Federal Income Tax: Deducting Long Term Care Premiums

[donheff]

I am hoping some of the knowledgeable people on this forum better understand self employed deductions that I do. My wife is effectively retired but for several years will continue to receive about $30K per year in partnership income from her law firm. She pays self employment taxes on this income. She gets subsidized health insurance through my retired Fed policy. But we pay for unsubsidized long term care insurance by check. We have itemized in previous years and deducted LTC premiums when the overall medical expenses hit the threshold. This year we are not itemizing.

As I was entering DW's K-1 in turbo tax this afternoon, the questionnaire came to a box that asked if she pays for health insurance and/or long term care insurance on her own. I can't enter the HI premiums since they are from a subsidized employer program but the LTC premiums are on us. When I enter the information on LTC premiums (hers and mine) we get a big deduction off the top - no itemizing needed. I am leery of unexpected windfalls so I tried to research the topic and ended up even more confused. It sounds like she could definitely claim this if she owned her own business but for partnership LLCs it was very confusing as to whether the LTC policy had to be something offered through the firm or could simply be a policy she picked up on her own.

Has anyone else dealt with this issue?

 

[donheff]

I found some additional information but am still confused. This appears to be new for 2018. Turbo Tax discusses it in a publication noting that "most" self employed including partners will qualify for a page 1 deduction of premiums even if they don't itemize. IRS Publication 535 covers this. But I find Pub 535 confusing. In the section for health insurance premiums it appears to require that the health insurance be "established under the business." We don't qualify for that. But the publication then goes on to discuss Medicare premiums and Long Term care premiums. These appear to be a separate deal to me but it may only apply if you are already able to take the deduction for health insurance.

 

[gauss]

I found some additional information but am still confused. This appears to be new for 2018. Turbo Tax discusses it in a publication noting that "most" self employed including partners will qualify for a page 1 deduction of premiums even if they don't itemize. IRS Publication 535 covers this. But I find Pub 535 confusing. In the section for health insurance premiums it appears to require that the health insurance be "established under the business." We don't qualify for that. But the publication then goes on to discuss Medicare premiums and Long Term care premiums. These appear to be a separate deal to me but it may only apply if you are already able to take the deduction for health insurance.

edit: response retracted. As sole-proprieter vs partership self-employment income appear to be treated differently by the IRS. See following post. -gauss

[-]Don't get caught up on "established in the name of the business". If she meets the requirements, take the deduction. This was the direction at the volunteer tax prep organization that I take part in.

Read about the Self-Employed Health Insurance Deduction for further info.

If memory serves, the amount of her deduction will be capped by the amount of her self-employment (aka Schedule C or Schedule E ) income.

Note this can get a bit confusing if you purchase an ACA policy and qualify for a subsidy/Premium Tax Credit .

reference: check out page 18-4 and 18-5 of the following IRS training document. You will likely find it an easier read than pub 535. Note we aren't allowed to do K1's with self-employment income in the volunteer programs, so the training only mentions Schedule C.[/-]

-gauss

 

[gauss]

The following excerpt from Pub 535 addresses the differences in the "established in the name of the business" for Schedule C vs Schedule E/K-1 filers:

Perhaps look to your wife's K-1 Box 4 "Guaranteed Payments" for further clarification if she qualifies.

You may benefit from visiting a professional business tax accountant this year and see how they prepare your return vs what you have done yourself. They may save you a significant amount of money.

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.

 

[donheff]

I read the info in the pamphlet and concluded that she doesn’t qualify for health insurance premium deductions. But the Medicare and long term care premiums look like they may be a separate matter. That’s what I’m trying to figure out.

 

[Bir48die]

So, LTC premiums are not deductible for SE. They do go in as medical deductions on Schedule A.

 

[donheff]

So, LTC premiums are not deductible for SE. They do go in as medical deductions on Schedule A.

No. LTC premiums are definitely deductible for self employed without itemizing. That is clear from the various articles I cited and from the pamphlet. The only question I have is whether an SE partner can deduct them in the absence of a broader health insurance program under the firm. Medicare premiums are also deductible without itemizing for SE.

 

[gauss]

Have you filled out (by hand) Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet in Pub 535?

It looks like it is designed to walk you through this and indeed LTC premiums are taken into account in step 2 so you may be correct on this.

I would avoid letting the computer fill out the worksheet (at least at first). You will get much more insight into this if you do it yourself and understand it. When the computer asks you questions, the answers are not always obvious and can cause tax issues when they are not answered correctly (correctly in the mind of the software developer that is).

edit: Note it appears that there is a simpler worksheet related to this in the instructions for 1040 - BUT - you must use the long version (ie worksheet 6a Pub 535) if LTC premiums are in play.

-gauss

 

[gauss]

This IRS Memo from 2012
suggests to me in conclusion 2 that Medicare premiums paid by a partner with SE income, must still be reported on K-1 as "guaranteed payments" as mentioned above for regular medical insurance to qualify for the deduction.

Note that Medicare premiums are not addressed separately in worksheet 6A (described above), unlike LTC premiums, so this is consistent with above paragraph.

As such, at this point I would conclude 'no' on the Medicare premiums that aren't reimbursed and reported on K-1, but perhaps yes to the LTC premiums if they meet the other conditions as described in Pub 535 and worksheet 6a.

I look forward to seeing here either a confirmation of my amateur analysis or a counter-opinion.

-gauss

 

[donheff]

Thanks Gauss. A knowledgeable poster on the Turbo Tax forum pointed out al the gotchas. We fit almost all the requirements to qualify except the big one. The firm has to reimburse you for the premiums and report the funds as guaranteed payments of Box 4 of the K-1.