A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of taxpayer, spouse, dependents, and children under age 27 even if the child is not a dependent (Code Sec. 162(l)(1)(D)). For the taxpayer to be eligible for the deduction, one of the following statements must be true (material from Form 7206 instructions):
• Schedule C or F - The taxpayer was self-employed and had a net profit for the year reported on Schedule C (Form 1040) or Schedule F (Form 1040). The deduction cannot exceed the individual’s net earnings from self-employment derived from the trade or business for which the plan providing the coverage is established. Net earnings is the net profit from Schedule C or F reduced by the 50% of SE tax deduction (1040 Schedule 1, line 15) and/or the contributions to the taxpayer’s qualified retirement plan, SEP or SIMPLE plan (1040 Schedule 1, line 16) (Form 1040, Schedule 1, instructions worksheet). Schedule 1 line references are for the 2021 form. The health care policy can be either in the name of the business or in the name of the taxpayer.
• S-Corporation Shareholder –
o Must be a more-than-2% S corporation shareholder.
o The shareholder's Medicare wages (i.e., the amount from box 5 of Form W-2) from the S Corporation are treated as the shareholder’s earned income (Form 7206 Line 11), and
o The premiums paid or reimbursed by the S Corp are shown as wages on Form W-2 (Box 1).
o The premiums are not subject to FICA or Medicare tax.
o The policy can be either in the name of the S corporation or in the name of the shareholder.
If the S Corp pays the premiums, the premium amounts are included on Form W-2 as wages.
If the shareholder pays the premiums, and the policy is in the shareholder's name, the S corporation must reimburse the shareholder and report the premium amounts on the W-2 as wages. Otherwise, the insurance plan won't be considered established under the business.
• Partner - The taxpayer is a partner with net earnings from self-employment for the year reported on Schedule K-1 (2023 Form 1065), box 14, code A. The policy can be in the name of the partnership or in the name of the partner.
o If the partnership pays the premiums, the premium amounts must be reported on Schedule K-1, Form 1065, as guaranteed payments included in the partner's gross income.
o If a taxpayer/partner pays the premiums, and the policy is in the taxpayer/partner's name, the partnership must reimburse the taxpayer and the premium amounts will be included in gross income as guaranteed payments on Schedule K-1. Otherwise, the insurance plan won't be considered established under the business.
“Subsidized” Health Plan - No deduction is available for any month in which the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer's spouse, or any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. This rule is applied separately to:
(1) plans that provide coverage for qualified long-term care services, or are qualified long-term care insurance contracts and
(2) plans which don't include such coverage and aren't such contracts (Code Sec. 162(l)(2)(B)).
Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, so long as he isn't eligible for employer-subsidized long-term care insurance. Important Definition - The term “subsidized” means at least 50% of the cost of the coverage is paid by the employer (Sec 35(f)(1)).
No Double Dipping - The health insurance premiums claimed as an above-the-line SE health insurance expense cannot also be claimed as a Schedule A medical expense.