SE Health Insurance

[RLymanC]

The following is published in the August issue of TAXPRO monthly by the NATP.

Chief Counsel Advice 200524001 expressly says that self-employed individuals who purchase health insurance to cover themselves and/or their family may deduct the expense against their income when purchasing the policy in their individual name. The policy does not have to be in the business’ name; it only needs to be established with respect to the business.

Can some tell me what established with respect to the business means?

Does this mean that Medicare & Medicare supplement is not deductable because it wasn't established with respect to the business but was established for personal purposes?

Of course, all other requirements of Sec. 162 must be met (i.e. the sole proprietor cannot be eligible for other employer coverage: the deduction cannot reduce the income below zero, etc.). It is possible to have health insurance plans established if the sole proprietor has two business. Example: Business A may have a medical policy established under it, while business B has a dental plan. He may deduct the premiums for medical to the extent business A has earned income. The same applies to business B.

[dyne]

medicare

I called the Chief Council of IRS and asked if Medicare B premiums are deductible as
business self-employed health insurance. They answered: "No".

[dyne]

H & A Insurance IRC 162.

Office of Chief Council, IRS, Memo dated 5-17-2005 says that the health insurance
IS deductible when the health insurance policy is issued in the name of the individual
and not in the name of the business.
However an even more important requirement is that NO deduction is allowable for any
month that the self-employed individual or spouse is eligible to participate in a subsidized
health plan maintained by an employer or former employer. This disqualifies many taxpayers.
I met the creator of this law and I told him that it is a virtually useless law
as it is so restricted. I would prefer that the law and deduction not exist.

[Armando Beaujolais]

This whole self-employed health insurance mess is, in my opinion, the result of somebody making up rules that don't have any basis in the law.

The code says "...the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents."

It doesn't say anything about "established under the business," "in the sole proprietor's name," "you can only use one sole proprietorship."

It's not in the code, and I don't believe it's in the regs unless it's buried somewhere.

I think this is a case where somebody at the IRS decided for whatever reason to put "established under the business" in the instructions. The latest directive from the IRS is a convoluted mess that doesn't do anything to make sense of the rule. I think they're spraying perfume on a skunk. It ends up smelling just as bad, only different.

[dyne]

more H & A deduction

IRC 162(l)(2)(B) states that the deduction is allowed as long a there is no subsidised
insurance paid by the employer of the taxpayer or the spouse. It says nothing about
insurance subsidised by a former employer causing the deduction to be denied. Accordingly
I plan to allow the deduction for former employees who are under a subsidized plan after they retire.
A deduction is clearly not allowable for medicare B premiums since
the IRS Cheif Council told me on the phone it is not allowable. But medicare is NOT
a subsidized plan provided by an EMPLOYER. I believe that it is subsidized by the
federal goverment. In my experience allmost all of my clients who operate a business
have either themselves or their spouse covered by a subsidised plan and are therefore
not entitled to the deduction. Since the medicare part B insurance is not subsidised
by their employer, the existance of such insurance can NOT be used to disallow the
deduction of other health insurance paid for by the taxpayer as long as it itself is
not subsidised. Or does IRS contend that medicare B was subsidised through the
FICA payroll system in prior years? Any opinions ?

[jimmcg]

SE Health Insurance

Agree with a previous comment that this whole area is a mess of opinions not based on Code or Regs. We should base our actiions on our interpretation of the facts and take it to the audit and appelate level when necessary.

[Jiggers]

Self-Employed Health Insurance & Medicare

I contacted the NATP Tax Knowledge Center who researched the question about Medicare premiums that are deducted from a taxpayer's social security monthly benefits. Their response is that it is not deductible as "Self-Employed Health Insurance".

[Unregistered]

Health premiums

Well, ok, I'm glad you guys cleared that up.............

[Mark Goldberg]

Still not convinced

Until we find out why the IRS says Medicare B does not count I am not convinced. If the reason is, it is a subsidized plan, then I don't buy it. The law says subsidized by an employer. Medicare B is not subsidized by an employer. It is subsidized by the government. We need a Court case. Till then, it is every tax professional for himself.

[Unregistered]

SE Heath Insurance

On the NAEA webboard, this issue was discussed. Many EAs are familiar with Claudia Hill. She is an EA and pretty well known provider of seminars. She is also on the staff of a tax research publisher. One of the EA members asked about this issue.

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).

[S T]

Medicare Part B and the Self Employed

Thank you for this post. I had not found it on the NAEA, and Claudia Hill is very well known and respected.

I have always failed to see why the PART B medicare would NOT be allowed as a self employed insurance premium deduction as an adjustment on the front page of the 1040. The taxpayer that is 65 or over has to sign up for this medical insurance, it is voluntary.

So if you have a self employed individual that is age 65 or over, they more than likely have signed up for Part B as a VOLUNTARY insurance coverage and pay for it each month out of their benefits and have either assigned the coverage to an HMO plan such as Secure Horizons, Kaiser, etc, or they have opted for a PPO plan and then on top of the Part B premiums pay for an additional supplemental coverage through Blue Shield, Blue Cross, Aetna, etc.

And the term "subsidized" what does that actually mean in the context of this deduction?

I would think that both the Medicare Part B premiums paid monthly AND the supplemental plans bought privately would qualify as a deduction for the self employed individual.

So far I have found nothing to the contrary, and I do not like to accept that an IRS Revenue Agent said NO IT IS NOT DEDUCTIBLE without any source documentation.

Sandy

[Bees Knees]

Claudia Hill did not address the established under business issue.

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. Therefore, that leaves room for Armando and I to argue the issue. I of course will take the correct position while Armando argues the losing side.

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.

[jainen]

Thank you

That was a well-presented explanation of the rules and the intent behind the rules. This is only a gray area if you ignore the plain words.

[Armando Beaujolais]

That was a well-presented explanation of the rules surrounding this issue. Too bad the reasoning is flawed.

>>>"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.”

You're misreading the code. The phrase "...derived by the taxpayer from the trade or business..." does not refer to the medical expense. It refers directly to "...the taxpayer's earned income..."

The code section you cited does not address whether a particular expense qualifies or not. It's talking about the income limit.

>>>"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."

I differ. I agree that the code does not define insurance in this context. I think you're making a huge leap backwards by arbitrarily deciding that voluntary Medicare premiums don't qualify. Why not?

Let's look at Pub 502.

"MEDICARE A

"If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare A. The payroll tax paid for Medicare A is not a medical expense. If you are not covered under social security (or were not a government employee who paid Medicare tax), you can voluntarily enroll in Medicare A. In this situation you can include the premiums you paid for Medicare A as a medical expense.

"MEDICARE B

"Medicare B is a supplemental medical insurance. Premiums you pay for Medicare B are a medical expense. If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. If you were over age 65 or disabled when you first enrolled, check the information you received from the Social Security Administration to find out your premium."

Those are the stated rules for itemized deductions. Why all of a sudden pull out Medicare premiums and say it's not insurance for purposes of 162(l)?

>>>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.

Now I answer. Yes, a corporate employee could pay for Medicare with pre-tax dollars. It's called a Medical Reimbursement Plan.

>>>"Oh my, there’s that established under a trade or business talk again."

That's the mess, and why so many people are misguided. The "established" language refers directly to the income limit, not the expense. Some instruction writer at the IRS misread it and put that incorrect reference in the instructions saying the plan has to be established under the business. The IRS tried to spray perfume on a skunk by issuing the letter ruling, but the letter ruling doesn't solve anything, because the code is clearly in conflict with IRS position.

>>>"How can any person in their right mind make the argument that Medicare insurance is “established” under a taxpayer’s trade or business?"

I've seldom been accused of being in my right mind, but the short answer to that is it doesn't make any difference. Insurance doesn't have to be established under the taxpayer's trade or business. "Established" refers to the income limit.

[dyne]

IRS's position

When I called the IRS Chief Council, I talked to a woman who advised me that H & A
insurance is not deductible under Sect 162. I failed to ask her why. My mistake.
To provide further info about IRS, the last audit I was involved with was an issue which I
researched. I met with an IRS Conferee and the taxpayer and quoted the authority and
law which clearly established that my taxpayer was correct and owed no additional tax.
The IRS Conferee said you are absolutely correct in the law and authority that you quote
but it is the position of IRS that the taxpayers owes the tax. No explanation, no law,
nothing. I asked that it be submitted unagreed and that that the taxpayer contact a local
tax attorney. The tax attorney told him that his fee would exceed the tax, so the taxpayer
should concede. The point is that IRS apparrently now ignores tax law, etc. when it
so desires.