Taxpayer's business was in bad shape in 2007 and took an early IRA w/d to pay living expenses. AGI is about 13,000 and because all of his tax is penalty on early w/d and SE tax, he gets a better tax advantatge by putting all of the health insurance premiums he paid on Sch A rather than as SE health insurance, since the amount of medical expenses over 7.5 of AGI qualifies for an exclusion from the penalty. Can I elect to put all of the medical expenses on Sch A, rather than use the usually more advantageous SE health ins. deduction?
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The exception to the 10% penalty in §72(t) for medical expenses deductible under §213 applies whether or not the taxpayer itemizes. See §72(t)(2)(B) -
follow up
therefore, given no income tax, it makes sense to still take the se insurance on page 1,Originally posted by New York Enrolled Agent View Post
lowering AGI, just in case, the state income tax starts with federal AGI.ChEAr$,
Harlan Lunsford, EA n LAComment
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The taxpayer is still itemizing no matter what, because of mortgage interest paid. But by foregoing the SE health ins deduction, there is a higher deduction of medical expenses on Sch A over the 7.5% limit, and therefore more is exempted from the penalty for early w/d under section 72(t). The taxpayer pays no income tax regardless of whether I move all the medical to Sch A, but even with higher AGI, the dollar for dollar reduction in the penalty more than makes up for the 7.5% haircut.
This has gotta be a one in a million occurance.Comment
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A couple of things
First, NY EA taught me something I did not know which is you don't have to itemize to use the medical exception BUT the medical that counts is only that which is over 7.5% of income.
I believe the SE health deduction is not mandatory. So whichever way produces the least tax I would go for.Comment
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If I understand this correctly, SE health insurance will count for medical expenses above 7.5% for the purpose of penalty relief?
What comes to my mind is that taking SE health insurance on pg. 1 will also lower AGI, so if allowed to be counted for penalty relief it would be kind of double dipping?Comment
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I'm talking about an either/or, not double dipping. In other words, NOT taking the SE health deduction but instead putting all medical on Sch A.Comment
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It would APPEAR (though I can offer no confirmation) that the S/E health insurance is not an election that you can choose to ignore and then use all the premiums on Schedule A.
I've pasted §162(l)(3)(caps added)
3) Coordination with medical deduction.
Any amount paid by a taxpayer for insurance to which paragraph (1) APPLIES shall NOT be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a) .
Paragraph 1 is the allowance for the deduction to reduce AGI. It APPEARS from reading paragraph 1, there is no election to forgo the deduction. If that's true, then you take the S/E deduction to the extent allowed by income and only the remaining amount would be available for Schedule A. Others obviously may reach a different conclusion.Comment
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Yes, I did read that, and am struggling as to whether it referrs to 'double-dipping' or indeed says the SE health is not aln election. I'm hoping for more to chime in as to their interpretation. For my client's sake, I hope it is the former, but I am afraid it is the latter.Comment
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I didn't know that either and
while, like KB, I believe it's not mandatory, I don't have a cite. But, I've alway done what I wanted with the medical -- no complaints yet. We spend a lot of time debating such arcane and esoteric questions, but meanwhile, back in real life, if nobody here knows, then the odds that such a question would even occur to an IRS clerk are astronomically remote.Originally posted by Kram BergGold View PostComment
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