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self employed health insurance deduction when both spouses are self employed

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Level 4

Husband's self employment income is above the ceiling for Soc Sec tax. Wife's income is much lower. Proseries calculates the % to multiply health premiums based on a pro rata share of her business to ALL business from both spouses and Sch 1, line 14 SE tax from both spouses.Because his  SE tax is capped and hers is not, the SE tax allocated to the wife is $469 for purposes of the SEHID worksheet, even though her 1/2 of SE tax is $529. The SE tax allocated on the SEHID worksheet is less than the true 1/2 SE tax by $60, allowing $60 more to SEHI deduction to the wife than had the formula reported the $529 that is her portion of the 1/2 SE tax. The excess $60 SEHI deduction also has created a negative QBI by $60, which otherwise would be 0. 

Lacerte allocates the SE tax for calculation of allowed health insurance deduction based on the $529, not the $469.  Proseries tax is $14 less due to this ( and NIIT tax which is affected by MAGI. 

Proseries does use the worksheet in the Pub, but Lacerte uses each spouse's 1/2 SE tax to limit the SEHID, not a % of All sch C (both H and W). Because his net earnings are capped for SE tax, the % method is skewed.

Proseries says their program is working correctly. I am concerned that Lacerte and Proseries do not arrive at the same SEHID. 

Could both methods be correct even though the the SEHID are not the same.?

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Level 12

@jgcpa wrote:

Thank you for your reply. Each person had a single health plan. None were family plans. Therefore, husband cannot consider her plan as paid under his business, correct?


Sigh.  It's a "gray area".  Prior to 2012 I probably would have have said her insurance would not qualify under his business, but now I would take it all under his business if the payment came from a Joint account or his business account.

 

§162(l) allowed the deduction for himself, his spouse and his dependents.  The question arises if the "plan" is "established" under his business.

(1)  Although the Publications use the word "policy", the Code clearly says "plan".  His business may have a "plan" to pay for insurance "policies" for himself, his spouse and his dependents. 

(2)  CCA 201228037 discusses if Medicare qualifies for the SEHI deduction.  In that guidance, question #3 says that Medicare premiums for a spouse and dependent DO qualify as SEHI (assuming all other criteria are met).  Medicare is only in each person's name.  So it is indirectly saying that the individual policy does not need to be in the business owner's name.  Logically, that principle should extend to non-Medicare insurance.

https://www.irs.gov/pub/irs-wd/1228037.pdf

 

I know some people will strongly argue against it, but in my opinion it can be deductible under his business.   But because of the uncertainty of it, I would let the client know in writing that it is a "gray area".

 

However, if the wife's insurance was paid by a separate account that was only in her name or business, then it would be difficult to say that his business "plan" paid for it (unless there was a reimbursement given), so I don't think I would be comfortable putting it under his business in that situation.

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Level 12

Interesting.  I think you are right, the worksheet in Publication 535 is wrong.

The developers for ProSeries are clueless, and don't use Code, Regs or logic.  The only rely on the Publications.  So if the Publication is wrong or unclear, the Developers will always say is it "working as designed".

 

But let's take a step back.  Why is the insurance "established" under the wife's business rather than the husband's business?  It wouldn't be an issue if it was under the husband.

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Level 4

Thank you for your reply. Each person had a single health plan. None were family plans. Therefore, husband cannot consider her plan as paid under his business, correct?

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Highlighted
Level 12

@jgcpa wrote:

Thank you for your reply. Each person had a single health plan. None were family plans. Therefore, husband cannot consider her plan as paid under his business, correct?


Sigh.  It's a "gray area".  Prior to 2012 I probably would have have said her insurance would not qualify under his business, but now I would take it all under his business if the payment came from a Joint account or his business account.

 

§162(l) allowed the deduction for himself, his spouse and his dependents.  The question arises if the "plan" is "established" under his business.

(1)  Although the Publications use the word "policy", the Code clearly says "plan".  His business may have a "plan" to pay for insurance "policies" for himself, his spouse and his dependents. 

(2)  CCA 201228037 discusses if Medicare qualifies for the SEHI deduction.  In that guidance, question #3 says that Medicare premiums for a spouse and dependent DO qualify as SEHI (assuming all other criteria are met).  Medicare is only in each person's name.  So it is indirectly saying that the individual policy does not need to be in the business owner's name.  Logically, that principle should extend to non-Medicare insurance.

https://www.irs.gov/pub/irs-wd/1228037.pdf

 

I know some people will strongly argue against it, but in my opinion it can be deductible under his business.   But because of the uncertainty of it, I would let the client know in writing that it is a "gray area".

 

However, if the wife's insurance was paid by a separate account that was only in her name or business, then it would be difficult to say that his business "plan" paid for it (unless there was a reimbursement given), so I don't think I would be comfortable putting it under his business in that situation.

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Level 4

Thank you for your insights! Much appreciated!