Back in 1995, the IRS issued a Field Service Advice document stating that self-employed individuals could not deduct Medicare premiums. In contradiction of that advice, the 2010 Form 1040 instructions stated that self-employed individuals could deduct Medicare premiums as health insurance costs under §162(l).
In an effort to clarify the 2010 instructions, Chief Counsel Advice (CCA) 201228037 was issued and states that premiums for all Medicare parts are deductible as an adjustment to income.
The IRS Office of Chief Counsel, in a chief counsel advice memorandum released July 13, addressed the treatment of Medicare premiums under Section 162(l)’s special rules for deducting health insurance costs of self-employed individuals, noting all Medicare parts qualify as insurance that constitutes medical care under the section.
CCA 201228037 said a partner in a partnership may pay premiums directly and be reimbursed by the partnership, or the premiums may be paid by the partnership, and still qualify for the deduction. “In either case, the premiums must be reported to the partner as guaranteed payments, and the partner must report the guaranteed payments as gross income on his or her Form 1040,” the memo said. Similarly, the office said a 2 percent shareholder-employee in an S corporation may pay the premiums directly and be reimbursed, or the premiums may be paid by the S corporation. In either case, the premiums must be reported to the shareholder-employee as wages on Form W-2 and reported by the shareholder-employee as gross income on Form 1040, it said.
A sole proprietor must pay the Medicare premiums directly, according to the memo. Section 162(l) allows a self-employed individual who is treated as an employee within the meaning of Section 401(c)(1) to take a deduction in computing adjusted gross income for amounts paid during the tax year for insurance that constitutes medical care for the taxpayer, his or her spouse, dependents, or a child.
Sole proprietors, partners in a partnership, and 2 percent shareholders in an S corporation are considered employees for purposes of Section 162(l), the memo said. If the requirements of Section 162(l) are satisfied, Medicare premiums may be deducted for coverage of such an individual’s spouse, dependent, or child.
Instructions for the 2010 Form 1040, U.S. Individual Income Tax Return, indicate that Medicare premiums can be used to compute the deduction under Section 162(l), the memo said, but Form 1040 instructions for 2009 and prior years omitted mention of Medicare premiums.
Self-employed individuals who failed to deduct Medicare premiums in prior years may file an amended return to claim a refund, subject to the statute of limitations, the office said.
