Medicare premium deduction for self-employed individuals.

• Author: Quilao, Maribeth

On July 13, 2012, the IRS Chief Counsel's Office released Chief Counsel Advice (CCA) 201228037, which clarified that all Medicare premiums (Parts A, B, C, and D) are insurance constituting medical care and may be deducted under Sec. 162(1) as an above-the-line deduction by self-employed individuals. Self-employed individuals for the purposes of the Sec. 162(1) deduction include sole proprietors, partners, and more-than-2% shareholders of an S corporation. The CCA determined that Medicare is insurance constituting medical care under Sec. 162(1); therefore, Medicare premiums paid may be deducted on line 29 of Form 1040, U.S. Individual Income Tax Return, just like other health insurance premiums.

The 2010 Form 1040 instructions and Publication 535, Business Expenses (2010), were amended to include Medicare premiums as a qualified insurance deduction under Sec. 162(1), but no reason for the change was provided at the time of release. Previously, the Form 1040 instructions stated that Medicare premiums could not be used in computing the self-employed health insurance deduction. Taxpayers who failed to deduct Medicare premiums may file an amended return to claim a refund for open tax years.

Background

Sec. 162(1) allows a deduction from gross income for medical insurance paid during the tax year for self-employed individuals, their spouses, and their dependents, including their children under age 27. However, the deduction may not exceed the taxpayer's earned income (within the meaning of Sec. 401(c)(2)) from the trade or business with which the plan is established (Sec. 162(I)(2)(A)). Furthermore, the deduction only applies for months when the self-employed taxpayer is not eligible to participate in a subsidized health plan maintained by an employer of either the taxpayer or the taxpayer's spouse (Sec. 162(1)(2)(B)).

The CCA provides guidance on additional requirements for self-employed individuals to claim the Medicare premium deduction under Sec. 162(1). Sole proprietors must pay the Medicare premiums directly. Two percent...