Background - A self-employed
individual (or a partner or a more-than-2%-shareholder
of an S corporation) can deduct as an above-the-line
expense 100% of the amount paid during the tax year for
medical insurance on behalf of himself, his spouse and
his dependents subject to the following requirements
(Code Sec. 162(l)(1)(B)):
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The deduction cannot exceed the
individual’s net earnings from self-employment
derived from the trade or business for which the
plan providing the coverage is established.
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For a more-than-2% S corporation
shareholder, that shareholder's wages from the S
corporation are treated as his earned income.
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No individual who is eligible to
participate in any subsidized health plan maintained
by any employer of the individual or of the
individual's spouse is entitled to the deduction.
This test for eligibility is made for each calendar
month and applied separately to long-term care
insurance.
New Benefit
- As part of the new health care reform law (Notice
2010-38), this deduction, as of March 30, 2010, also
applies to a self-employed individual’s child under the
age of 27 as of the end of the year. The definition of
“child” for this purpose includes the individual’s:
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child,
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stepchild,
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legally-adopted individual,
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an individual lawfully placed with
the employee for legal adoption, and
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an eligible foster child.
Previously, the child
would have had to qualify as a dependent. No other
requirements apply so long as the individual meets the
definition of a child and has not reached age 27 by the
last day of the year. Even a married child is included
by this definition! (But the married child’s spouse
and/or children are not covered.) A child attains age 27
on the 27th anniversary of the date the child was born
(for example, a child born on April 10, 1983 attained
age 27 on April 10, 2010).
If the self-employed individual utilizes a group policy
provided by an association, be aware that although group
policies offered by insurers are also required to cover
older children, they are only required for children
under the age of 26. Also, that law change only becomes
effective for plan years beginning on or after September
23, 2010.
