Self-employed health insurance and Medicare (again!)

[appelman]

The IRS has quietly slipped into Pub. 535 language expressly stating that Medicare B does not qualify for the self-employed health insurance above-the-line deduction. I have not found any recent ruling or advice memo that might have precipitated this. The code and regs remain pretty silent on the issue, particularly once you accept that qualifying insurance can be taken out in the name of the owner rather than in the name of the business.

I had gotten the recent impression that practitioner opinion was moving in the direction of taking this deduction. In fact, it seems hard to understand why Medicare B should be treated differently from any other electively purchased group insurance plan.

But it also seems hard to argue when its spelled out in black and white. Does anyone think we might have any alternative other than to acquiesce? I have a client to whom this is worth a couple of thou an year in taxes.

[Burke]

It is not something that was slipped in. Just qualified by stating it in the Pub. It has never been an expense which qualifies for the SE deduction. It says "the insurance plan must be established under your trade or business,....." and the MC tax and/or premium for Part B does not meet this requirement. It has nothing to do with a trade or business. If you want the definitive, detailed analysis of this, see BeesKnees reply dated 9/16/05 in old thread.

[Bees Knees]

A position I took way back in 2005, despite so called experts like Claudia Hill making the claim you could.

http://www.thetaxbook.com/forums/showthread.php?t=242

Maybe IRS Pub writers read my argument and decided it made sense.

[Jiggers]

Agree on non-deductible

I was one that supported Claudia Hill, then read further into her information and I really believed that she was calling it a medical deduction and letting us take the heat if audited.

I have since switched to making this strictly a medical deduction and not a self-employed health insurance deduction.

I am glad that the IRS has finally said so. Don't know what took them so long.

[FEDUKE404]

Not again ?!?

On these boards this topic has previously been beaten to a pulp, shredded, spindled, mutilated, and a few other similar actions.

While the phrase "established in the name of the business" has been a constant sticking point for many, the counter argument has always been what about a self-employed individual who IS the business? (Not to sound overly dense, but the item does go by the name "Self-Employed Health Insurance Deduction.")

The classic example is for retiree Joe who starts his own consulting business (and even pays SE taxes!! ) and he continues to pay family medical coverage available to him through his former employer. (Assume neither spouse is an employee.) Does Joe have a valid deduction? (His former employer offers coverage to Joe but not to Joe's Consulting Services.)

As for the "TIP" in the middle of page 18 of the 2009 Pub 535, when/how did the IRS start "considering" those insurance expenses non-deductible ??

It appears that rule A has been replaced by statement of fact B.

FE

[appelman]

An earlier IRS ruling...

An earlier IRS ruling did establish that the insurance could be taken out in your name rather than in the name of your business. That's what makes this development a little puzzling, if not downright disconcerting!

[Bees Knees]

An earlier IRS ruling did establish that the insurance could be taken out in your name rather than in the name of your business. That's what makes this development a little puzzling, if not downright disconcerting!

I disagree.

Section 162(l)(2)(A) still requires the plan providing the medical care coverage to be established under the business. That ruling did not change the code. The only thing that ruling said was health insurance that is in the name of the sole proprietor can be considered established under the business. Medicare Part B is not considered established under the name of any individual or business. It is a government entitlement program. Thus, it cannot meet the requirement imposed by the code that it has to be a plan established by a business to provide health insurance for a self-employed individual.

[appelman]

Here we go again

Blue Cross isn't established under the name of any individual or business, either, but the individual policy is. Ditto for Medicare. But I guess you can't fight City Hall!

[FEDUKE404]

another surprise to me

Blue Cross isn't established under the name of any individual or business, either, but the individual policy is. Ditto for Medicare. But I guess you can't fight City Hall!

....and I certainly did not know that Medicare B is a "government entitlement program" - most folks I know currently pay a minimum of $1320/year for it!

FE

[S T]

And I

always thought that Medicare Part B - you had to sign up for - it was not automatic, and we t/p pays for via the SS deduction. However, take the t/p that is still working and receiving full health care benefits via employer - there is no Part B paid as it is under an employer plan and can be delayed.

Part A is automatic and no charge, as I understand it.

Then there is supplemental Medicare to reach the gap coverage and now Medicare RX which the t/p pays separately outside of the SS deduction with an outside provider

How can all of this be an entitlement?

Sandy

[veritas]

Could it be that

Medicare B is considered a subsidized premium and therefore is ineligible?

Don't know just surmising.

[FEDUKE404]

Further explanation

always thought that Medicare Part B - you had to sign up for - it was not automatic, and we t/p pays for via the SS deduction. However, take the t/p that is still working and receiving full health care benefits via employer - there is no Part B paid as it is under an employer plan and can be delayed.

Part A is automatic and no charge, as I understand it.

Then there is supplemental Medicare to reach the gap coverage and now Medicare RX which the t/p pays separately outside of the SS deduction with an outside provider

How can all of this be an entitlement?

Sandy

A person can collect (reduced) Social Security benefits as early as age 62, whether or not employment continues. (Someone on complete disability, as defined by the SSA, can collect benefits earlier.) Those benefits could be further reduced if a person earns "too much" from either employee or self-employment income, until "full retirement age" (66 YOA for those born between 1943 and 1954) is reached.

Medicare benefits cannot be used until age 65, unless a disability issue exists. Medicare A benefits are "free" and Medicare B benefits are not. The additional cost of Medicare B premiums comes out of the monthly Social Security benefits a person is already receiving, so the person is definitely "paying" for those benefits. It is also possible to opt out of Medicare B coverage, although few people do that (most insurance companies require Med B coverage, which becomes primary).

As a simple example, a retiree could see (other than COLA) constant Medicare benefits paid starting at age 62, but once age 65 is reached and Medicare B is chosen, those monthly checks/deposits would shrink due to the cost of the Medicare B premiums.

I see no "entitlement" issue here.....

FE

[PIGLEE]

I have never deducted this, ( not sure I have anyone that qualifies, except me) but have always been very interested in the discussion.

A couple of questions that I have never heard asked are.......

1. If it was deductible, would you have to multiply the Medicare B amount by the percentage amount, that SS is taxable ( Max of 85%). Maybe IRS considers the Medicare B to be apart of the 15% that is not taxable.

2. What about the Medicare Supplement that is purchased elsewhere, like AARP. Would that amount qualify?

[appelman]

IMHO (1) no; (2) yes

I don't think taxability of Social Security is relevant. And I think almost everyone would consider supplemental or "Medi-gap" policies to qualify, regardless of opinion concerning Medicare B.

[Bees Knees]

Welcome to Civics 101

....and I certainly did not know that Medicare B is a "government entitlement program" - most folks I know currently pay a minimum of $1320/year for it!

FE

And if you think that $1,320 per year is a health insurance premium dedicated to funding your health care, you don't know how government works.

There is no such thing as a Social Security trust fund, or a Medicare trust fund, or any other kind of dedicated fund trust fund.

ALL money collected by the U.S. government goes into the general fund to pay for whatever the government needs to pay for at the time, without having to issue more bonds to fund their deficits.

IT IS A TAX. No different than the income taxes you pay. Your Medicare Part B payments are a tax that go into the general fund and can be used for any purpose, including funding the war in Afghanistan.