Older Small Business Owners Get a Health Insurance Tax Break
March 30, 2011
The IRS has reversed its position on allowing a large expense as part of the health insurance deduction for some small business owners. Sole proprietors, partners, LLC members, and S corporation employees who own more than two percent of the stock in a business can deduct qualified health insurance premiums paid to cover themselves and family members. This is the self-employed health insurance deduction. It's an "above-the-line deduction" for 2010, meaning you don't have to itemize to benefit.
For years, the IRS took the position that Medicare Part B premiums did not count as qualified health insurance premiums for purposes of the self-employed health insurance deduction. This was bad news for older small business owners, because Medicare Part B premiums for 2010 ranged from $1,157 to $4,243 depending on income level. For married couples, both spouses might be paying.
The IRS suddenly reversed course on the Medicare Part B premium issue. 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.
As a bonus, you can subtract self-employed health insurance premiums (the amount claimed on Form 1040) from self-employment income when calculating your 2010 self-employment tax bill. So the additional 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.
Note: The privilege of subtracting the self-employed health insurance deduction from your SE income is a one-time deal for the 2010 tax year only (unless Congress extends it).
As another bonus, you can also claim the self-employed health insurance deduction for qualified long-term care (LTC) insurance premiums. However, for the 2010 tax year, you cannot deduct more than the age-based limits shown in the following table.
Age of Covered Person
Age 40 or younger
Age 41 - 50
Age 51 - 60
Age 61 - 70
Older than age 70
For more information, please contact your Perelson Weiner partner.
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