IRS Reverses Position
IRS Reverses PositionSelf Employed Individuals May be Entitled To an Above-the-Line Deduction for Medicare Premiums
In a recent reversal of a long-held IRS stance, those who are self-employed, partners in partnerships, or a more than 2% shareholder of an S corporation, may now qualify for an above-the-line deduction for health insurance premiums. This includes premiums that you pay for yourself, your spouse, your dependents or your children who have not reached age 27 by the end of the tax year.
The IRS Confirms the Deduction
Until recently, there has been some confusion as to whether Medicare premiums paid by a self-employed individual, a partner in a partnership or a more than 2% shareholder of an S corporation qualified for this deduction. The IRS recently confirmed in a Chief Counsel Advice (CCA) that if you otherwise qualify for the above-the-line deduction for health insurance premiums, you may be able to deduct your Medicare premiums. The CCA concludes that all Medicare parts are insurance constituting medical care and that all Medicare premiums may be deductible – not just the supplemental medical insurance of Medicare Part B.
According to the IRS, if you are self-employed and failed to take this deduction for Medicare premiums in prior years for which the statute of limitations is still open (generally, three years back); you may file an amended return to claim the deduction. If you are a partner in a partnership or a more than 2% shareholder in an S corporation and you pay your health insurance premiums directly (including Medicare premiums), the IRS recommends having the partnership or S corporation reimburse you for those premiums. These reimbursements must be made before year end in order to take a current year deduction.
Premium Payments Made on Behalf of Shareholder
Medicare insurance premiums may be paid by a partnership or S corporation on behalf of a partner in a partnership or a greater than 2% shareholder in an S corporation. If that is the case, the premiums must be reported on the shareholder’s Form W-2 in the same year the premiums are paid. Failure to comply with this requirement may result in the loss of the deduction for the corporation. The medicare insurance premiums are not subject to Social Security (FICA), Medicare or unemployment taxes (FUTA).
Employee shareholders may then deduct the cost of health insurance premiums paid on their behalf by the S corporation as an adjustment to income on their individual Forms 1040. If a corporation prepares its own W-2 forms, the corporation should include the health insurance premium in the W-2 of any greater than 2% shareholder. If the corporation uses an outside payroll service, this information should be provided to the payroll service prior to the end of the year so that it can be included in the shareholder employee’s Form W-2.
For additional information, please contact the author Valentina Stoyanovska at vkstoyanovska@herbein.com.
Valentina K. Stoyanovska
vkstoyanovska@herbein.com
412.392.2345
