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Medical Insurance Deductions
for Self-Employed Individuals
Freelance writers, photographers, artists and other self-employed individuals qualify for a valuable tax break on what they spend for medical insurance.
You need no reminder that the cost of medical care keeps climbing. Worse yet, you have to absorb more of the cost because so many charges are not covered by your insurance.
Understandably, these outlays loom large in your eyes. Unfortunately, they usually fail to measure up to a deductible size in the view of the IRS: As you laboriously list your itemized expenses on Schedule A of Form 1040, you'll find that the only expenditures deemed allowable are those exceeding 7.5 percent of your AGI, short for adjusted gross income, the figure on the last line of page one of the 1040 form.
But self-employeds are able to deduct 100 percent of their medical insurance premiums for themselves and their spouses and dependents without regard to that 7.5 percent threshold.
Who qualifies: (1) self-employeds, whether they operate their businesses or professions as sole proprietorships, partnerships, or limited liability companies; and (2) S corporation shareholders owning more than 2 percent of the stock. (S corporations are companies, taxed much the same way as partnerships are, that pass profits through to their shareholders.)
I said that this deduction for medical insurance payments for self-employeds is not subject to the 7.5 percent threshold for all other medical expenditures. This means that the deduction is not claimed on Schedule A, where expenses are itemized, but on the front (line 29 of 2003's return) for Form 1040. In IRS argot, this is an "above-the-line adjustment," that is, it's one of the off-the-top subtractions applied in the section where you calculate your AGI. Thus, take this deduction the same way you claim write-offs for funds put in traditional IRAs or other retirement plans.
Not only is this deduction not lumped with those sums to which the 7.5 percent limit is applied. The self-employed medical-insurance deduction is available even to someone who foregoes itemizing altogether and instead simply uses the standard deduction—the no-questions-asked amount that is authorized for someone who finds it more advantageous not to itemize. So even if you opt not to itemize, you nonetheless get an up-front deduction for 100 percent of your medical insurance premiums.
If you do choose to itemize, don't forget that you've already claimed your medical insurance premiums; you can't count that sum again under itemized medical expenses.
How does that up-front deduction affect your self-employment income for purposes of calculating Social Security taxes? Sorry: It doesn't. The amount you deduct above the line for insurance coverage does not reduce self-employment income when filling Schedule SE (Self-Employment Tax) of Form 1040 to compute net (receipts minus expenses) earnings from self-employment. The computation on that schedule is based strictly on Schedule C, on which you report your self-employment receipts and expenses to arrive at a net profit.
Copyright 2003 Julian Block. All rights reserved.
Julian Block is a syndicated columnist, attorney
and former IRS investigator who has been cited by the New York Times as "a
leading tax professional" and by the Wall Street Journal as an "accomplished
writer on taxes." This article is excerpted from his "Tax Tips For Freelance
Writers, Photographers And Artists." His publication covers key changes
introduced by the 2003 tax act, show how to save truly big money on taxes—legally—and
explains the steps you should take to reduce taxes for this year and even gain a
head start for future years. Send $9.95 for an e-mailed copy or $14.95 for a
postpaid copy to:
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