By Bill Bischoff
Sole proprietors, partners, limited liability company (LLC) members, and S corporation shareholders can deduct qualified health insurance premiums paid to cover themselves and family members. This is the so-called self-employed health insurance deduction.
For 2010, you claim it on Line 29 on Page 1 of Form 1040. Because it’s an above-the-line deduction (meaning a deduction claimed on Page 1), you don’t have to itemize to benefit.
Medicare Part B Premiums Suddenly Count as Qualified Expenses
For years, the IRS had taken the position that Medicare Part B premiums did not count as qualified health insurance premiums. This was bad news if you are an older small business owner because your Medicare Part B premiums for 2010 could range from about $1,300 to over $4,200, depending on your income. If you are married, your spouse’s premiums could be in the same range. So we can be talking about major bucks.
Now for the good news: with no fanfare, the IRS suddenly reversed course on the Medicare Part B premium issue. We know this because the 2010 instructions for Line 29 of Form 1040 explicitly allow you to include Medicare Part B premiums in your health insurance costs for purposes of the self-employed health insurance deduction.
Make sure you (or your tax preparer) take the new taxpayer-friendly IRS attitude into account when putting together your 2010 return. The additional Line 29 write-off could lower your federal income tax bill by hundreds of dollars or more.
It’s a Double Tax-Saver!
As a bonus, you can subtract your self-employed health insurance premiums (the amount claimed on Line 29 of Form 1040) from self-employment income when calculating your 2010 self-employment tax bill. So the additional Line 29 deduction for Medicare Part B premiums could lower your self-employment tax bill by a significant amount as well as your federal income tax bill. It’s a double tax saver!
What about Medicare Part C and D Premiums and Medigap Premiums?
The IRS still says nothing about whether you can include premiums for Medicare Part C coverage (for so-called Medicare Advantage HMO-type coverage) or premiums for Medicare Part D coverage (for prescription drugs) in your deduction for self-employed health insurance premiums. The IRS also says nothing about premiums for Medicare supplemental insurance policies (for so-called Medigap coverage). It would be nice if the government would take an updated stand on all the Medicare insurance premium issues at one time instead of issuing piecemeal guidance.
The Bottom Line
What I’ve told you here is all good news, but I would love to hear what any tax pros who read this think about the Medicare Part C and D and Medigap premium question. Will you deduct these premiums on Line 29 of your client’s 2010 returns? What about those of you who will be preparing your own returns? Readers: please weigh in.