Published February 10, 2011
As if tax code isn’t difficult enough to understand, it only gets worse when there are so many ifs, ands, and buts.
When it comes to insurance and tax deductions, the situation isn’t black and white, more like shades of grey. So here’s a little primer on what you can and can’t deduct when it comes to insurance expense.
Medicare Premiums: If you collect Social Security benefits, you will likely find a line item on your Form SSA-1099 that reads “Medicare premiums deducted from your benefits.” This amount is deductible as a medical expense. Any Medicare premiums paid, whether reported on your SSA-1099 or not, are tax deductible on Schedule A.
Disability Insurance: For the most part, premiums are not deductible nor is the receipt of disability benefits taxable income to the recipient. Naturally, it doesn’t stop there. It depends on the type of plan and if your employer made contributions to the plan. This is an item to discuss with your tax pro and your employer.
Insurance as an Alimony Payment: If your divorce or separation instrument requires that you pay insurance premiums to benefit your former spouse, whether it’s the homeowner’s policy or a life insurance policy, you may deduct the premiums as alimony under Adjustments to Income on Form 1040. Your former spouse is required to show these amounts as taxable alimony received. Remember, this is not deductible unless it is court ordered.
Self-Employed Health Insurance: If you are self-employed (sole proprietor, partner in a partnership, or a more than 2% shareholder of a Sub S Corporation), write off your health insurance premiums “above the line.” List it as an adjustment to income on page 1 of your Form 1040. You cannot write this off at the partnership level, the Sub S Corp level or on your Schedule C. Also, the plan must be established in your name, under your business for your benefit. If, for example, your spouse pays premiums through his/her employer’s plan that provides health insurance for your family, you cannot deduct any of it as self-employed health insurance. You still may deduct the amount she pays on Schedule A as a medical deduction. Deductible health insurance also includes special packages for prescriptions, dental, contact lens replacement, and eye care.
A new tax law passed last year allows a deduction for health coverage for an employee's children s 27 years of age. It is now generally tax-free to the employee. This expanded health-care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans (plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits) to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Health Insurance: If you are not self-employed, health insurance premiums paid, including the special packages listed above are deductible as a medical expense on Schedule A. If you are on an employer subsidized plan, check your final 2010 paystub to determine the amount deducted from your pay for health insurance premiums. If the premiums are paid from pre-tax dollars, they are not deductible. But if the premiums are included in gross pay on your W2 (after tax dollars) they are deductible on Schedule A as a medical expense. Check with your personnel department to determine the deductibility of these premiums.
Long-Term Care Insurance: Payment of premiums for long term care insurance is deductible, but it’s limited. Make sure you complete the worksheet to determine how much you may deduct.
Health Insurance Premiums Paid from Unused Sick Leave: They’ve got a rule for everything. This is deductible as a medical expense.
Life Insurance: Not deductible as an expense on your individual income tax return. However, if you own a C Corporation, which provides health insurance for yourself and/or your employees, you may deduct the premiums. Special rules apply so discuss this topic with your tax pro.
Automobile Insurance: You might want to get tricky here and allocate the portion of the auto insurance that covers medical as a medical expense, but the IRS is on to you and it’s a no-go. However, if you use your vehicle in business, and you deduct actual expenses, you may deduct a pro rata portion based on business use of the premiums you pay.
Homeowner’s Insurance: Not deductible unless you are renting out a portion of your home and reporting the income and expenses on Schedule E or you are declaring a home office on Form 8829. Needless to say, if you own rental properties you may deduct 100% of the premiums paid for homeowner’s insurance.
Mortgage Insurance: Sometimes referred to as PMI, mortgage insurance is tax deductible on Schedule A under mortgage interest.
Credit Card Insurance: If you use credit cards in your business, you may deduct any premiums paid for credit card insurance on your Schedule C or your business tax return.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.