Se Ins Deductibility

[JenMO]

New client: came from well known local cpa. Last year cpa took se ins deduct. Client has self employment income, but works in factory too, factory has insurance, some premiums are deducted out of his check. He brought me the factory's year end stub, so I could use the insurance prem.(like the guy did last year). I'm not a cpa, just a tax practitioner, does he know something I don't? But I don't think the premiums can be used as a deduction. Should I ask more questions of the client?

[outwest]

From a CPA..

don't let the title intimidate you. At first blush you are right.

Step one: determine if the premiums are some sort of cafeteria (sec. 125) plan. If so, end of story; they're already pretax and they've already reaped the tax benefit. Can't be used as SE Health, can't go the the Sch A, they are done.

I'd be really surprised if these were not pretax, but if the they were, I think they would likely fail the "established under the business" requirement for the SE Health insurance deduction.

Long shot given you said "worked in a factory": Could this be a 2% S corp shareholder of the factory?

[Lion]

SE Insurance

SE insurance has to be established under the company/person who is self-employed. If your client received insurance as an employee of another company and not from his own company or in his individual name, that insurance does not qualify for the SE insurance deduction above the line.

If he paid the premiums after tax, then it would qualify as a medical expense subject to 7.5% on his Schedule A. But, the premiums were probably pre-tax.

Do ask him questions, in case he bought his own dental insurance or something. But, I think you'll end up explaining to him where various expenses are deducted and that he already has a tax benefit from his employer plan.

[appelman]

I think you know a few things he doesn't.

From Pub. 535:

"Other coverage. You cannot take the deduction for any month you were eligible to participate in any employer (including your spouse’s) subsidized health plan at any time during that month."

Also, the payroll deductions were almost certainly pre-tax, in which case they can't even go on Schedule A.

[FEDUKE404]

Salient point

There is a red herring here:

Whether the insurance premiums were pre-tax (likely) or otherwise, so long as the self-employed person was covered by an employer plan, he cannot under any circumstances claim the benefits of the self-employment health deduction.

This is a completely separate issue from whether he could or could not potentially claim the medical premiums on Schedule A. I would bet at last 2¢ that the premiums were pre-tax.)

It looks as if the CPA was cutting some corners and/or earning some brownie points with his client. It is not unusual for a "skilled" tax person, regardless of title, to be able to run circles around the tax advice dispensed by some CPAs. Unless the CPA bothered to ask some questions of the client, or scrutinize carefully the W2, the mere presence of insurance premiums on the year-end pay stub is essentially useless information.

Kudos to JenMO for picking up on what is likely an error (or two) on the CPA's part. And appelman has also summarized things nicely!

One additional item: If it turns out the facts precluded the client from taking the adjustment and/or deduction in the prior year(s), you may wish to steer him back to the CPA for an amended return to include payment of any interest/penalties by the CPA.

FE

[JenMO]

Thanks to all, after looking more closely, and adding a few figures and subtracting them from gross, the ins prem are pretax. Ends that discussion. Last year's stub showed exactly the same thing, that the ins prem were pretax. (there was even a box that said pretax deducts with the total) Not only not deductible, but cpa used as se health ins prem. in 2009. I will tell client and let him decide whether he wants me to amend, or he wants to contact the cpa. I felt I was right, but I don't know everything and am always willing to learn more. Thought maybe I was missing something.

[JohnH]

Want to bet he will say he wants to let the CPA amend the return, then spend the next 2 years trying to find the guy's phone number?

[joanmcq]

Yeah, I can't even deduct my COBRA as SE insurance, although my dental plan and long-term care does qualify for SE. 2011 will be my first year in history I can deduct medical on Sch A; the COBRA alone puts me over the 7.5%.

[Y2KEA]

Want to bet he will say he wants to let the CPA amend the return, then spend the next 2 years trying to find the guy's phone number?

Or let him go back to the CPA so his preparer can continue to do it the same way because you must be wrong.

[veritas]

I would

Yeah, I can't even deduct my COBRA as SE insurance, although my dental plan and long-term care does qualify for SE. 2011 will be my first year in history I can deduct medical on Sch A; the COBRA alone puts me over the 7.5%.

deduct cobra premiums as self employed insurance premiums.

.

[FEDUKE404]

Is it or is it not?

deduct cobra premiums as self employed insurance premiums.

That would seem to be a correct statement, assuming there is no way the person is "covered" by any employer-provided insurance.

OTOH, since COBRA technically (I think) provides the "same" coverage as the employer once did, is there some very fine print that might muck up the works by being a "continuation" of employer coverage or something similar??

FE

[joanmcq]

That would seem to be a correct statement, assuming there is no way the person is "covered" by any employer-provided insurance.

OTOH, since COBRA technically (I think) provides the "same" coverage as the employer once did, is there some very fine print that might muck up the works by being a "continuation" of employer coverage or something similar??

FE

Because it isn't a plan established in the name of the business or individual. COBRA is coverage under your former employer's plan.

[S T]

Not sure if it applies

Joan
I found this on a forum for Lawyers.com(Lexis Nexus) - Sect 162(I)(1) - this is an excerpt from a post

adjuster jack:
1 - YOU were laid off. YOU continue to pay premiums for YOUR former employer's coverage under COBRA. YOU deduct those premiums on Schedule A.
Not quite. This is a situation that the IRS publications do not directly address, unfortunately. The basic rule for the deduction of self-employed medical insurance deductions is found in Internal Revenue Code (IRC) section 162(l)(1), which provides:

"Allowance of deduction.--In the case of a taxpayer who is [self-employed], there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for--

(A) the taxpayer,

(B) the taxpayer's spouse,

(C) the taxpayer's dependents, and

(D) any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27."

(I put the term "self-employed" in brackets to make the provision easier to read; the actual statute instead refers you to another code section which then goes on to define self-employed individuals.)

There is, however, and important limitation on this deduction, in paragraph 2 of § 162(l), which states:

"(B) Other coverage.--Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to--

(i) plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and

(ii) plans which do not include such coverage and are not such contracts."

Note that it disallows as a self-employed health insurance deduction (a § 162(l) deduction) any premiums paid on an insurance plan subsidized by an employer. The term subsidized means that the employer pays some part of the premium cost. The normal COBRA plan requires that the employee pay 100% of the cost of the insurance plus a 2% handling fee. It is therefore not subsidized by the employer, and thus the premiums paid for that insurance is eligible for the § 162(l) deduction. This is something that IRS national office counsel noted in advice to a field attorney: "With respect to COBRA continuation coverage, we understand that in the typical situation a group health plan requires premium payments of 102 percent of the applicable premium, as permitted by section 4980B(f)(2)(C) of the Code. Therefore, an individual receiving COBRA continuation coverage from such a plan would not be receiving subsidized coverage within the meaning of section 162(l)." IRS FSA 1995 WL 1918547.

There was, however, a program in which COBRA payments were subsidized 35% by the employer and then the employer claimed a credit for that from the government as part of the economic recovery effort. This was called the COBRA premium assistance credit, and it ended in May, 2010. Moonrock refers to his plan qualifying for a subsidy, and I assume this is the subsidy to which he refers. Thus, premiums he paid for any month in which the plan was subsidized (i.e. through May) would NOT qualify for the self-employed health insurance deduction. Premiums paid in any month that were not subsidized (from June onward) would qualify for the self-employed insurance deduction. So, moonrock will need to look at each month separately to determine which months were subsidized and which were not.



adjuster jack:
2 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family and your wife's employer did not provide health insurance of any kind. You deduct those premiums on Line 29, but only if you meet the qualifications for that deduction.
Correct.


adjuster jack:
3 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family but your wife's employer does provide medical coverage, where she pays part of the premium for her and dependent coverage and the employer pays the rest. Her cost would be deductible on Schedule A. Your cost for the business coverage would not be deductible at all because you are eligible to be covered under her employer's subsidized plan.
Correct, but there is something important to note here. The deduction under § 162(l) is not allowed if the taxpayer or his/her spouse are ELIGIBLE for employer subsidized medical insurance. Thus, if Moonrock's spouse was eligible for health insurance provided by his/her employer but the spouse declined to take it and they instead opted for Moonrock's COBRA coverage for the family, Moonrock will be ineligible for the § 162(l) deduction.

Sandy

[veritas]

Sect 162(I)(1)

Seems very clear and straight forward, though the IRS hates it and tries to twist simple words to mean something it doesn't.

"maintained by any employer of the taxpayer"

How is someone an employer for someone else who no longer works for them?

[S T]

Thinking Out Loud

Of course if you are no longer working for the Employer, then you are No longer an employee and no longer part of the group ------I am thinking it depends on whether or not the Cobra Premiums are paid directly to the ex-employer or that ex-employer is paying a portion of the premium ----- or if the t/p is making the premiums payments directly to the Insurance Carrier and the Ex-employer is not participating in any of the premiums payments.

Note: With the subsidy credit - in 2010 of course that month is dis-allowed

Most all of my T/P that have Cobra have no contact with the employer or HR at the employer and deal directly with the Insurance Company Cobra contract, and the T/P pays the premium directly to the Cobra Insurance Company and even changes coverages directly with the Cobra Insurance Company.

S