Another SEHI Question

[Burke]

Self-employed TP is on Medicare, not that this is relevant in this case. In attempting to deduct SEHI using his premium and his self-employment income, it is picking up the total amount for 1/2 SE deduction from the 1040 in its calculation, when the majority of that 1/2 SE deduction belongs to the other spouse who is clergy, has W-2 and has not elected out of SE tax. I think this may be a software error, or is that correct? In determining his SEHI deduction, I think it should only consider the self-employed TP's SE deduction, not both of them, even though both of them are on the same line.

[appelman]

Pub. 535 worksheet

Look at the worksheet on p. 19 of Pub. 535.If your results don't match that, it might well be a software error.

[Burke]

This is the exact same worksheet as in the software. Note line 7 says simply to show the amount from line 27 of Form 1040. This is the 1/2 SE deduction for both spouses. Line 8 of the worksheet, however, which concerns a SEP, SIMPLE etc plan deduction, says to show the amount from line 28 which is attributable to the business for which the SEHI deduction is being calculated. So the software is doing it correctly? And the SEHI is disallowed as the spouse's portion of the amount on Line 27 is way more than the self-employed spouse's profit? That doesn't seem right.

[appelman]

Not on my worksheet, it doesn't!

Line 7 of the worksheet says: "Multiply Form 1040, line 27, by the percentage on line 6." That is to say, it pro rates it by the percentage of business income that goes with that business.

[Burke]

Hmmm. My worksheet shows 100%, since this is the only business income he has subj to SE tax. So it is picking up 100% of Line 27 of 1040. To get it to pro-rate the 1/2 SE deduction amount, I would have to put the spouse's W-2 clergy income subject to SS tax on Line 5 of the worksheet, which does not belong to him. That doesn't make sense. Besides, why would it require a pro-rated figure, when we know the exact amount of his 1/2 SE deduction from Schedule SE? I can do that and see what happens. I am not sure this is the way Congress intended the SEHI to be figured, especially given the instructions for the SEP/SIMPLE contribution shown on the next line of the worksheet, but I cannot find any guidance on this issue. After all, if they filed separately, it would be allowed, since her income would not be on the return. Of course, we don't want to do that for all sorts of other reasons.

[appelman]

My interpretation

would be that line 5 of the worksheet would include net profits from all Schedule C's on the return. It isn't the way I'd go about it if I were designing the worksheet, but there we are...

[Burke]

And I agree with that assessment. The wrinkle here is that the spouse's W-2 clergy income is not from a Sche C, C-EZ, F, partnership K-1, all of which are indicated on that worksheet for line 5. BUT it is all subject to SE tax just as those forms' net income would be, and is paid on the return via a Schedule SE in her name, so it meets the intent of what the worksheet is trying to accomplish, in my opinion. In any event, putting all income subj to self-employment tax on that line does work. Then Line 6 does its computation and when it multiplies that percentage by Line 27 on the 1040, voila! (The amt on Line 7 is within $3 of the actual amt of the self-employed TP's 1/2 SE deduction.) And the SEHI deduction appears on 1040, Line 29 just like it should. The only problem is -- I had to override the input on Line 5 of the worksheet. It is not automatically populating. So that's my story and I'm stickin' to it. Return passes all efile checks and its outta here. We'll see if it hits any snags. Would be interested if anyone else's software does the same thing. This is an unusual situation and I have never run into these exact circumstances before.

[appelman]

Ah, so!

Now I see the problem. (A little slow, I guess!) TaxAct defaults to the same thing you are seeing, BUT it leaves line 5 of the worksheet as user-defined, so you can alter it as needed without having a guilty conscience.

[Burke]

Thanks for the input. It makes me feel better. Now I have something to go to the software people with. My Line 5 is not a user-input field, so I had to override. It could not find anything to autopopulate. I still think there is a problem with the IRS worksheet itself; after all it could pull that figure from the Schedules SE, and not from Line 27 of 1040, which would also solve the problem (no pro-rating would be involved.)