Medicare premium for the self employed

[veritas]

I had a brain freeze and could not remember if I could deduct Medicare premiums as an adjustment to income for sch c taxpayer. Could not finf the answer in thetaxbook. Had to find answer in theotherbook.

[Bird Legs]

Medicare premiums for S E

What did the Other Book Say?

[Mary A.]

Yes, the Medicare premiums are deductible as an adjustment to income. A few years ago I attended a seminar where Claudia Hill spoke. She stated that medicare premiums qualified as health insurance premiums for self employed health insurance deduction. After the seminar I emailed her and asked what she based her decision on. This is what she emailed back to me:

Response from Claudia Hill:

The following information was obtained using the CCH Tax Research Network:

Amounts paid or withheld from social security benefits as premiums for Medicare, Part B, which provides supplemental medical insurance for the aged, qualify as amounts paid for insurance covering medical care and are deductible as medical expenses. Code Sec. 213(d)(1)(D); Rev. Rul. 66-216, 1966-2 CB 100.


Premiums for insurance that covers medical care are deductible as medical expenses. Prepaid insurance premiums may be deductible as medical expenses. Amounts paid for Medicare, Part A coverage are not usually deductible as medical expenses. Amounts paid for Medicare, Part B coverage are deductible as medical expenses.


Medical insurance premiums qualify as medical expenses that can be claimed as an itemized deduction subject to the 7.5-percent floor on medical deductions, or 10-percent for alternative minimum tax purposes. A self-employed individual can deduct a percentage of the amount paid for medical insurance for the individual, his spouse and dependents. Code Sec. 162(l)(1); The Tax and Trade Relief Extension Act of 1998, P.L. 105-277, Act §2002 (October 21, 1998).


Claudia Hill, EA, MBA
Tax Mam, Inc.
408-446-4451 x 1153 TALK
408-973-8757 FAX

https://www.taxmam.com

[ecb34691]

Her whole discussion is ok for the deduction on Sch A - no question! She doesn't mention the adjust to income. I think if you look in Pub 502, you will find that Medicare B is not one of the allowable adjustments to income. It is a subsidized program and not set up for the business.

[Mark Goldberg]

Not so fast

Medical insurance premiums qualify as medical expenses that can be claimed as an itemized deduction subject to the 7.5-percent floor on medical deductions, or 10-percent for alternative minimum tax purposes. A self-employed individual can deduct a percentage of the amount paid for medical insurance for the individual, his spouse and dependents. Code Sec. 162(l)(1); The Tax and Trade Relief Extension Act of 1998, P.L. 105-277, Act §2002 (October 21, 1998).

The last sentance in this paragraph speaks of deductng a percentage. Remember, it was a few years ago when she answered this question. Back then the SE health deducton was not 100%. It was a percentage that was going up every few years. This does support teh arguement for taking Medicare B as SE health.

[Bees Knees]

Claudia Hill did not address the established under business issue.

I had a brain freeze and could not remember if I could deduct Medicare premiums as an adjustment to income for sch c taxpayer. Could not finf the answer in thetaxbook. Had to find answer in theotherbook.

Good for them. I hope they offered a disclaimer saying it was based on opinion and their interpretation.

Issue: Can a self-employed individual deduct 100% of voluntary Medicare payments (either voluntary Medicare A or part B) on the front of the 1040 under the self-employed health insurance deduction? [Code section 162(l)]

The answer is there is no direct answer or ruling from IRS on the subject.

Facts: Rev. Rul. 79-175 is clear that the voluntary payments under Medicare A are considered health insurance premiums and thus are deductible under Section 213 (Schedule A medical deduction subject to 7.5% AGI limitation). Rev. Rul. 66-216 also makes it clear that the voluntary payments under Medicare B are considered health insurance premiums and thus are deductible under Section 213 (Same Schedule A deduction subject to 7.5% AGI limits). These facts are undisputed for even IRS Pub 502 says this. The only thing not deductible as health insurance is the TAX paid for Medicare A. In other words, you can’t deduct that portion of FICA or SE Tax that qualifies you for Medicare A coverage.

Facts: Code section 162(l) says: “there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.”

The code makes no reference or limits on what is meant by “insurance which constitutes medical care.” This is where people are making a huge leap forward saying voluntary Medicare payments are defined as insurance and therefore qualify.

But people keep ignoring the one rule nobody ever liked in the first place. The fact that the self employed health insurance had to be established under the business. Section 162(l)(2)(A) says: “No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.”

This rule that talks about the health insurance being established under the trade or business has been ignored and ignored and ignored for so long that the IRS finally came out with Letter Ruling 200524001 in affect saying; OK if you are not going to follow this rule, fine. We will just say if you bought the policy under your personal name, we will pretend you meant it for your business and allow that to be considered established under your business name.

It is interesting to read the reasoning given in this ruling why the IRS came to this conclusion. The ruling said: “One of the reasons for enacting the section 162(l) deduction was that the existing rules relating to the exclusion from gross income for benefits under employer accident or health plans created unfair distinctions between self-employed individuals and the owners of corporations. Owners of corporations could exclude from gross income health benefits provided by the corporation, whereas no similar exclusion was available to self-employed individuals.”

“Similarly, the deduction was increased in 1998 for taxable years beginning after December 31, 1998 "in order to reduce the disparity of treatment between insurance expenses of self-employed individuals and employer-provided health insurance and to help make health insurance more affordable for self-employed individuals."

Note Congressional intent here. It was to equalize employer provided health plans with what self-employed taxpayers had as an option. It was not about allowing a medical expense deduction, because both were already equal in that area on Schedule A. This was about equalizing the pre-tax option employees had on employer provided insurance verses the self employed who’s only option was to deduct the expense on Schedule A.

Now I ask: Could a corporate employee ever pay for Medicare with pre-tax dollars? No. So if you allow self employed people to do that, you now went beyond Congressional intent.

The letter ruling also says: “ I.R.C. section 162(l) also included a provision under which the section 162(l) deduction was not available to any taxpayer for any taxable year unless coverage was provided under one or more plans meeting the requirements of section 89 (nondiscrimination requirements), treating such coverage as an employer-provided benefit. This provision was deleted in 1989 by section 203(a)(4) of Pub. L. No. 101-140, 1990-1 C.B. 207, retroactive to the enactment of section 162(l). The reason for the retroactive deletion was that section 89 was retroactively repealed by the same Act and never took effect.

Thus, the statute has always required that a plan be established under a trade or business. Generally, the earned income from only that trade or business can be considered.”

Oh my, there’s that established under a trade or business talk again. Now of course we all know that the conclusion of this letter ruling allowed for taxpayers to have the insurance in the name of the individual and that will still meet the requirement that the insurance be established under the trade or business of the self employed taxpayer.

Here is the key: NOTHING in this letter ruling deletes the “established under the trade or business” requirement. That law still exists. So the question is: How can any person in their right mind make the argument that Medicare insurance is “established” under a taxpayer’s trade or business? Could a corporate employer offer a medical plan to employees saying when you turn 65 we will pay for your Medicare premiums? No because the nondiscrimination rules would kick in saying you can’t discriminate based on age. Medicare A and B cannot even be remotely argued that it is established under the business of a self employed person, and so therefore cannot qualify for the self employed health insurance deduction.

[veritas]

Thank you bees knees for the information. Essentially that's what theotherbook said.