SEHI limitations - a NEW wrinkle needing an answer

[FEDUKE404]

Married man has filed a Schedule C for several years. He has had a single insurance policy ("retiree plus family") that covers himself, spouse, and their child who is 23 YOA. Neither husband nor wife receives a W2, and both pay Medicare B premiums. The unmarried child is not their dependent.

Conventional wisdom () would have allowed as a potential SEHI adjustment to income the cost of the family policy plus the Medicare B premiums for the husband. The Medicare B premiums for the wife would not have qualified for any SEHI consideration.

I hope we are all, so far, agreed. . .

Through no actions of the taxpayer, in 2014 the insurance coverage was reorganized. Although the husband pays essentially the same premiums to the same provider, there now are technically three separate insurance "policies" with different policy numbers (not just the last couple of digits). There is also provided a breakdown of the "cost" for Policy A and Policy B and Policy C.

I fear that the Schedule C owner can now only take as a potential SEHI adjustment to income the cost of "his" policy plus the cost of his Medicare B premiums. As a retiree, the cost of "his" part of the coverage is far less than the cost of the "plus family" coverage he carried/carries. If my assumption is correct, he will see a significant decrease in his 2014 SEHI adjustment to income.

Is there any hope of claiming the costs of the coverage for his wife and child under these new circumstances?

FE

[Bees Knees]

TTB, page 5-11 says : "Deductible amounts include health insurance premium paid for the self-employed taxpayer, spouse, dependents, and a child under age 27..."

I'm not sure that separating out the costs and providing separate IDs on a policy changes the fact that it is still a single health insurance policy paid by the self-employed taxpayer. I doubt, for example, that the cost of a single policy for the spouse only, or adult child only would be the same as their allocated portion of the cost of single + family coverage. Thus, I would continue to deduct the cost of all three under the assumption that it is still just one policy.

[Kram BergGold]

Disagree

The insurance policies for the spouse and child are no longer in the taxpayer's name so I say they don't qualify.
Bees, if the reorganizaton of the policies made the spouse the insured and the taxpayer was covered on her policy would you take it as SE Health? To me it is the same issue.

[BHoffman]

FEDUKE404 - How is the bill addressed - to the taxpayer, or are there three separate bills arriving each month addressed to each insured member? Can the taxpayer show that he paid the premiums? Can the insurance agent provide a letter for your files that says the taxpayer is responsible for payment of the premiums of all 3 people?

I'm agreeing with Bees and vote that you take the full deduction. An administrative insurance company change doesn't change the facts, and there is a history. I think you could defend the deduction if it ever comes up.

[TaxGuyBill]

I've always had the same understanding as Kram. If the policy is not in the name of the taxpayer, it is not 'established' under the business and therefore not deductible.


HOWEVER, I recently re-read the Memorandum where the IRS states that Medicare premiums count for the SEHI deduction. Here is an interesting paragraph that caught my attention:

Medicare is insurance that constitutes medical care under section 162(l). Therefore, all Medicare premiums are similar to other health insurance premiums and can be used to compute the deduction under section 162(l). This rule also extends to Medicare premiums for coverage of a self-employed individual’s spouse, dependent, or child (as defined in section 152(f)(1) who as of the end of the taxable year has not attained age 27).

http://www.irs.gov/pub/irs-wd/1228037.pdf

I could be wrong, but as far as I know, Medicare premiums for your Spouse or Dependents can not be in your name. They would be in the name of the Spouse or Dependent. If that is true, this paragraph seems to indicate that insurance that is NOT in your name, but in the name of your Spouse or Dependent, IS eligible for the SEHI deduction.


What do you think?

[kathyc2]

My opinion is it is deductible. I also think both husband and wife part B is SEHI.

http://www.irs.gov/pub/irs-wd/1228037.pdf

[FEDUKE404]

More info

The "bill" is a monthly debit from retiree income of the husband. It has been that way for several years, and also continues to show up as a single debit.

It would be an uphill climb to say the monthly Medicare B premiums, for and paid by the wife from her own Social Security benefits, are "in the name of" her husband who is the Schedule C owner.

What really is frustrating is the husband could have continued the same coverage into 2014, i.e. a single policy ("his") which covered all three individuals. He chose to switch to a Medicare Advantage Plan, leaving the child in coverage similar to what already existed under the old plan. For the "old" folks, there are now two separate policy numbers, two sets of EOBs, two online accounts, etc. There are also similar, separate, arrangements for the child's policy which obviously cannot be a Medicare Advantage Plan.

For my 2¢ worth, I still feel the husband can only take the cost of "his" policy plus his own Medicare B premiums. The cost of his wife's (and child's?) insurance, plus the cost of his wife's Medicare B premiums, must slide over to Schedule A for the usual AGI haircut. (Of course, in North Carolina, those medical deductions now evaporate into thin air. . .)

Thanks for the comments. It makes for an interesting exchange of ideas.

FE

[kathyc2]

IRS Memorandum linked above states:

Medicare premiums may be deducted under section 162(l) for coverage of the self-employed individual's spouse.....

[Bees Knees]

IRS Memorandum linked above states:

Medicare premiums may be deducted under section 162(l) for coverage of the self-employed individual's spouse.....

To me, this is a key point. IRS opened a can of worms when they came out with that ruling, basically saying the "in the name of the business" rule is meaningless. If Medicare for the spouse is deductible, so is Medigap insurance for the spouse and kids.

[FEDUKE404]

But on further review

IRS Memorandum linked above states:

Medicare premiums may be deducted under section 162(l) for coverage of the self-employed individual's spouse.....

Some interesting reading:

http://www.marcumllp.com/blog-tax-and-business/deductibility_of_medicare_premiums_as_self_employed_health_insurance_deduction_-_tax_advantages-_dis

****

EXCERPTS (all highlights are my own):

Recently the IRS reversed their opinion on the matter referencing Notice 2008-1. Notice 2008-1 states that as long as the self employed individual’s business ultimately pays for the health insurance and follows certain reporting requirements, the health insurance premium payments are deductible as above the line for the self employed individual. The Office of Chief Counsel IRS Memorandum extended Notice 2008-1 to apply to self employed individuals who pay Medicare premiums.

The IRS could disallow this deduction. Although the Office of Chief Counsel IRS Memorandum is the IRS’s opinion it is not the law and cannot be relied upon.

In order for the Medicare premium payments to be deductible under Section 162(l) the medical plan must be established by the taxpayer’s business. If the taxpayer's Medicare premium payments were not properly administered and accounted for by their business, then their premium payments are not considered established by their business and are not deductible. Most self employed individuals pay Medicare premiums from their Social Security benefits. In this case the business will need to reimburse the taxpayer for the premiums paid. In addition, the business must report the income on the self employed individual’s Form W-2 or Schedule K-1 depending on whether the self employed individual is a more-than-2% shareholder or partner. The self employed individual is responsible for reporting the income on their Form 1040.


***

FWIW, it took the IRS many years to allow ANY Medicare B premiums to be considered for SEHI. Maybe it will take a few more for them to straighten out this related issue. . .

FE

[DonB]

I recall discussions on this that concluded there are no health insurance policies in the name of a business of a sole proprietor and therefore in the name of the individual is the only choice and is acceptable. I am reading the Memorandum as both taxpayer and spouse part B premiums can be used for SEHI adjustment as long as other restrictions do not apply. This is a new one for me.

[ruthc]

Medicare Advantage Plans?

If it so that Medicare premiums are ok, then would this also include the Advantage plans for each spouse?

[kathyc2]

If it so that Medicare premiums are ok, then would this also include the Advantage plans for each spouse?

According to AICPA, yes.

http://www.aicpa.org/publications/taxadviser/2012/november/pages/clinic-story-08.aspx

[ruthc]

Thank You!

Thanks for the link. I will print it out for my files. It's great to have backup. There have been so many posts on this subject. I am glad to get it finally!!

[Kram BergGold]

Reimbursing

The IRS came out with something that curtailed ones ability to reimburse for medical insurance. I bring this up relative to the issue of deducting a spouse's Medicare Premium as SEHI since it almost always is taken from the spouse's SS, it would have to be reimbursed to make the argument that it is deductible as SEHI. .