 Income tax 2023-2024, self-employed health insurance deduction. Get ready and some coffee. Because if taxes were an animal, the government would surely be a leech. You get it off! Most of this information can be found in the Instructions for Schedule 1 section of the Form 1040 Instructions Tax Year 2023, which you can find on the IRS website at irs.gov, irs.gov, looking at the income tax formula. We're focused online to adjustments to income, which you might hear called above-the-line deductions, possibly Schedule 1 deductions. Remembering that the first half of the income tax formula is basically a funny income statement. Most income statements having income minus expenses resulting in net income. Here we have income minus various deductions getting to taxable income, noting for taxes, deductions are good, therefore we're always looking to increase the possibility of having more deductions, also recognizing the difference between the above-the-line deductions or adjustments to income and the below-the-line deductions, which are the greater of either standardized or itemized deductions, one difference being that if you qualify for an adjustment to income above-the-line deduction, then you don't have to clear the hurdle of the standard deduction to get a benefit from it. This is the first page of the Form 1040. We're looking at Line 10, Adjustments to Income from Schedule 1. Here is the Schedule 1, Part Number 2, Adjustments to Income. We're focused on Line 17, Self-Employed Health Insurance Deduction. All right, so we have Line 17, Self-Employed Health Insurance Deduction. First thing to note here is it says self-employed, so as we have seen in the past, oftentimes if you're going from tax preparation for an employee, which will typically be driven by W-2s, and then going to self-employed or some kind of business income, typically a Schedule C, or possibly some other entity like pass-through entities, S-Corporations, Partnerships, LLCs, or a C-Corporation, that's going to increase the complexity of the return, making it a requirement to have at least some bookkeeping skills, typically, because there will often be adjustments in that way, and then there's also often increases in the complexity of the return, as well as possible opportunities for tax planning. So as a tax preparer, the question is, do you want to be taking on more complex returns where you have Schedule C and self-employment business, which typically means you're going to be doing more complex returns, possibly more bookkeeping, and possibly able to charge more per return, or are you specializing in fewer returns, making less profit margin, but be able to crank out more returns? First, a word from our sponsor. Actually, we're sponsoring ourselves on this one, because apparently the merchandisers, they don't want to be seen with us, but that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like this CPA thinking cap, for example, CPA thinking, CAP, you see what we did with like with the letters, and this CPA thinking cap is not just for CPAs either. Anyone can and should have at least one possibly multiple CPA thinking caps. Why? 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Now also note that if someone is a W2 employee that they could also have a schedule C business on the side and possibly still have access to some benefits from a W2 employee situation, which might be a little bit easier because they might not have a whole lot or very complex bookkeeping situation because they have a fairly basic business and their main income is coming from the W2 employee wages. If however their entire income is coming from a business, then then it's likely that you're going to have more of these kind of planning type things that are going to come up. One of them possibly being the employed health insurance, the the self employed health insurance deduction because it's historically been the case that health insurance has kind of been tied in with the employer. It used to be the case that many people actually worked for the same company their entire lives, right? And then and then it was not it was routine typically to have the health insurance tied to the company in part because the insurance premiums for a grouped plan sometimes could be cheaper than if you bought the health insurance yourself. So just for that reason itself there could be a link from the employer that could provide a benefit to the employees but these days people are switching jobs a lot more routinely and a lot people might have work on the side or might be self employed in some way. If you're self employed then the question is well do I get a benefit for my self employed health insurance because when it was linked to an employee or situation if it was an employee employee or situation there could be some link between that so that historical link has kind of leaked over once again to the self employment situation where the IRS is trying to mirror a similar kind of structure on a self employed individual. Okay so 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 2023 even if the child wasn't your dependent. So how would you deduct this? Well it would be dependent upon you being the self employed uh self employed typically not deducted on the schedule C but rather on as we saw the schedule one why wouldn't it be deducted on the schedule C you might ask. Note that the bottom line of the schedule C will be the thing that you're going to have income tax calculations on but also that self employment tax calculation. So the fact that it's not deduction deducted on the schedule C means you might still be subject to paying the equivalent of payroll taxes social security and Medicare but you'll get the federal income tax benefit because it'll be deducted on the schedule one. Okay a child includes your son daughter stepchild adopted child or foster child defined in who qualifies as your dependent and the instructions for form 1040 so we looked at that in a prior presentation 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 you're self employed and so that would typically mean you have a schedule C or possibly a schedule F and you didn't have a loss right if you have a loss then you lost money the IRS is already skeptical of people taking a loss against other incomes such as W2 income or other income possibly so you might not get a benefit in the case of there's a loss in other words the iris in some cases will restrict the amount of deductions you're going to get to to to break even or have a zero on your net income and not go below in a loss situation. So you were a partner with net earnings from self employment so if you're in a partnership situation then typically you have to file another return a partnership return but it's not actually kind of a separate legal entity because it's not like a separate corporation generally you could have an LLC which is kind of like an in-between world but the idea of a partnership is that the income still flows through to your tax return possibly with a K1 form and is still oftentimes subject to self employment which means you might have been basically the same situation where you might be able to take the deduction for the health insurance situation. So you used one of the optional methods to figure your net earnings from self employment on schedule S.E. so it's going to be a calculation that we've seen summarized in the past in software we're going to obviously have to pay our self employment tax which is social security and Medicare the self employed equivalent of payroll taxes in essence you received wages in 2023 from an S corporation in which you were a more than 2% shareholder so S corporation another complication in the situation because these are pass-through entities the S corporation typically trying to get the best of both worlds having some separation of a separate legal entity possibly for litigation purposes possibly for benefits with regards to the calculation of things like payroll taxes but it's still a flow through entity that's going to also flow through to the individual tax return so we're not going to dive too too much deeper into the S corporation and and partnerships here it's a whole another world in and of itself but as a tax preparer that's going to be one of the questions you have once again do you want to take on those more complex returns because there's a whole separate return that you have to file and have a flow through situation and or do you just want to do the individual side of things possibly allowing someone else to do the S corporation returns and the partnerships but still be able to take the K ones and put them into the tax return in which case you might have to understand some more about about this flow through entities and the consequences on things like health insurance so health insurance premiums paid or reimbursed by the S corporation are shown as wages on the form W2 because S corporation still has to has to pay wages in the form of W2s to the employees okay 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 schedule C or F the policy can be either in your name or in the name of the business that oftentimes is like a sticking point that can be a little bit scary in terms of setting up the policy should you know how how what's the name that we should be putting on the policy to make sure that we're in compliance with our tax benefits so 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 and you pay the premiums yourself the partnership must reimburse you and report the premiums as guaranteed payments this is getting a little bit into the weeds in terms of the bookkeeping for different types of entities which I don't want to you know go into in too much detail at this point in time mainly focusing in on a schedule C sole proprietor business kind of situation so if you are a more than two percent shareholder in an S corporation the policy can be either in your name or in the name of the S corporation so you can either pay the premiums yourself or the S corporation can pay them and report them as wages so you have this kind of interplay in the situation with the S corporation note that instead of having the self-employment tax basically flow through to you so you have to calculate self-employment tax you're going to have to pay the social security and Medicare by basically treating yourself as an employee of the S corporation and then you'll and so that means you're going to have a w2 to yourself basically kind of situation which is a little bit different than possibly you would see obviously in a schedule C where you don't pay yourself a w2 or even in a partnership or possibly again you may not pay yourself a w2 although you might pay other people employees w2s in those cases so if the policy is in your name and you pay the premiums yourself the S corporation must reimburse you so you can deduct the premiums only if the S corporation reports the premiums paid or reimbursed as wages in box one of your form w2 in 2023 and you also report the premium payments or reimburses as wages on form 10 40 and 10 40 s r so in those situations you can see that these pass through entities are more complex in many ways the S corporation possibly being more complex in some ways than even like a partnership type of situation so that these are things that you have to weigh out when you're deciding if you want to be an S corporation versus a sole proprietorship for example so but if you were also eligible to participate in any subsidized health plan maintenance by by your or your spouse's employer for any month or part of a month in 2023 amounts paid for health insurance coverage for that month can't be used to figure the deduction 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 2023 don't use amounts paid for coverage for that month to figure the deduction so now we've got this kind of interplay this kind of confusing interplay in terms of well what if you're in a situation where you have access to health insurance through an employer because you can see how this kind of grew out what happened here is you're saying well health insurance typically is tied to an employee or employee situation the employee possibly having more favorable health care through the employer in part due to having group plans available and then well what if people don't have the capacity to participate in the group plans because they're self-employed well then the iris wants to make this kind of deduction situation well what if you have you have the possibility to have access to an employer kind of plan will that restrict you from from basically doing your own health insurance and deducting it see these are the questions that you want to you want to go through and you can go through a questionnaire here here's the questionnaire self-employed health insurance deduction worksheet schedule one line 17 before you begin be sure you have read the the exceptions all right number one enter the total amount paid in 2023 for health insurance covered established under your business or the S corporation in which you were a more than 2 percent shareholder for 2023 for you your spouse and your dependents your insurance can also cover your child who was under age 27 at the end of 2023 even if the child wasn't your dependent but don't include amounts for any month you were eligible both to participate in an employer sponsored health plan or amounts paid from retirement plan distributions that were non-taxable because you are a retired public safety officer which is a very special situation there number two enter your net profit and any other earned income from the business from schedule c typically or the k1 income that flows through from an s corporation or a partnership possibly uh or uh so from the business under which the insurance plan is established minus any deductions on schedule one line 15 and 16 don't include conservation reserve program payments so and then three self-employed health insurance deduction into the smaller of line one or line two here and on schedule one line 17 don't include this amount in figuring any medical expense deduction on schedule a okay caution so a qualified small employer health reimbursement arrangement a q s e h r a is considered to be a subsidized health plan maintained by an employer all right let's look at an example if you were eligible to participate in a subsidized health plan maintained by your spouse 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 so medicare premiums you voluntarily pay to maintain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction amounts paid for health insurance coverage from retirement plan distributions that were non-taxable because you are a retired public safety officer can't be used to figure the deduction for more details you can see instructions for form 7206 on the iris website of course iris dot gov iris dot gov if you qualify to take the deduction use the self-employed health insurance deduction worksheet to figure the amount you can deduct exceptions so use form 7206 instead of self-employed health insurance deduction worksheet in these instructions to figure your deduction if any of the following applies so this is another one of those situations we've seen in the past computer software will typically help of course with these situations because they will help to populate and go through an interview process but one of the worksheets is going to be in the more simplified scenario the more complicated worksheet is if these things are in play and therefore you have a bit more complex worksheet possibly you had more than one source of income subject to self-employment tax so when we think about self-employment we usually think schedule C but what if you had multiple forms of self-employment schedule C partnership income that's flowing through in the form of a K1 or something like that for example you file form 2555 I believe that's foreign income situation which always complicates things you are using amounts paid for qualified long-term care insurance to figure the deduction use publication 974 instead of the worksheet in these instructions if the insurance plan was considered to be established under your business and was obtained through the marketplace and advanced payments of the premium tax credit were made or you are claiming the premium tax credit in other words this is kind of like the obama care situation in which case you have a credit that might be applicable to you that would typically apply if you're in a lower income situation where you're prepaying the premiums and then you can have to determine if there's a credit for it when you actually file the tax return we'll talk more about these credits in a future presentation but obviously that's going to complicate your deduction calculation because now you have this credit coming into play which will which is which will kind of complicate how much you paid for basically the insurance