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Friday, February 18, 2011


-By JC Leahy, MA Accounting
There are two new enhancements to the Self Employed Health Insurance deduction for 2010.  One relates to self employment tax, and the other to Medicare Part B.  Don’t miss these two improvements when you prepare your 2010 (or 2011 and beyond) income tax returns.
The Self Employed Health Insurance deduction originated when President Ronald Regan signed Tax Reform Act of 1986.  Beginning in 1987, self employed persons were allowed to make a “deduction for adjusted gross income” of 25 percent of the cost of health insurance.  This original provision was supposed to expire at the end of 1989.  It was extended, however, and increased to 30 percent in 1995, 35 percent in 1998, 40 percent in 1999, 45 percent in 2002, 100 percent in 2003, permanently.   You might ask how it gets better than a 100% deduction.
One of 2010’s improvements has to do with Self Employment tax, not income tax.  To put it simply, prior to 2010 self employment health insurance could be deducted when computing your income tax, but not AT ALL when computing self employment tax.  That has changed for 2010. Now self employment health insurance is fully deductible when you compute your self-employment tax.   Oddly enough, though, there is no line anywhere on the tax forms where you actually write this deduction down.  You have to read the Schedule SE instructions carefully and follow them.  For example, I had a client last week who had self-employment (Schedule C) income of $4,200 and self employed health insurance costs of $5,000.  In past years, she would have owed self employment tax on the $4,200 profit, but this year her self-employment tax comes to zero.  That’s a significant change for any self employed person, but it’s easy to overlook.
The other improvement has to do with Medicare Part B premiums.  They never qualified as self employed insurance prior to 2010.  There has been no legislation to change this, nor any official announcement from the IRS.  Publication 535 still SAYS that you CANNOT count Medicare Part B premiums as self employed health insurance.  But you can.  The 2010 Form 1040 instructions say you can, and rather than admit a mistake the IRS says that you should follow the Form 1040 instructions.  This is what you might call a “stealth improvement,” and it’s really easy to miss.
If you need expert help with your income tax filings, either in Silver Spring, Maryland, or long-distance, contact me:

JC Leahy, MA Accounting
Maximum Legal Refund (TM)
"Taxes Minimized to Your Best Advantage" (TM)
JC Leahy and Company, LLC
Silver Spring, Maryland
Tel.: (301)537-5365

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