Self Employment Health Insurance Deduction

[lem1955]

For those of you who have quit full time employment and are working part time as consultants, do you take the self-employment health insurance deduction (line 29) on the 1040 Schedule 1 form? What does it mean to have purchased health insurance "under" your business?

 

[Rianne]

DH has part time consulting LLC business. We're on ACA and have to keep our income below $65K this year, 2020 is $67K, I think. So the HC deduction is irrelevant to us. Are you on the ACA?

 

[lem1955]

DH has part time consulting LLC business. We're on ACA and have to keep our income below $65K this year, 2020 is $67K, I think. So the HC deduction is irrelevant to us. Are you on the ACA?

Nope. I pay full freight for health insurance.


P.S. I like your dog avatar!

 

[Rianne]

P.S. I like your dog avatar!

The loves of my life. The big guy passed 2 years ago and I still shed a tear when I think of him chasing tennis balls in the lake. You have quite a cutie yourself!

 

[EastWest Gal]

As an independent contractor, you pay for your own health insurance, and you can subtract the health insurance and long term care insurance premiums as a line item on your 1040, but you cannot subtract more than your self-employed earned income for the year. You don’t have to have a named business to do this.

If you buy health insurance for yourself and employees, that is a business expense on schedule C. If you are self-employed as a consultant with a contract, you can absolutely take that line 29 deduction.

Also as a consultant, you can take the mileage deduction, even to and from your home.

Of course, you’ll be paying the self-employment tax.

I use a tax accountant and he advised me to do all these things. I’m not the expert.

 

[Scrapr]

As a Sub S owner I have to add back health care premiums on my W2. All >2% owners. It's a PITA and I do not understand it. Just a line item on the payroll company input form.

 

[kaneohe]

...................................What does it mean to have purchased health insurance "under" your business?

perhaps not much...............volunteer AARP tax preparers were advised last year that if you have Medicare,you can deduct Medicare premiums (up to self-employed income). Obviously Medicare has nothing to do with the business....but you do need a business to take the deduction.

 

[kaneohe]

DH has part time consulting LLC business. We're on ACA and have to keep our income below $65K this year, 2020 is $67K, I think. So the HC deduction is irrelevant to us. Are you on the ACA?

Might want to take another look : The HC deduction in question is an "adjustment" also called above-the-line deduction which applies before
AGI is determined. In other words, if applicable to you, it would lower AGI and would help w/ your ACA issue. Don't know about how the LLC part applies
but check https://turbotax.intuit.com/tax-tip...nce-premiums-if-youre-self-employed/L6bRhLaVE
which has a section about LLC.

 

[jebmke]

As an independent contractor, you pay for your own health insurance, and you can subtract the health insurance and long term care insurance premiums as a line item on your 1040, but you cannot subtract more than your self-employed earned income for the year. You don’t have to have a named business to do this.

Actually, it is a little more complicated than this. The maximum adjustment is the business income less the SE tax adjustment (1/2 of the SE tax).


Any not taken as an adjustment can be applied to Schedule A.

 

[Bir48die]

As an independent contractor, you pay for your own health insurance, and you can subtract the health insurance and long term care insurance premiums as a line item on your 1040, but you cannot subtract more than your self-employed earned income for the year. You don’t have to have a named business to do this.

If you buy health insurance for yourself and employees, that is a business expense on schedule C. If you are self-employed as a consultant with a contract, you can absolutely take that line 29 deduction.

Also as a consultant, you can take the mileage deduction, even to and from your home.

Of course, you’ll be paying the self-employment tax.

I use a tax accountant and he advised me to do all these things. I’m not the expert.

+1

Schedule C is correct. Tax programs will automatically transfer to line 29

 

[Rianne]

Might want to take another look : The HC deduction in question is an "adjustment" also called above-the-line deduction which applies before
AGI is determined. In other words, if applicable to you, it would lower AGI and would help w/ your ACA issue. Don't know about how the LLC part applies
but check https://turbotax.intuit.com/tax-tip...nce-premiums-if-youre-self-employed/L6bRhLaVE
which has a section about LLC.

Appreciate the info. In 2019 our monthly premium for HDHP is $8.28 with a family deductible of $13,600. In 2020 our MP is $7 something/month. We have been lucky our 2018-2019 health costs average < $2000/yr. The HSA contributions will hopefully build to a safe level-we max those contributions. Good health is our ticket to success and I cannot be more grateful we've been fortunate so far.

 

[pb4uski]

All interesting, but sometimes I wonder if it should be called wealth insurance rather than health insurance.

 

[DrBrisket]

... What does it mean to have purchased health insurance "under" your business?

You have to purchase an ACA plan or a small business health plan to deduct the premiums from your self-employment income.

Perhaps some counter-examples are more helpful. If you are now self-employed, but are purchasing health insurance through COBRA from your previous employer, then you can NOT deduct the premiums paid from self-employment income. In this case the insurance is "under" your previous employer, so is only eligible for itemizing on Schedule A subject to the 10% AGI limitation.

Similarly, if you get health coverage through a spouse's employment, this insurance is NOT "under" your business and any premium deduction has to go on Schedule A subject to aforementioned limitations.

This is not exhaustive, but hope this helps. Spent waayyyyy tooooo much time on Roth conversion calculations and this was a critical aspect of my 2019 tax estimation.

 

[kaneohe]

You have to purchase an ACA plan or a small business health plan to deduct the premiums from your self-employment income.

Perhaps some counter-examples are more helpful. If you are now self-employed, but are purchasing health insurance through COBRA from your previous employer, then you can NOT deduct the premiums paid from self-employment income. In this case the insurance is "under" your previous employer, so is only eligible for itemizing on Schedule A subject to the 10% AGI limitation.

Similarly, if you get health coverage through a spouse's employment, this insurance is NOT "under" your business and any premium deduction has to go on Schedule A subject to aforementioned limitations.

This is not exhaustive, but hope this helps. Spent waayyyyy tooooo much time on Roth conversion calculations and this was a critical aspect of my 2019 tax estimation.

some conflicting info here re: COBRA

" Premiums paid for health insurance coverage during a month where the taxpayer could participate in an employer-subsidized health plan are not allowable for this deduction, whether or not the taxpayer did participate.
 But coverage from a former employer does not affect what can be claimed – for example, if the taxpayer has a COBRA policy that is part of a separation package, with part of the policy costs paid by the former
employer, the taxpayer can still claim the premiums that he/she paid."

p.66 http://taxaide-southbay.org/uploads...8_ca_crm_-_8_january_2019_-_without_index.pdf

 

[DrBrisket]

some conflicting info here re: COBRA

" Premiums paid for health insurance coverage during a month where the taxpayer could participate in an employer-subsidized health plan are not allowable for this deduction, whether or not the taxpayer did participate.
 But coverage from a former employer does not affect what can be claimed – for example, if the taxpayer has a COBRA policy that is part of a separation package, with part of the policy costs paid by the former
employer, the taxpayer can still claim the premiums that he/she paid."

p.66 http://taxaide-southbay.org/uploads...8_ca_crm_-_8_january_2019_-_without_index.pdf

Made me double check as I just had enough time to do some more Roth conversions.

Unfortunately, I still have to stick to the assertions of my previous post. Here's some links that I found in my browser history from my searching on this matter:

Health Insurance Costs for Self-Employed Persons

If you were self-employed and had a net profit for the year, you may be able to deduct, as an adjustment to income, amounts paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, your dependents, and your children who were under age 27 at the end of 2018. For this purpose, you were self-employed if you were a general partner (or a limited partner receiving guaranteed payments) or you received wages from an S corporation in which you were more than a 2% shareholder. The insurance plan must be established under your trade or business and the deduction can't be more than your earned income from that trade or business.

(emphasis added by me) Source: irs.gov; no recent changes are noted in the 2019 updates page.

COBRA premiums pay for an insurance plan established under a former employer, so it seems clear to me this rules out a Schedule C deduction for COBRA premiums.

Now, that leaves the question of ACA premiums above the amount of any Premium Tax Credits qualifying for the Schedule C deduction. This is answered in this IRS memo on the second page:

A self-employed individual who is a sole proprietor may deduct the medical care insurance costs of the sole proprietor and his or her family from the earned income of his or her trade or business when the health insurance policy purchased by the sole proprietor is issued in his or her individual name and not in the name of the sole proprietor’s trade or business.

So where does this little excursus lead next? To none other than the instructions for the venerable ol' 1040 instructions, where, on page 91, we find the following requirement for the Self-Employed Health Insurance Deduction:

The insurance plan must be established under your business. Your personal services must have been a material income-producing factor in the business. If you are filing Schedule C, C-EZ, or F, the policy can be either in your name or in the name of the business.

So, while there may be conflicting opinions on the web, it seems that the IRS is, unfortunately, quite consistent on answering the question at hand.

Bummer...no more Roth conversions for me this year.

 

[SecondCor521]

So if I have a side gig that I do a Schedule C for and use the ACA for myself and my family, then I can deduct my portion of my ACA premiums as a business expense?

 

[DrBrisket]

So if I have a side gig that I do a Schedule C for and use the ACA for myself and my family, then I can deduct my portion of my ACA premiums as a business expense?

Assuming you are not eligible for subsidized health coverage through your own or your spouse's or a dependent's employment , then, IMHO, the answer is YES!

And, per the 1040 instructions, on page 91 (the 2019 instructions are in draft, but have the same language with a change to the year) has this exception:

But if you also were eligible to participate in any subsidized health plan maintained by your or your spouse's employer for any month or part of a month in 2019, amounts paid for health insurance coverage for that month can't be used to figure the deduction. Also, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2019, don’t use amounts paid for coverage for that month to figure the deduction.

The deduction is limited to the net profit from your side gig. Any premium payments over this amount will have to go on Schedule A which is much less desirable.

 

[SecondCor521]

Thanks, I'll look into that.

I'm FIREd and single so no spouse and no employer coverage. And my dependents are currently all students, so no employer coverage that way.

 

[Potstickers]

Assuming you are not eligible for subsidized health coverage through your own or your spouse's or a dependent's employment , then, IMHO, the answer is YES!

And, per the 1040 instructions, on page 91 (the 2019 instructions are in draft, but have the same language with a change to the year) has this exception:



The deduction is limited to the net profit from your side gig. Any premium payments over this amount will have to go on Schedule A which is much less desirable.

But COBRA isn't subsidized, at least in most cases.

DH is retired. In 2020, we will elect (I think) COBRA through his (former) employer for medical coverage. Vision and dental coverage we're buying separately. In 2020, can I deduct the cost of vision and dental coverage above the line (I have plenty of business income) but have to deal with the COBRA premiums as an itemized deduction subject to the 7.5% limitation?

 

[DrBrisket]

But COBRA isn't subsidized, at least in most cases.

DH is retired. In 2020, we will elect (I think) COBRA through his (former) employer for medical coverage. Vision and dental coverage we're buying separately. In 2020, can I deduct the cost of vision and dental coverage above the line (I have plenty of business income) but have to deal with the COBRA premiums as an itemized deduction subject to the 7.5% limitation?

That sounds correct to my understanding except the 7.5% limitation is 10% starting in 2019.

From the Draft 2019 1040 instructions on page A-1:

Medical expense deduction. The adjusted gross income (AGI) threshold for deducting medical and dental expenses has increased to 10% for all taxpayers.

 

[SecondCor521]

That sounds correct to my understanding except the 7.5% limitation is 10% starting in 2019.

From the Draft 2019 1040 instructions on page A-1:

Except the spending bill passed about a week ago extended the 7.5% floor to 2019 and 2020. See here, among others:

https://www.forbes.com/sites/kellyp...healthcare-tax-repeal--retirement-plan-tweaks

I'm sure the IRS will update the 2019 draft instructions before releasing them.

 

[Luck_Club]

Appreciate the info. In 2019 our monthly premium for HDHP is $8.28 with a family deductible of $13,600. In 2020 our MP is $7 something/month. We have been lucky our 2018-2019 health costs average < $2000/yr. The HSA contributions will hopefully build to a safe level-we max those contributions. Good health is our ticket to success and I cannot be more grateful we've been fortunate so far.

WOW $7 a month for health insurance premium?

How is that even possible?

 

[DrBrisket]

Except the spending bill passed about a week ago extended the 7.5% floor to 2019 and 2020. See here, among others:

https://www.forbes.com/sites/kellyp...healthcare-tax-repeal--retirement-plan-tweaks

I'm sure the IRS will update the 2019 draft instructions before releasing them.

Thanks for pointing that out!

Strangely enough, we had COBRA coverage in 2019 and this is just enough of a difference to allow me to use Schedule A and save a few bucks on my 2019 taxes, but does not impact how much Roth conversions as I was already up against the AGI limits for AOTC.

 

[DrBrisket]

WOW $7 a month for health insurance premium?

How is that even possible?

The short answer is ACA premium tax credits (PTC).

The in-depth answer is a straight-forward, but leads to a bit of a headscratcher for me.

From irs.gov

The amount of the premium tax credit is generally equal to the premium for the second lowest cost silver plan available through the Marketplace that applies to the members of your coverage family, minus a certain percentage of your household income.

Plans available on the marketplace are determined by the county you reside in.

In our case, we are targeting income to be just below 400% FPL for 2020 as we are in a multi-year Roth conversion process. This income level substantially reduces the PTC. However, the PTC is available on any ACA plan offered in my county, so we chose a Bronze plan for 2020 that has a net cost of around $500/month for my family.

The headscratcher for me is: if I were to move 7 miles west to the next county over, the EXACT SAME plan we chose for 2020 would be under $100/month for my family. This is because the second lowest price silver plan in the adjacent county has a much higher cost than second lowest cost silver plan in my county. We are not willing to move for a variety of reasons, but this is an interesting form of "geo-arbitrage".

 

[Luck_Club]

The short answer is ACA premium tax credits (PTC).

The in-depth answer is a straight-forward, but leads to a bit of a headscratcher for me.

From irs.gov
.

I know it is ACA tax credits but according to Rianne, her family has a $70,000 spend per year. That money must be coming from somewhere. If you ask me this is no different then Medicare asset protection, which is so frowned upon.

Meanwhile my 74 year old father, who never made more than $30K per year, and lives on a small pension and SS amounting to a bit under 30K per year pays $257 per month in medicare health insurance, for a single person.