Personal Taxes

Self-employed can deduct Medicare premiums, says the IRS. Amended returns may be in order.

Reversing a long-held IRS position, the Office of Chief Counsel advised IRS attorneys on July 13, 2012, in Chief Counsel Advice (“CCA”) 201228037, that self-employed individuals may deduct Medicare premiums from their self-employment income, if they meet the requirements of Section 162(l) of the Internal Revenue Code (the “Code”).  This treatment is beneficial because the premium amount is treated as an “above-the-line” deduction and not as an itemized deduction on Schedule A that may be severely limited in deductibility.

This change also applies to “2% partners” and “2% shareholder-employees” of S Corporations, if the entity establishes a plan to pay directly the Medicare premiums or reimburse the premiums to the individual.  These entity owners are treated as self-employed for purposes of Section 162(l) of the Code.  IRS Notice 2008-1, 2008-2 IRB 251, outlines what must occur for these partners and shareholders to get their deductions.

Taxpayers who did not deduct Medicare premiums for prior tax years may file amended returns, if the statute of limitation has not tolled for such returns.

For a long time, the IRS position was that Medicare was not an insurance plan established by the business.  Thus, concluded the IRS, no Medicare premiums are deductible under Section 162(l) of the Code.  In the instructions to Form 1040 for 2010, the IRS quietly changed its position and said that Medicare Part B premiums only may be deductible under Section 162(l) of the Code.  According to this CCA, all Medicare premiums may be deductible.

Of course, little about tax laws is simple.  Not everyone with self-employment income is eligible for an above-the-line medical insurance premium deduction under Section 162(l) of the Code.  So, contact your tax adviser, if you think you may be eligible for this treatment of your Medicare premiums, and do so quickly, if you extended your 2008 Federal income tax return. You may have three years of refunds available.  What a nice summer treat!