Tuesday, April 2, 2013

Self-employed Seniors: Don’t forget to deduct your Medicare Premiums on your tax return

Do you know that self-employed seniors can use their Medicare and other health insurance premiums to reduce their income tax liability? Here’s how. 

Section 162(I) of the Tax Code provides a special health insurance deduction for self-employed individuals. The deduction is for medical, dental or long-term care insurance premiums that self-employed people pay for themselves, their spouse and their dependents. 

But until May of last year it was not clear that premiums paid for Medicare coverage were allowable deductions under that section of the tax law. Then on May 1, 2012 the IRS issued Chief Counsel Advice (CCA) 201228037 which clarified that Medicare premiums are fully deductible.

The deduction is particularly valuable because it is not limited by the general limitations on deducting medical expenses (currently 7.5% of AGI for persons over age 65). The premium costs are not listed on Schedule A – itemized deductions. Instead you take them "above the line" on Form 1040 - Line 29 – where they reduce your Adjusted Gross Income.

People who may take the deduction include sole proprietors who file Schedule C, farmers who file Schedule F, partners in a partnership and actively participating members in an LLC treated as a partnership, and employees of an S-corporation who own 2% or more of the S-corporation's stock. 

Premiums you pay for all Medicare parts are deductible. In addition, you can deduct other premiums you pay for medical insurance such as your Medicare Supplement policy, dental insurance, and long term care insurance premiums.

The IRS Advice states that “Medicare is insurance that constitutes medical care under section 162(l). Therefore, all Medicare premiums are similar to other health insurance premiums and can be used to compute the deduction under section 162(l). This rule also extends to Medicare premiums for coverage of a self-employed individual’s spouse, dependent, or child (as defined in section 152(f)(1) who as of the end of the taxable year has not attained age 27). . . . Self-employed individuals who failed to deduct Medicare premiums in prior years may file an amended return to claim a refund (subject to the statute of limitations).”

Note that the deduction is available only to the extent that you had self-employment income during the year. It may also be limited if you or your spouse were eligible to participate in a subsidized group health insurance from an employer. See IRS Instructions for Form 1040 for 2012 pages 31-32 for more details and a Self-Employed Health Insurance Deduction Worksheet.

Here are some links to further information

IRS Chief Counsel Advice (CCA) 201228037

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