states by Farm Bureau. Not Available if Eligible for Subsidized Health PlanNo SEHD is allowed for any month during which the self-employed taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer, the taxpayer’s spouse, the taxpayer’s dependent or any child who hasn’t attained age 27 as of the end of the tax year. This rule applies separately to (1) plans providing coverage for qualified long-term care and (2) other health plans. [I.R.C. § 162(l)(2)(B))]. In other words, taxpayers eligible to participate in a subsidized health insurance plan, but not a subsidized LTC plan, may take the SEHD for the cost of the LTC plan, but not the health insurance plan. No court opinion or rule defines “subsidized” for purposes of the SEHD. While I.R.C. § 35(f)(1) (health coverage tax credit) defines a subsidized health plan as one where at least 50% of the cost of the coverage is paid by the employer, I.R.C. § 162(l) includes no such definition. In the absence of further guidance, it would appear that most any employer-provided plan would be “subsidized,” making the person to whom it was offered ineligible for the SEHD. Plan Must Be Established under a Trade or BusinessTo qualify for the SEHD, a taxpayer must have a health plan “established” under a trade or business.
Note: Although the Affordable Care Act restricted the ability of employers to reimburse employees for the cost of insurance without violating the market reforms of the law, IRS Notice 2015-17 provided relief. The notice states that, unless and until additional guidance provides otherwise, S corporations and their shareholders may continue to rely on Notice 2008-1 with regard to the tax treatment of > 2% shareholder-employees. No additional guidance has issued. This means that >2% shareholders may be reimbursed for the cost of insurance without violating ACA. Limited to Earned Income from the Trade or BusinessThe amount of the SEHD may not exceed an eligible taxpayer’s net earned income from the trade or business in which the health plan was established, less the deductions for 50% of the self-employment tax and contributions to certain pension plans. These plans include Keogh plans or simplified employee pension plans for the self-employed. For this purpose, earned income is defined in I.R.C. § 401(c) and generally means the individual’s trade or business income, reduced by business expenses. Taxpayers may deduct the costs of the health insurance plan established for the trade or business only up to the net earnings of the specific trade or business that established the plan. They may not add the net profits from all trades and businesses to determine the deduction limit. [CCA 200524001]. For S corporation shareholders, the deduction is limited to W-2, Box 5 (FICA) wages paid by the corporation. For a partnership, it is limited to the net earnings from self-employment reported on the K-1 by the partnership. Interaction Between the PTC and the SEHDSelf-employed taxpayers who receive their insurance on the Marketplace may not receive the benefit of both the PTC and the SEHD for the same premium. This is complicated by the fact, however, that the PTC is determined by the MAGI, and the SEHD reduces MAGI. Rev. Proc. 2014-41 provided optional instructions to resolve this difficulty. Taxpayers are allowed, however, to use “any computation method,” as long as the sum of the SEHD claimed for the premiums and the PTC computed, taking the SEHD into account, is less than or equal to the enrollment premiums. Publication 974 implements Rev. Proc. 2014-41 by allowing taxpayers to choose from a simplified calculation method and an iterative calculation method. Although the simplified method is easier to calculate, the iterative method may lead to a more favorable result. Can selfIf you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents.
Can you deduct health insurance premiums if selfSelf-employed individuals may be eligible to deduct up to 100% of their health insurance premiums on their tax return. You can claim the self-employed health insurance deduction even if you do not itemize deductions.
How does the selfYou deduct it in the "Adjustments to Income" section on Schedule 1 of Form 1040. If you itemize your deductions and don't claim 100% of your self-employed health insurance costs on Schedule 1, you may include the rest with all other medical expenses on Schedule A, subject to the 7.5% of Adjusted Gross Income limit.
Can an S Corp owner take selfWhen it comes to health insurance, you're treated like a self-employed person as an S corporation owner. You can deduct the cost of healthcare premiums for you, your spouse, and your dependents on Form 1040 Schedule 1. This is a special deduction.
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