Self-employed health insurance issues - 2016 version

[FEDUKE404]

For better or for worse, the 2016 IRS Pub 535 is now available.
LINK: -->>> www.irs.gov/pub/irs-pdf/p535.pdf

The below is excerpted from pages 18 and 19 of that publication. All highlights are my own.

Let the cites begin!!

FE

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You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2016, even if the child wasn’t your dependent. A child includes your son, daughter, stepchild, adopted child, or foster child. A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

One of the following statements must be true.

You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040).

You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), box 14, code A.

You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.

You received wages in 2016 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.

The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business.

For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.

For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction. Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer can’t be used to figure the deduction.

[Burke]

Which seems to answer the perennial question about deducting Medicare premiums for the spouse as SEHI. No.

[TaxGuyBill]

Publications have absolutely no authority. They are simplified and based on items that DO have authority. In fact, the part about Medicare is based on Memorandum 201228037.

I have given citations that DO have authority before (namely, Memorandum 201228037). Unless there is newer authoritative guidance that I have not yet seen, I don't understand how anybody could argue that a spouse's Medicare premiums do not qualify when the authoritative Memorandum clearly says it does qualify.

Although I am convinced that a spouse's non-Medicare premiums qualify based on the principle in that Memorandum (it says a spouse's Medicare premiums are deductible), it not specifically addressed in that Memorandum, so I understand why the deductibility of a spouse's non-Medicare premium is an arguable point.

If you can find any newer authoritative guidance than Memorandum 201228037, I would be happy to see it.

[Happy Camper]

Thanks FE!

You just saved me some research time! I know this was more about the Medicare premiums but I needed information on >2% owners of an S corporation.

Question, I have a new client that started a new business in 2016. They are a Partnership with an S election. 50% owners. Since they were a start up, they only paid the Health insurance through the company when the company had the funds. Each had their policy established under their own names. They paid the policy out of their own pocket when the company didn't have the funds.

The way I read this, they have to report the premiums paid whether through the company or out of their own pocket on box 1 of the W-2 for it to qualify as SEHI and deduct on page 1 of the 1040. I don't think this happened. ADP was their payroll company and it seems to me I need to get ADP to update the W-2's to reflect these payments so they qualify for SEHI. If this is done, it is likely the S corporation will show a loss. I don't think that will be an issue as their 'basis' will have increased by the amount they paid out of their own pocket and they have W-2 income to absorb the S corp loss.

Am I missing or misunderstanding anything? Input appreciated!