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Medicare and Self-Employed Taxpayers

February 28, 2011 · 13 comments

See folks, this is why you should always read the comments in the blog. We’ve been having a discussion about whether Medicare Part B is deductible as a self employed health insurance premium in the comments at this post: The A, B, C and Ds of Medicare.

The old Pub 535 said no. And the old instructions for the form 1040 said no. This year, the instructions for the 1040 said yes. And there is no updated Pub 535. So, which is correct?

In 2010, self-employed people may deduct their Medicare Part B health insurance premiums.

The IRS did not announce the change and I can’t find it anywhere on the IRS web site except on the form 1040 instructions. However, it’s been confirmed all over the place, including, apparently by the IRS to Bloomberg, as reported by Insurance & Financial Advisor. A similar report was posted by SFGate, also quoting IRS sources and noting that:

The IRS has long held that Medicare premiums are not eligible for the deduction because Medicare cannot be established by a taxpayer under a business.

This year, it’s different. Nobody knows why the change happened, where it’s been recorded (it wasn’t in the new tax law) or why the IRS has been so slow to get the word out. Mind boggling.

{ 12 comments… read them below or add one }

1 Bert Earp March 2, 2011 at 1:50 pm

I just got tripped up on this. Our tax software just got updated to handle this and started printing a diagnostic on applicable returns. Ugh!

2 Oxnate March 3, 2011 at 2:35 pm

I work for a CPA. We’ve been arguing about this for years. I said that it wasn’t deductible, while he said to deduct it anyway. He signs the returns (and the paychecks) so he won.

I told him this today and he just said, “See? We were just ahead of the curve.”

3 Marsha March 20, 2011 at 4:31 pm

Does this mean that self employed person may also deduct Medicare Part D premiums and Medicare supplemental insurance ?

4 DAVID L. ZALLES, CPA March 24, 2011 at 12:58 pm

In 1995 The IRS Legal Counsel issued an advice that Medicare Premiums were not includible as self-employed health insurance premiums. In late Dec 2010, after the 1040 instructions were PRINTED, that office changed its mins, and updated the ONLINE instructions to state that they were deductible. NO OFFICIAL IRS NOTICE OR ALERT WAS EVER ISSUED. IRS just buried it hoping that no one would notice.

Since then, I have been trying to get further clarification that Medicare A, C & D are also includible, in addition to Medicare B. It is clear that for 2010 the same figure that is reportable on page 1 as an Adjustment to GI is also teh firgure to be used to reduce S E Taxable Income for calculating the SE Tax. In addition, the IRS has not responded as to whether the inclusion of Medicare premiums as self-employment health insurance is retroactive, and can be taken on amended tax returns for 2007, 2008, and 2009. Finally, IRS has not responded as to whether or not the Medicare premiums for the spouse of the self-employed taxpayer are also includible, especially since family coverage premiums are includible.

5 Marsha March 25, 2011 at 4:20 pm

So it appears there is no clear answer to whether one can deduct the Medicare supplement and/or Part D premiums. The only thing we know is that Medicare Part B can be deducted. What would you do? I’m afraid to deduct the other premiums, but on the other hand I don’t want to leave a deduction on the table.

6 DAVID L. ZALLES, CPA March 25, 2011 at 4:24 pm

I’m deducting all Medicare A, B, C, and D under S E Health Insurance Premiums, and the S E Tax calculation for 2010.

7 Bruce Lehnhard April 1, 2011 at 6:43 am

I have been doing a lot of research on this as I will begin receiving SE income in 2011 and both my wife and I pay medicare Part B as well as premiums for Supplemental (Medigap) and Part D. In the recently released Pub 535, Chapter 6 (page 19), top of middle column, the following statement is made: “For tax YEARS (notice the plural) beginning in 2010 you can subtract the SE Health Insurance Deduction when computing SE Tax”. Many statements have been made that this benefit would be for 2010 only unless extended by Congress.

Also, in Chapter 6 it is noted that insurance premiums paid by SE individuals that provide coverage similar to what is provided by an employer can be included in the Health Insurance Deduction. As the Part B premium issue has already been answered (favorable) this statement would seem to allow both Part C, Medigap, and Part D premiums to be included.

Thanks – Bruce

8 bill April 12, 2011 at 12:02 pm

How about deducting as self employed b and d premiums if you get a K-1 from a
partnership that you and your son own and manage one residential realty
house?

Turbotax wouldn’t do it.

9 Kelly April 12, 2011 at 3:50 pm

Bill, I don’t know what the scoop was but my guess is that it has to do with the fact that TurboTax couldn’t reconcile income as self-employed which wasn’t reported on a Schedule C.

10 bill April 12, 2011 at 3:55 pm

Turbo tax $29.95 research said it was because there were no
‘self employment” earnings. Profit from a partnership not subject
to SE so NO deduction for self insured insurance.

11 DAVID L. ZALLES, CPA April 12, 2011 at 5:00 pm

It is well-founded that partnership income from an operating partnership IS SELF-EMPLOYMENT INCOME for active partners. For several years there has been an on-going debate with, and within, the IRS as to limited partners. As far as I know, inactive limited partners are not sublect to SE tax on their share of partnership income.

It is possible that since this is a real estate partnership, this is PASSIVE INCOME, and therefore is not subject to SE tax. WHy would you want to pay SE tax on this income if you do not have to, just so you can deduct the helath insurance and Medicare premioums.

12 RCR April 17, 2011 at 5:05 pm

In addition to Medicare B premiums, can a retired employee’s portion of preimiums paid for their employer’s insurance “offered to retirees” be deducted as well?

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