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The IRS instructions for the self-employed health insurance deduction state: The insurance plan must be established under your business. I checked Pub 535, but it doesn't offer any further clarification of this sentence.

Does that mean I'm not eligible to deduct my health insurance premiums, because it is not in my business's name (which, in fact, I don't even have)?

Ken
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The IRS instructions for the self-employed health insurance deduction state: The insurance plan must be established under your business. I checked Pub 535, but it doesn't offer any further clarification of this sentence.

Does that mean I'm not eligible to deduct my health insurance premiums, because it is not in my business's name (which, in fact, I don't even have)?


If you don't have a business, why are you asking the question? Or do you mean you don't have a business name (other than your personal name)? You don't need a D/B/A name to qualify for the self-employed health insurance deduction.

Ira
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If you don't have a business, why are you asking the question? Or do you mean you don't have a business name (other than your personal name)?

The latter, of course. :)

You don't need a D/B/A name to qualify for the self-employed health insurance deduction.

That's good to hear. But what, then, does the phrase must be established under your business refer to? Any ideas? This is a personal health insurance policy that I took out before I even started my business.

Thanks,

Ken
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You established the "plan" to pay your health insurance premiums under your "business" when you decided to deduct the premiums on line 29. The "plan" is not the insurance policy but the "plan" to pay the premium. ed
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FWIW... I called the IRS recently to get clarification on the phrase "established under business" because it threw me also. I thought because I had schedule C income and was self-employed for several months last year, I could claim the line 29 deduction for premiums paid during that time. The IRS person I spoke to said that what this means is that if your business goes away and the "plan" goes away too, then you can claim the deduction. Simply paying premiums out of pocket doesn't cut it with the IRS.

After speaking with the rep and some research on the net, I have come to following conclusions (other people correct me if I'm wrong):

- sole proprietors with schedule C income are screwed out of the deduction, unless they take active steps to setup a "plan" under their "business".

- a "plan" is not the same as an "insurance policy".

- one "plan" is to have the premiums paid by the business (better if the policy is issued to the business and paid by the business).

- or establish a company "plan" to reimburse the business owner for premiums.

- the "plan" should be in writing to defend it in case of audit.

- doesn't really matter if the company pays the premiums or the company reimburses the owner to take line 29 deduction.

- for s-corps, reimbursement to the owners is subject to federal tax withholding but not FICA, Medicare, and FUTA withholding, and is reported on W-2.

I found this link helpful on the IRS web site:

http://www.irs.gov/businesses/small/article/0,,id=107451,00.html

You should be able to itemize and deduct the premiums on sch. A, however.
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Thanks, perez2000, for all that info.

It doesn't surprise me that the IRS is taking that position. I, too, did a little net exploration just now, and it seems that the "established under your business" phrase really hasn't been adequately explained anywhere. Congress apparently raised the allowable deduction to 100% to put the self-employed on an equal footing with other business forms, so it seems pretty unfair to exclude us small-time Schedule C'ers.

I just got notice that my health insurance rates are going up 31% this month, so ANY little help, even a small deduction, is worthwhile.

I'm probably going to take the chance of an audit and deduct it, because I believe the intent was to allow me to do so, regardless of the IRS interpretation.

Ken (hoping he doesn't regret that decision)
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I have heard of other sole props who take the deduction year after year and haven't had any problems. I really think your position is defensible, and the IRS agents I spoke with didn't come out and say "don't do it". In fact, the agents seemed to skirt the real question, even after I explained my exact circumstances.

The intent of the law was to give self-employeed people a deduction, and I think the waffle words in pub 535 was to give people leeway. If you are solo business owner (no employees), then it make sense to me to take the deduction.

If you have any suggestions on formalizing an insurance "plan" for sole props, I would like to hear it.

Health insurance is VERY expensive. I was tempted to flame the IRS agent when she suggested I get insurance under the name of of the business. Group policies, at least where I live, are 2 times more expensive than individual policies. It is not like I have a cool $1,000 or more to drop on health insurance every month.

One other thing I'm in the process of setting up is a Health Savings Account (HSA), previously MSA. Contributions are deductible and disbursements for medical expenses are not taxed.

Thanks for listening, and sorry for all my ranting!
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perez2000,

Thank you for your additional comments. I'm not going to even bother formalizing a "plan". I think some of the rules the IRS comes up with are ridiculous. :)

Boy, do I agree with you on the cost of health insurance. Rant on!

I'm also looking into setting up an HSA. Seems like a very good idea, though it helps only a bit compared to the cost of insurance these days.

Ken
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The IRS agent you quote is wrong, as usual. The plan doesn't have to be in writing. Just deduct the premium on line 29. I've been doing it for years, including Medicare Deduction and AARP Suplemental after I hit 65 You CAN'T buy a policy to insure an individual under a business name (except from an association and even then its in a personal name) so if you're a Sole Propriator all you can get is a personal policy. ed
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The agent never said the plan had to be writing. This was my assumption based on what I also read on the Net concerning what was best for an s-corp (pass a resolution reimbursing the shareholders).

To me, it is mentally weird to have a "plan" that isn't documented anywhere. I guess this is simply my existential bias showing :)

And yes, I will be take the deduction this year too :)
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edcosoft writes:

You established the "plan" to pay your health insurance premiums under your "business" when you decided to deduct the premiums on line 29. The "plan" is not the insurance policy but the "plan" to pay the premium.

I reply:

A friend spent the latter part of 2001 self-employed, using COBRA from her former employment as her health insurance. Her husband used COBRA from his employment to cover himself and their daughter. Would any of this have been available as either a reduction of self-employment income (which was positive that year) or an itemized deduction? If so, I assume there's plenty of time left for my friend to file a 1040X. --Bob

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Would any of this have been available as either a reduction of self-employment income (which was positive that year) or an itemized deduction?

It is certainly an itemized deduction as a medical expense. And although others might be a bit more conservative, I would take the COBRA insurance payments as a self-employed insurance deduction. It wouldn't reduce the SE tax, but 60% of the insurance would be available as an adjustment to Gross Income, with the balance going into medical expenses as an itemized deduction. I would only deduct the insurance this way for the months she was self-employed. For the other months, the insurance would go into medical expenses.

If so, I assume there's plenty of time left for my friend to file a 1040X.

Yep. 2001 returns can be amended until 4/15/2005. (And up to 10/15/05 if the original return was on extension.)

--Peter
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ptheland writes (in part):

And although others might be a bit more conservative, I would take the COBRA insurance payments as a self-employed insurance deduction. It wouldn't reduce the SE tax, but 60% of the insurance would be available as an adjustment to Gross Income, with the balance going into medical expenses as an itemized deduction.

I reply:

Thanks, Peter. I've passed this along to my friend, and she had a follow-up question. It turns out that in 2001 she made the maximum possible contribution to her SEP IRA as a percentage of self-employment income. If she now claims the self-employed insurance deduction, would she thereby lower the allowable SEP IRA contribution, thereby rendering some of her contributions excess? If so, I'm thinking it can't be worth it to her. --Bob
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If she now claims the self-employed insurance deduction, would she thereby lower the allowable SEP IRA contribution,

No. The SEP contribution is not affected by the amount of self-employed health insurance deductions.

Fire up that return amender.

--Peter
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