Icon Tax Group: Self-Employed – Medical Insurance Deductions


by Michael Lodge

I am always looking for ways for self employed individuals to reduce their taxable income.  Here is a great article written by Julian Block , Julian Block writes and practices law in Larchmont, NY. He is frequently quoted in the New York Times, the Wall StreetJournal, and the Washington Post.

Usually, there’s only one way for freelancers, consultants, and other self-employed persons to write off medical and health expenses. They have to claim those outlays as itemized deductions on Schedule A of Form 1040. That’s just the first obstacle.

Tax code exceptions for 2015 and 2016. The 10 percent floor drops to 7.5 percent if you or your spouse is age 65 or older. The 7.5 percent threshold goes off the books at the end of 2016. For 2012 and earlier years, it was 7.5 percent for all individuals.

Let’s say expenses are mostly for insurance and they aggregate $7,000. An AGI of $40,000 trims the allowable deduction to $3,000 ($7,000 of expenses less 10 percent of $40,000). When AGI surpasses $70,000, the deduction vanishes ($7,000 of expenses less 10 percent of $70,000).

More favorable rules for medical insurance. The law doesn’t require self-employed individuals to list their insurance payments on Schedule A, and the nondeductible floor of 10 percent doesn’t apply to them, notes Jeff A. Schnepper, author of How To Pay Zero Taxes.

They’re able to deduct 100 percent of their payments for medical and dental insurance for themselves, their spouses, and dependents and children who at the end of the year are under age 27 (whether or not they’re your dependents). Similarly deductible are premiums for Medicare Part B and Part D, Medigap policies offered by organizations like AARP, and qualifying long-term care insurance (deductible in an amount that rises with age).

Where to claim the payments on Form 1040 and who qualifies. People who are their own bosses deduct payments on Line 29 of the 1040 form – the same way they claim write-offs for, say, moving expenses and alimony payments.

The only persons who qualify for Line 29 deductions are those who are self-employed and operate their businesses as sole proprietorships, partnerships, or limited liability companies.

The IRS acknowledges that those qualifying include individuals who receive wages from S corporations in which they own more than 2 percent of the shares and self-employed persons who start to make payments to their own plans after they lose jobs with companies that provide employer-sponsored insurance plans. Consistent with this approach, it prohibits Line 29 deductions by newly minted self-employed persons who buy COBRA coverage through their former employers’ group plans. They must use Schedule A to claim COBRA payments.

Don’t claim insurance payments twice. Should you use Schedule A, keep in mind that you’ve already claimed those payments on Line 29; you can’t again claim them as itemized medical expenses.

Other considerations. There’re several other aspects of this special break that you should bear in mind. IRS rules emphasize that the special break becomes unavailable when you’re self-employed and are covered by your spouse’s employer’s insurance. When you’re eligible to participate in a health plan maintained by your employer or your spouse’s employer, include insurance payments with other medical expenses on Schedule A.

Similar rules apply when you spend just part of the year – a month or two, say – on staff with a company or organization. No special break for any month during the year in question for which you’re eligible to be covered by an insurance plan provided by an organization that employs you or your spouse. That is true whether the employment is on a full- or part-time basis.

The IRS also prohibits using insurance payments claimed on Line 29 to reduce self-employment income when filling out Schedule SE. The computation on that schedule is based strictly on Schedule C, on which you report receipts and expenses to arrive at a net profit.

What if the premiums were so high, and your Schedule C income so low, that the insurance cost you more than you made for the year? No special write-off for insurance payments that exceed the net (receipts minus expenses) earnings from the business.