When you’re self-employed, filing a Schedule C or F with your 1040 or as partner in a partnership or qualified S-corporation employee, you have the ability to take health insurance premiums as an adjustment to income. Most taxpayers have to include their out of pocket health insurance premiums with their other medical expenses on the Schedule A. These expenses are first limited by 7.5% of the adjusted gross income and then what are above this “floor” are added to the other itemized deductions. The total of these deductions are compares to the return’s standard deduction and generally the taxpayer takes the higher amount. Medicare premiums have always qualified as a medical expense on the Schedule A.
A self-employed taxpayer has another option to deduct their health insurance as long as the insurance is bought under the business name or, in the case of the sole proprietor, under their name. But before 2010, they could not include the Medicare B premiums which are deducted from their Social Security. In 2010, the IRS changed the 1040 instructions and Pub 535 to allow Medicare B but they didn’t provide any explanation as to why the change.
The Office of the Chief Counsel has now clarified their position in CCA 201228037. The argument against Medicare B was that it wasn’t a plan established under a trade or business. It’s a Federal program not the taxpayer’s insurance. But the Chief Counsel has ruled that Medicare B is a qualified insurance under Sec 162(l) and qualifies for the Self-Employed Health Insurance (SEHI) deduction. Medicare D (the drug plan) has always qualified for the special deduction.
Talk to your tax pro to see if you meet the qualifications for the SEHI. You can amend any open tax years to take advantage of the new rules.