 Income tax 2021-2022, self-employed health insurance deduction. Get ready to get refunds to the max diving into income tax 2021-2022. Most of this information can be found in the form 1040 instructions tax year 2021 found on the IRS website irs.gov irs.gov. Here's the income tax formula. We're looking at the adjustments to income, which you might hear called the above the line deductions, the schedule one deductions, the deductions for adjusted gross income, keeping them distinct in our mind from the other deductions, which are the standard and itemized deductions. For example, also noting that the subtotal of income minus these adjustments to income, adjusted gross income is an important subtotal as well, because when we think about phase outs due to income levels, such as phase outs for expenses or deductions and for credits, they're often based not on the top line income, but rather on the adjustment adjusted gross income, the AGI. This is the first page of the form 1040. We're focused here on line number 10 adjustments to income from schedule one line 26. This is the schedule one part two. The total from this section will then flow through into the first page of the form 1040. Line 17, self-employed health insurance deduction is our focus. Note that if they're self-employed, they probably have a schedule C filled out as well, and they're going to be attaching the schedule SE, which is the self-employment, half of that being deductible here on line 15. So we're talking about a business type of entity. That means it's going to be a more complex return as a tax preparer. You want to think about what kind of returns are you focused on? Do you want to focus on entities that have a business component to it, in which case you're going to do more consulting, possibly more bookkeeping kind of situations, or focus not on those types of entities, possibly networking with people to focus on those components and do your part on returns that are going to be more automated, which you could put together possibly just with the documentation given like W2s and 1099s. So you got to think about that as a business, the business entity is being more complicated. When you think about the self-employed health insurance in general, you can kind of compare what the IRS is trying to do in a similar way as we saw with a C corporation, right? They're trying to mirror this employment type of situation because the health insurance is something that sometimes are benefits given by a company. And as we saw up top with the self-employment tax, they're basically treating the self-employed person, let's say you're sole proprietorship and you have no employees. Well, they're still kind of seeing you as an employee and that means that your net income as we saw before is subject to the payroll taxes, self-employment tax, which in essence is similar to being an employee at a company and paying both the employee and employer portion of the Social Security and Medicare. So you saw what kind of workarounds we had to do to treat the sole proprietorship in a similar way to treat you as the owner as kind of like the employee and the employer. Well, we have a similar situation here with the self-employed health insurance. If you were talking about a C corporation and an employee of it, it's possible that a C corporation being a normal corporation, you would get a deduction for the benefits maybe of the health insurance possibly. And so if it's a sole proprietorship and we're treating the sole proprietor now as basically an employee, you would think that they would get some component of the deduction as well for the self-employed health insurance. And so instead of deducting that on the Schedule C because it's not really a business-related thing, it's kind of another thing we're trying to make equivalent to being an employee. So they put it over here on line 17 of Part 2 of Schedule 1. So that's kind of the general recap and how you might want to think about it and possibly explain it to clients. Okay, let's get into some more details. For the self-employed health insurance deduction, you may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2021 even if the child wasn't your dependent. A child includes your son, daughter, stepchild, adopt a child or foster child defined in who qualifies as your dependent in the instructions for Form 1040. So most likely it would be a dependent situation and you can then see who qualifies for a dependent and then get into the gray areas to the exceptions, diving into the instructions on the Form 1040 to get into more detail, at least as the starting point, to get into more complex situations. One of the following statements must be true. You were self-employed and had a net profit for the year reported on Schedule C or F. So generally note that means that you've got Schedule C, self-employed income, but note that you typically they're saying you need a profit here to basically benefit from this. So tax software can help you with that kind of calculation. In other words, if you had a loss, then they're going to say, well, we're not going to allow you to get this other deduction for the loss, because the IRS is skeptical of losses in the first place because you might take the loss and match it up against the income. The IRS wants to take some of your income but not be subject to your losses. So you were a partner from self-employment. So in a partnership type of situation, if you were subject to the self-employment tax, that would be another situation where you might have a partnership return that would flow through then to the 1040 and still be subject to self-employment in that instance. You used one of the optional methods to figure your net earnings from self-employment on Schedule SE. So that's the self-employment tax. So in other words, you're subject to self-employment and if you're subject to self-employment, it has an employee in essence and an employer because you're paying the payroll taxes of the employee and employer in essence in equivalent to basically if you were a C corporation. So you received wages in 2021 from an S corporation in which you were a more than 2% shareholder. So that's another type of flow-through entity, an S corporation. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W2. So that situation gets a little bit more confusing because in an S corporation you typically, even if it's a sole owner you have to pay yourself W2 wages and that's how the IRS hits you with the self-employment tax. So it's a little bit different dynamic on how the self-employment tax goes there. You have to actually charge yourself wages and that's how you get hit with the self-employment tax instead of the wages or the net income flowing through to your return. It's still a flow-through entity but it flows through to your return instead of hitting the self-employment tax on the self-employment on the Form 1040 they hit you with it by forcing you to be an employee of the business and then you get hit in the normal way which is the W2 income is going to be subject to payroll taxes, self-employment tax and so on. So the insurance plan must be established under your business your personal services must have been a material income producing factor in the business if you are filing a Schedule C or F the policy can be either in your name or in the name of the business. If you are a partner the policy can be either in your name or in the name of the partnership you can either pay the premiums yourself or your partnership can pay them and report them as guaranteed payments. If the policy is in your name you may pay the premiums yourself the partnership must reimburse you and report the premiums as guaranteed payments. As you are a more than 2% shareholder in an S corporation the policy can be either in your name or in the name of the S corporation. You can either pay the premiums yourself or the S corporation can pay them and report them as wages if the policy is in your name and you pay the premiums yourself the S corporation must reimburse you. You can deduct the premiums only if the S corporation reports the premiums paid or reimbursed wages in box 1 of your form W2 in 2021 and you also report the premium payments or reimbursements as wages on form 1040 or 1040 SR. So that if you are an S corporation entity it's a flow through entity you are going to want to do more deep of a dive in terms of how exactly you are going to be reporting your health insurance situation because the question is is it going to be something that is going to be on the W2 income so if you are an S corporation you are going to want to spend a little bit more time and research to know exactly how you are going to be setting this thing up because of the situation where you have a flow through entity but often times you are paying yourself at the same time because the IRS is forcing you to basically pay self employment taxes through having a payroll so then that kind of complicates the situation in terms of how exactly you are going to be setting up the insurance situation there so it's a little bit more straightforward of course with like a schedule C type of business or policy possibly a partnership where you are still paying the self employment tax generally after it flows through to the form 1040. So again for the S corporation probably when you are setting things up you probably want to dive in a little bit further and get a better understanding or make sure you have an understanding of exactly how things are working. Continuing on but if you were also eligible to participate in any subsidized health plan maintained by you or your spouse's employer for any month or part of a month in 2021 amounts paid for health insurance coverage for that month can't be used to figure the deduction basically it's been the fact that health insurance has been kind of tied to an employer employee type of relationship in the past and so the thought process may have been well if someone is self employed they should get that similar deduction so that they can be in a similar comparable type of situation they shouldn't be penalized for health insurance for being self employed in other words however if you have access to an employer related plan that's probably the better way to go so the idea would be that you would take that if applicable and if not then take the benefit of the self employed health insurance deduction would be the general idea of the law and kind of possibly the thought process as they put it into place also if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2021 don't use amounts paid for health insurance coverage for that month to figure the deduction a qualified small employer health reimbursement arrangement a QSEHRA is considered to be a subsidized health plan maintained by an employer example if you were eligible to participate in a subsidized health plan maintained by your spouse's employer from September 30th through December 31st you can't use amounts paid for health insurance coverage for September through December to figure your deduction if you were eligible to participate in a subsidized health plan maintained by your spouse's employer from September 30th through December 31st you can't use amounts paid for health insurance coverage for September through December to figure your deduction for more details you can see publication 535 so if you got questions about that take a look at the publication you can find it on the IRS website irs.gov if you qualified to take the deduction use the self-employed health insurance deduction worksheet to figure the amount you can deduct exceptions you can use publication 535 instead of self-employed health insurance deduction worksheet in these instructions to figure your deduction if any of the following applies you had more than one source of income subject to self-employment tax you file form 2555 so obviously it's pretty straightforward if you got one source of income but if you got multiple sources that are applying to the self-employment tax that can complicate things you file form 2555 you are using amounts paid for qualified long-term care insurance to figure the deduction use publication 974 instead of worksheet in these instructions if the insurance plan was considered to be established under the business and was obtained through the marketplace and advanced payments of the premium tax credit were made or you are claiming a premium tax credit so now you got a marketplace type of situation where you have that situation where they possibly deal with the credit that could be involved with that marketplace which we'll talk about later the credit that could be involved and you could have the pre-payments that could be involved for the payment when you make the actual premium payments in terms of basically a pre-payment of the credit so and we'll talk about that credit more in future presentations