Medicare health insurance may be less expensive than most private plans, but the premiums still add up to a considerable sum each year. This is especially true for high-income taxpayers and married couples who are both paying Medicare premiums. However, a CPA may be able to help you deduct those premiums as a business expense. There are three main ways in which you might be able to deduct your Medicare premiums. The first, the business deduction, is the most financially advantageous. That’s followed by the self-employed health insurance deduction and the itemized deduction, in that order.
Deducting Medicare as a Business Expense
It’s always best to deduct Medicare premiums as a business expense if you qualify for it. However, there are limited circumstances in which this is allowed. Talk to your CPA if any of the following situations applies to you:
- You are a sole proprietor or single-member LLC. You only have one employee, and it’s your spouse.
- You have no employees and you are the only owner of your C corporation.
- You operate as a C corporation. You have no more than 20 employees, whom you provide with group health insurance.
- You operate as a C corporation. You or your spouse is an employee. You provide a QSEHRA—a qualified small employer health reimbursement arrangement.
If you do not fit the eligibility criteria to deduct Medicare premiums as a business expense, you might qualify for the self-employed health insurance deduction.
Using the Self-Employed Health Insurance Deduction
This is the second-best way to deduct your Medicare premiums. You may qualify for it if you’re self-employed. You could be a sole proprietor, partner, S corporation shareholder-employee, or an LLC member who is treated as a partner for tax reasons. You could also qualify if you are an LLC member who is treated as a sole proprietor for tax reasons. If any of those descriptions apply to you, your CPA might be able to claim an above-the-line deduction for your Medicare premiums. Furthermore, it’s not necessary to itemize those deductions. Check out IRS Publication 535 (Business Expenses) for further information. It states that your health insurance coverage must be established under any of the following circumstances.
Sole proprietors who file Schedule C can deduct Medicare premiums. This also applies to LLC members who are treated as sole proprietors for tax purposes. The health insurance policy may either be in the name of the sole proprietor or the business. A CPA can figure out the above-the-line deductions for self-employed health insurance.
Partners, as well as LLC members treated as partners for tax reasons, may be eligible to deduct Medicare premiums. The health insurance policy may be in the name of either the taxpayer or the LLC partnership. If the policy is in the name of the taxpayer and the taxpayer pays the premiums, then the partnership must reimburse the taxpayer. The premiums must be reported as guaranteed payments on the Schedule K-1 and the taxpayer must report it on Form 1040. The partnership can deduct those guaranteed payments. Note that if the partnership pays the premiums, rather than the taxpayer, the premium amounts must still be reported on the Schedule K-1 and Form 1040.
S Corporation Shareholder-Employees
Shareholder-employees who own more than 2% of the company may have a health insurance policy in their names or the name of the S corporation. Similar to the rules for a partnership, either the shareholder-employee or the S corporation can pay the premiums. If the S corporation pays them, they must be reported on the shareholder-employee’s Form W-2 as additional taxable wages. Alternatively, if the shareholder-employee pays the premiums, the S corporation must provide reimbursement. The amounts must still be reported on the Form W-2.
Addressing a Spouse’s Medicare Premiums
It’s possible to deduct a spouse’s Medicare premiums. These may be reimbursed by the S corporation or partnership. The act of reimbursing the individual for the premiums automatically makes the insurance a business expense. The shareholder-employee’s Form W-2 will reflect the addition. In the case of a partnership, the reimbursement must be treated as guaranteed income. Note that these rules apply to both standard Medicare premiums and Medicare supplemental insurance. Proprietorships can be a little trickier. Generally, CPAs might recommend establishing the Medicare insurance as a business expense by having the sole proprietor reimburse the spouse for the premiums.
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