From ScienceWriters: Writers’ write-offs for medical insurance

ScienceWriters Spring 2016 cover

By Julian Block

Usually, there is only one way for writers and other self-employed persons to write off medical and health expenses: They have to claim those outlays as itemized deductions on Schedule A of Form 1040. That is just the first obstacle.

There is another barrier for itemizers. Their medical expenditures are not fully deductible. They are allowed to claim such expenses just to the extent that they exceed 10 percent of AGI (short for adjusted gross income), the figure on the last line of page one of the 1040 form.

Tax code exception for 2015 and 2016

The 10 percent floor drops to 7.5 percent if you or your spouse is 65 or older. The 7.5 percent threshold goes off the books at the end of 2016. For 2012 and earlier years, it was 7.5 percent for all individuals.

Let’s say expenses are mostly for insurance and they aggregate $7,000. An AGI of $40,000 trims the allowable deduction to $3,000 ($7,000 of expenses less 10 percent of $40,000). When AGI surpasses $70,000, the deduction vanishes ($7,000 of expenses less 10 percent of $70,000).

More favorable rules for medical insurance

The law does not require freelancers, consultants, and other self-employed individuals to list their insurance payments on Schedule A, and the nondeductible floor of 10 percent doesn’t apply to them.

They are able to deduct 100 percent of their payments for medical and dental insurance for themselves, their spouses, and dependents and children who at the end of the year are under age 27 (whether or not they are your dependents). Similarly deductible are premiums for Medicare Part B and Part D; Medigap policies offered by organizations like AARP; and qualifying long-term-care insurance (deductible in an amount that rises with age).

Where to claim the payments on Form 1040 and Who qualifies

The law allows people who are their own bosses to deduct payments on Line 29 of the 1040 form: The same way they claim write-offs for things like job-related moving expenses, alimony payments, and money stashed in IRAs and other tax-deferred retirement plans.

The only persons who qualify for Line-29 deductions are those who are self-employed and operate their businesses as sole proprietorships, partnerships, or limited liability companies.

The IRS acknowledges that those qualifying include self-employed persons who start to make payments to their own plans after they lose jobs with companies that provide employer-sponsored insurance plans. Consistent with this approach, it prohibits Line-29 deductions by newly minted self-employed persons who buy COBRA coverage through their former employers’ group plans. They must use Schedule A to claim COBRA payments.

Also qualifying are individuals who receive wages from S corporations in which they own more than two percent of the shares. S corporations is IRS lingo for companies that are taxed much the same way as partnerships are and that pass profits through to their shareholders, who pay taxes at their individual rates.

Don’t claim insurance payments twice

Should you use Schedule A, keep in mind that you have already claimed those payments on Line 29; you can’t again claim them as itemized medical expenses.

Other considerations

There are several other aspects of this special break that you should bear in mind.

IRS rules emphasize that the special break becomes unavailable when you are self-employed and are covered by your spouse’s employer’s insurance. When you are eligible to participate in a health plan maintained by your employer or your spouse’s employer, include insurance payments with other medical expenses on Schedule A.

Similar rules apply when you spend just part of the year — a month or two, say — on staff with a company or organization: No special break for any month during the year in question for which you are eligible to be covered by an insurance plan provided by an organization that employs you or your spouse. That is true whether the employment is on a full- or part-time basis.

The IRS also prohibits using insurance payments claimed on Line 29 to reduce self-employment income when filling out Schedule SE. The computation on that schedule is based strictly on Schedule C, on which you report receipts and expenses to arrive at a net profit.

What if the premiums were so high, and your Schedule C income so low, that the insurance cost you more than you made for the year? No special write-off for insurance payments that exceed the net (receipts minus expenses) earnings from the business.

Help from the IRS

IRS Publication 535, Business Expenses, provides additional information on health insurance deductions for self-employed individuals and is available at irs.gov.

Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: “a leading tax professional” (New York Times); “an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine). Information about his books is at julianblocktaxexpert.com.

(NASW members can read the rest of the Spring 2016 ScienceWriters by logging into the members area.) Free sample issue. How to join NASW.