Related Topics and Terms:
(Refer to Self-employed, Sole Proprietor, Independent Contractor and IRS Form SS-8)
Description/Scope: Health insurance Premiums. Medical Reimbursement Plans will not be covered herein but are covered in a separate section.
Purpose: To learn the qualifications for deducting health insurance premiums, keep the premiums within a budget and other items relating to health insurance.
Who This Applies to: for those who are self-employed, SOHO, partners, LLC Members and S corporations
Those who can use this deduction:
MEDICAL SAVINGS ACCOUNT. For tax years beginning after 1996, a new program for a tax-exempt medical savings account (MSA) is available (for up to 4 years) to self-employed persons and employees of a small business. An employer can contribute (within limits) to an MSA for each employee covered under a high deductible health plan. The amount contributed by the employer can be excluded from the employee's income. |
When to Perform: Annually
Special Circumstances: Any time there is more than one business, when the business has a loss or the premiums are more than the loss, either spouse is an employee of another company.
Why This Is Important: Failure to take the deduction may over pay taxes by as much as 40% for those in the upper income tax rates.
General Benefits Objectives: Reduce tax cost, insurance premiums, qualify for the deductions, effective use of management accounting and financial accounting methods.
It would be a big mistake to fail to check for the allowable maximum in health care deductions. In another recent change to the regulations that business filers may have overlooked the percentage deductible has been increased. The increase in the amount allowable for health-care deductions will be increased once again for in later years..
If your spouse works for you, there may be other savings in addition. -- MORE LATER.
Do not overlook MSA's.
Reduce tax cost, insurance premiums, qualify for the deductions, effective use of management accounting and financial accounting methods.
You can deduct 60% of the amount paid during 1999 for medical insurance and qualified long-term care insurance for yourself and your family if you are one of the following.
You are allowed this deduction whether you paid the premiums yourself or your partnership or S corporation paid them and you included the premium amounts in your gross income. Take this deduction on line 28 of Form 1040.
Percentage increases after 2001. For tax years beginning after 2001, the deductible percentage of your health insurance premiums gradually increases. The increases are shown in the following table.
For Tax Years Beginning in:
Deductible Percentage
1999 through 2001
60%
2002
70%
After 2002
100%
Long-term care insurance. If you pay the premiums on a qualified long-term care insurance contract for yourself, your spouse, or your dependents, you can include those premiums when figuring your deduction. But you can include only the lesser of the following amounts.
Use your age at the end of the tax year.
Long-term care insurance contract. A long-term care insurance contract is any insurance contract that only provides coverage of qualified long-term care services. The contract must meet all the following requirements.
Qualified long-term care services. Qualified long-term care services are:
The services must be required by a chronically ill individual and prescribed by a licensed health care practitioner.
Chronically ill individual. A chronically ill individual is a person who has been certified as one of the following.
The certification must have been made by a licensed health care practitioner within the previous 12 months.
Limits. You cannot deduct an amount more than your net earnings from the trade or business in which the medical insurance plan or long-term care insurance plan is established. If the business in which the insurance plan is established is an S corporation, you cannot deduct more than your wages from the S corporation.
Other coverage. You cannot take the deduction for any month if you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. However, any medical insurance payments not deductible on line 28 of Form 1040 can be included as part of your medical expenses on Schedule A (Form 1040) if you itemize your deductions.
Effect on self-employment tax. Do not subtract the health insurance deduction when figuring net earnings for your self-employment tax.
Effect on itemized deductions. Subtract the amount of the health insurance deduction from your medical insurance when figuring your medical expenses on Schedule A (Form 1040) if you itemize your deductions.
How to figure the deduction. Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction.
However, if any of the following apply, you must make special computations:
If you have more than one health plan during the year and each plan is established under a different business, you must use separate worksheets to figure each plan's net earnings limit. Include your insurance payments under that plan on line 1 of the separate worksheet and your net profit (or wages) from that business on line 4 (or line 11).
Law (commentary and citation)
prescribe.
Regs (commentary and citation)
Cases (commentary and citation)
§§§ Law §§§
§162(l) {this is an L}
(l) Special rules for health insurance costs of self-employed individuals
(1) ALLOWANCE OF DEDUCTION
(A) IN GENERAL
In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.
(B) APPLICABLE PERCENTAGE
For purposes of subparagraph (A), the applicable percentage shall be determined under the following table:
For taxable years beginning The applicable in calendar year-- percentage is--
1999 and 2001 60 percent
2002 70 percent
2003 and thereafter 100 percent
(2) LIMITATIONS
(A) DOLLAR AMOUNT
No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.
(B) OTHER COVERAGE
Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer. The preceding sentence shall be applied separately with respect to--
(i) plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and
(ii) plans which do not include such coverage and are not such contracts.
(C) LONG-TERM CARE PREMIUMS
In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1).
(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).
(4) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT TAX PURPOSES
The deduction allowable by reason of this subsection shall not be taken into account in determining an individual's net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2.
(5) TREATMENT OF CERTAIN S CORPORATION SHAREHOLDERS
This subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that--
(A) for purposes of this subsection, such individual's wages (as defined in section 3121) from the S corporation shall be treated as such individual's earned income (within the meaning of section 401(c)(1)), and
(B) there shall be such adjustments in the application of this subsection as the Secretary may by regulations
§§§ Regs §§§
§§§ Cases §§§
This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.
Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
Using the deduction is a tax reduction method that is easy to qualify for. Be certain to furnish the amount of the premiums paid to Bob Parrish CPA PC so the deduction can be claimed.
Hiring family
members can also save taxes by allowing insurance coverage and other benefits to be
provided to the family members at a lower tax cost. For example, a self-employed taxpayer
who provides health insurance to his spouse or other family member as an employee may
deduct the cost of the coverage as a business expense if the spouse is a bona fide
employee.
In addition, the cost of the insurance coverage and insurance reimbursements are excludable from the spouse's gross income. Similarly, in a family corporation or sole proprietorship, income earned from employment can qualify the family member for fringe benefits and retirement benefits that are deductible by the business and non-taxable to the employee. This can be a relatively inexpensive way to provide benefits such as health insurance for parents or other relatives, as well as spouses or children.
This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support sytems - in general about being a manager.
When it comes to cutting health insurance costs the task is certainly a difficult one. The insurance carrier is usually in the driver's seat.
However, you cam make yourself heard as a "back seat driver".
Here are some items that can be controlled by you as the purchaser of the insurance:
Amount of the Deductible
Coverage for medications
Private room selections
Catastrophic illness coverage
From Banking Records
Find the canceled checks for all the premiums paid.
From Customer Records
Not applicable
From Signed Documents
Copy of insurance policy(ies)
From Your Other Business, or Financial Records
Any amounts paid from business accounts
From Corporation or Organization Records (meetings, etc.)
Not applicable
Assistance - What to do
Forms - Checklists - Etc.
Worksheet to compute the deduction
Not applicable
Not applicable
Financial Statement Presentation
Notes to Financial Statements
How to Make Entries
What Kind of Records to Keep
Bookkeeping Methods - Cash, Accrual and Other
How the Business Entity Affects the Recording
Sole Proprietor
Corporation - C & S
Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company
Trusts
Tax Exempt
Alerts & Dangers - Risks
Asset Protection
Your Defense
selfemployed_healthcare.htm
