Self-employed health insurance deduction

[jpdx]

For a sole proprietor who wants to deduct health insurance premiums, should these expenses be paid from the owner's personal checking account or the business checking account? I understand this will appear a personal deduction on the 1040, I'm just not clear if it matters accounting-wise.

[secondcor521]

Not an expert.  My AARP resources say the premiums must be paid by the taxpayer/spouse, so paying it from a personal checking account would make that more clear if it were ever questioned.

There are a lot of other things about SEHI to note.  There is a circularity with ACA PTC that is tricky.  You can't double dip among SEHI, Schedule A Medical, and Schedule C business expenses.  The AARP resource suggests a Schedule A Medical deduction might result in lower taxes if TP itemizes.

[seattlecyclone]

The AARP resource suggests a Schedule A Medical deduction might result in lower taxes if TP itemizes.

I wonder why they say that. The self-employed premium deduction is a pre-AGI deduction so it would increase ACA subsidies. Also you have to chop off 7.5% of your income from your health expenses before you put them down on Schedule A, so even if your other itemizable deductions already put you over the standard deduction (rare these days) you're still paying tax on quite a bit of those expenses when you put them on Schedule A. Is there something else I'm missing that would offset these disadvantages?

[secondcor521]

The AARP resource suggests a Schedule A Medical deduction might result in lower taxes if TP itemizes.

I wonder why they say that. The self-employed premium deduction is a pre-AGI deduction so it would increase ACA subsidies. Also you have to chop off 7.5% of your income from your health expenses before you put them down on Schedule A, so even if your other itemizable deductions already put you over the standard deduction (rare these days) you're still paying tax on quite a bit of those expenses when you put them on Schedule A. Is there something else I'm missing that would offset these disadvantages?

Your understanding and mine are similar.  So I looked at it a bit more closely.

They don't explain it very well, but the main case seems to be that SEHI has a maximum adjustment - it is limited by Schedule C net profit.  So in cases where you have eligible premiums (including LTC premiums up to some limit) which exceed Schedule C net profit and the TP is itemizing already, then you'd be better off putting the full amount of eligible premiums on Schedule A.

Imagine a late 50s couple both with LTC policies and a small side gig, I guess.  Probably unusual but possible.  I suspect most cases you deal with the SEHI limitation doesn't come into play.

[seattlecyclone]

Sure, I guess if your side gig brings in less than (your premium - 7.5% of your AGI), and you're already itemizing regardless, you could deduct more on Schedule A than with the self-employed premium deduction. Seems like a pretty niche use case to base your default advice off of.

[secondcor521]

Sure, I guess if your side gig brings in less than (your premium - 7.5% of your AGI), and you're already itemizing regardless, you could deduct more on Schedule A than with the self-employed premium deduction. Seems like a pretty niche use case to base your default advice off of.

Well it would be (side gig income minus 1/2 SE tax < premium) if one assumes other medical expenses.  But that just makes it more of a niche case, I readily grant you.

Not sure it was their (or my) default advice.  Just something to evaluate to try to get the TP the best possible result.  They (and I) suggest running it both ways or at least considering both options.

[MDM]

They don't explain it very well, but the main case seems to be that SEHI has a maximum adjustment - it is limited by Schedule C net profit.  So in cases where you have eligible premiums (including LTC premiums up to some limit) which exceed Schedule C net profit and the TP is itemizing already, then you'd be better off putting the full amount of eligible premiums on Schedule A.

Imagine a late 50s couple both with LTC policies and a small side gig, I guess.  Probably unusual but possible.  I suspect most cases you deal with the SEHI limitation doesn't come into play.

It would be interesting to see an actual example where using the full insurance premium on Schedule A beats using the fraction of the premiums that hits the maximum SEHI deduction for SEHI and the remaining premium amount on Schedule A.

[secondcor521]

They don't explain it very well, but the main case seems to be that SEHI has a maximum adjustment - it is limited by Schedule C net profit.  So in cases where you have eligible premiums (including LTC premiums up to some limit) which exceed Schedule C net profit and the TP is itemizing already, then you'd be better off putting the full amount of eligible premiums on Schedule A.

Imagine a late 50s couple both with LTC policies and a small side gig, I guess.  Probably unusual but possible.  I suspect most cases you deal with the SEHI limitation doesn't come into play.

It would be interesting to see an actual example where using the full insurance premium on Schedule A beats using the fraction of the premiums that hits the maximum SEHI deduction for SEHI and the remaining premium amount on Schedule A.

Agree.  They don't provide a specific example to back up their statement.

I can imagine scenarios where premiums are only eligible on Schedule A because they meet Schedule A requirements but not SEHI requirements.  But when you phrase it the way you did, I can't envision a scenario where, if one has the choice, Schedule A could be better.  The AARP resource I looked at implied scenarios might exist where Schedule A results in a higher AGI but lower taxable income.  Not sure if that clue helps.

It's only a few sentences in a lengthy resource (Pub 4412).  Maybe it's wrong or outdated or out of context.  It could also have to do with scope issues, since we're not allowed to do the circular reference ACA PTC and SEHI thing.

[jpdx]

OP here with an urgent follow-up question. Is a sole prop able to deduct health insurance premiums when the family medical policy is in the spouse's name?

More details: We are transitioning from a MMLLC (taxed as partnership) to a SMLLC (taxed as sole prop). We have an established ACA Marketplace plan with my spouse listed as primary -- invoice is in her name -- and we already signed up for 2024 coverage. Is this going to be a problem? Do I need to throw out the whole ACA application and start over in my name?

[MDM]

OP here with an urgent follow-up question. Is a sole prop able to deduct health insurance premiums when the family medical policy is in the spouse's name?

Yes, if filing MFJ and neither you nor your spouse are eligible to participate in an employer-subsidized health plan.

With the combination of SEHI and ACA, see When TurboTax and H&R Block Give the Wrong ACA Subsidy when it comes time to file, or during the year if you estimate your tax liability then to avoid surprises at filing time.