Self-employed health insurance deduction on the rise
How much of my health insurance premium can I
deduct and how does the deduction work? I am self-employed and I understand only
some of the premium can be deducted as a business expense. Does the rest count
as an itemized deduction?
Congress has been fooling with the deduction for health insurance premiums
for the self-employed for a long time. Last year's sweeping changes to the tax
laws affected the rules in this area once again. Currently, here is how it
For 1998, a self-employed person can deduct 45% of health insurance costs as an adjustment to income. This means that you don. t deduct the cost on your Schedule C or Schedule F, but instead the deduction appears on page one of the 1040, near the bottom of the page, along with the lines for moving expenses and IRA deductions.
Eventually, self-employed individuals will be able to deduct 100% of the health insurance premium in this manner, but not until the year 2007. For now, the deduction is as follows:
- 45% for 1998 and 1999
- 50% for 2000 and 2001
- 60% for 2002
- 80% for 2003, 2004, and 2005
- 90% for 2006
- 100% for 2007 and years thereafter
Phase-in schedules like this always strike me as kind of a wimpy way to make a law, as if today's lawmakers are making the law take effect slowly so that tomorrow's lawmakers will have a chance to change it before things get out of hand.
Anyway, the health insurance costs that don't qualify as a page one adjustment (55% of the costs for 1998), count as a medical deduction if you itemize on Schedule A. Medical deductions, as you already know, are hard to come by unless you have ridiculously large expenses. So, for most people, the remainder of the insurance costs will simply be lost as a deduction.
This makes perfect sense, of course, because we wouldn't want those self-employed types to feel like they're getting anything like equal treatment under the tax laws. Their employed counterparts frequently have health insurance premiums paid for by employers, or they pay for the premiums themselves but with after-tax dollars. No such deal for the self-employed.
There are situations, however, in which a self-employed individual can hire a spouse as an employee, provide family health care benefits to the spouse, and deduct the premiums as a business expense. The spouse has to be a real employee, not just someone who collects a paycheck, and must be paid real income in addition to the benefits.
Setting up a plan to cover employees can be complicated. However, the tax savings from deductions for health care benefits are worth the effort it takes to put a plan in place. It is advisable to work with an accountant or another professional when setting up a plan to ensure that will meet all the requirements set out by the IRS.
I was called for jury duty this past spring and
received compensation from the Court. My boss kept me on the payroll at work,
but asked (demanded, actually) that I turn over my jury duty fees to the
company, which I did. Am I expected to show the jury income on my tax return,
even though I didn't get to keep it?
Strange as it seems, yes, you must report jury duty fees as income on your tax return, whether you get to keep the money or not. But never fear. The IRS also allows you to take a deduction for the fees if you turned them over to your boss.
Report jury duty income as "Other Income" on page one of your 1040 (line 21 of the 1997 form). You can't use a 1040A or 1040EZ to report this income. If you turned the income over to your boss, deduct the amount on page one of the 1040, just adding it in on the line that summarizes adjustments to income (it was line 31 on the 1997 form 1040). Across from the amount you are deducting, write "Jury Pay" so the IRS will know what you are deducting.
Voice of the Editor
Which isn’t completely true. I mean, occasionally I drop by when I manage to sneak out of the nonstop frat party over at Going Concern, but I’m mostly a wallflower over there. I’m happy to say that I’ve been given express permission (or explicit orders, if you like) to wander over here to AccountingWEB more often.
Why is that, you might ask? My job is to replace the irreplaceable Gail Perry as Editor-in-Chief. What does that mean? I don’t really know! I think it’ll be fun getting a feel for things, throwing in my own thoughts here and there, and listening to the discussions you’re having about the accounting profession.