 Income tax 2022-2023. Self-employed health insurance deduction. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from the form 1040 instructions tax year 2022 instructions for schedule one additional income and adjustments to income adjustment to income section which you could find at the IRS website IRS.gov IRS.gov looking at our income tax formula we're focused online to the adjustments to income remembering that the first half of our income tax formula is in essence an income statement we've got line one being the income minus in essence the equivalent of expenses those being the deductions gives us the equivalent of the net income that being the taxable income but everything's flipped on its head. We want the taxable income to be as low as possible as opposed to normally where we want the net income to be as high as possible. We're looking at the adjustments to income which are in essence a type of deduction or you might call it like a contra income type of account meaning it's decreasing the income on the way down to get to the net income or taxable income. You might think of it as a contra income account because it's getting to the subtotal of the adjusted gross income which is an important subtotal because it is used often times for most of the calculations to decrease the benefits from like deductions and credits related to phase outs. Also remember that the above the line deductions the adjustments to income do not have that same limitation as the itemized deductions do to have to clear a threshold such as the standard deduction to get a benefit from them. So we're looking here on the first page of the tax form and we're focused on line number eight other income from schedule one. If we look at schedule one part number two we are now focused on line 15 the deductible part. I'm sorry we're looking at the line 17 which is the self-employed health insurance deduction. So just a quick recap on this whole concept it's going to be tied to often times your self-employed business often a schedule C. So remember that if we have a schedule C that's going to add a lot of complication to the tax return and we always want to return to the question if we're doing tax preparation do we want to be taking on clients that are going to be more simplified have less bookkeeping needs less complication in which case we're going to have to do more of them and have less profit per return or are we going to do more complex returns and then choose which more complex returns we want to do maybe returns that have a business related to them like a schedule C possibly including like bookkeeping needs and whatnot as we take on those clients because many small businesses often need some help to get everything organized with regards to the reporting of them do we want to specialize in types of industry and possibly types of entity C corporation versus S corporation LLCs and so on or sole proprietorship and so those are kind of things you really want to keep in mind or else you might get a little bit overwhelmed and have too broad of a scope within your business which will make it difficult to scale the business as you kind of imagine it. So when we take on a schedule C for example a lot of different things are going to be in place that includes complications to just the calculation of the tax code even if we were just given everything we need such as they give us a income statement we plug that into the schedule C and so on we're also going to have the self employment tax we'll have to deal with half of the self employment tax you could see deductible here and then we have planning tools that might be put in place as well as we talked about in a prior presentation like retirement plans like a SEP or a simple for example and then with the health insurance that's also an added complication oftentimes because many times it used to be that the health insurance was kind of tied to the employer which makes sense to some degree because sometimes an employer can can get like a group plan which that makes it easier for the insurance company Paul possibly to give a lower cost so even if there were no tax incentives and whatnot sometimes an employer might be able to get a beneficial plan just for the fact of having like a group plan set up and it used to be that more people kind of had a single family household thing that's in every household or a single earner household and that earner often worked at the same company for a long period of time and so therefore a lot of the benefits being tied to that one place was kind of made sense to some degree as well because it was somewhat stable nowadays people are moving around a lot so you might not have you know one employer for your for your entire life and your of course could have multiple people that are working within the household instead of one people that's going to be primarily working in the household so this tying of the health insurance to the employer gets a lot more messy in those types of situations and if you're self-employed then the question is can I get a benefit for my for my self-employed type of situation which you may be able to do here online 17 so again obviously health insurance is a messy situation where they're kind of debating on what to do with it as well and the fact that it's tied to an employer gets kind of kind of a tricky situation and so if you're dealing with people that have their own businesses then you have that added complication to deal with how we're going to deal with the health insurance notice it's deducted here and we're it's not being deducted on the schedule C which you might first expect it to be deducted on right so that's another kind of funny thing all right so let's get into it self-employed health insurance deduction you may be able to deduct the amount you paid for health insurance for yourself your spouse and your dependence that's another kind of question obviously that would come up if I deal with health insurance through my work often times I can get coverage for not only me but my family and so you would like a similar situation if you were self-employed and possibly get some benefit from that the insurance can also cover your child who was age I was under age 27 at the end of 2022 even if the child wasn't your dependent so a child includes your son daughter stepchild adopted child or foster child defined and who qualifies as your dependent in the instructions for form 1040 so we'd look we looked at those a bit in the past you could find that of course in the IRS website and the instructions for 1040 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 self-employed and then net profit note that if you have a schedule C it's possible that you had more expenses than income then you have a loss now the IRS is skeptical of losses because if you have a loss you might be able to take that loss against other income the IRS wants a piece of your income they don't want to take take on the risk of your losses right if they could avoid it so if you have a loss then you might get a benefit from that loss but you're not going to be able to to possibly take advantage of some of the other kind of components such as putting money into the the health insurance possibly for it because they're going to limit the deduction in that in that case in the event of a loss that might be one reason they put this particular deduction not on the schedule C which would increase the loss amount but rather they use what you're on you have on the schedule C to help determine whether or not you qualify for the deduction which they put on the schedule 1 part 2 since similar kind of situation might happen if you set up like the seps and whatnot if you don't have any income you might not be able to get you're gonna not going to be able to get as much benefit or put as much money into like a sep for example so you were a partner with a net earnings from self-employment you used one of the optional methods to figure your net earnings from self-employment on the schedule se so now we're subject to the self-employment tax a lot of these rules kind of come down to the idea that if you're if you're treating me like a corporation as a sole proprietorship ship making me pay self-employment tax which is kind of the equivalent of payroll taxes then I should I should be able to have the benefits of some of these other stuff that corporations and employees have and so that's some of the justification that might justify for example why you'd be able to deduct like the health insurance and so on because they're trying to mirror what happens in a corporate situation as they treat you and your own business as kind of an employee in charge you these the social security and Medicare so you received rate wages in 2022 from an S corporation in which you were more than 2% shareholder health insurance premiums paid or reimbursed by the S corporation are shown as wages on W2 so let me just recap those again you were self-employed and had a net profit for the year reported on schedule C or F you were a partner with net earnings from self-employment you used one of the optional methods to figure your net earnings from self-employment on schedule se you received wages in 2022 from an S corporation in which you were more than 2% shareholder health insurance premiums paid or reimbursed by the S corporation are shown as wages on form W2 now notice if you're sole proprietorship for example then if you were growing you might end up being like try to try to expand by becoming a partnership that means you have two or more people which might mean that you have to report earnings on a separate form that would then flow into your your 1040 but still might be subject to self-employment tax so you're still kind of in a similar situation possibly self-employment tax you might set up an LLC which is in structure a little bit similar to a partnership so then you have a similar situation there and then the other option is an S corporation these are flow-through types of entities the S corporation gets a little bit more complicated that's more complicated than that because it's treated not like a like a partnership but like it's kind of like a corporation with regards to the shares but it's still basically a flow-through entity and that's where you got to be really careful with the calculation of the self-employment tax because you might not have the same you don't have the same kind of capacity to to calculate the self-employment tax because you're forced to pay yourself in essence wages in that situation and then and then so then you might have the health insurance situation with regards to paying yourself kind of wages like it's a little bit tricky so note that when you're dealing with business tax returns you have that kind of problem as well in terms of they're gonna inevitably ask am I in the ideal business entity should I be a sole proprietorship should I be an LLC should I be a partnership should I take on partners or should I hire contractors and employees as as as opposed to taking on other partners and that opens up a whole other line of questioning because if you're a sole proprietor reporting on a Schedule C that's the easiest thing to do clearly if you take on an equity partner then you have that added level of complexity and liability because now the partner can make decisions and what not which you might be liable for and then and then you might have to file another tax return which greatly increases just the filing requirements with regards to to it as well your other option would be to hire contractors or hire or have them as an employee and then you've got the question of liability which often comes up with regards to an LLC being set up or an S corporation which you could set up even with a very small business possibly as a sole proprietor possibly being able to set a single member LLC or an S corporation oftentimes people arguing for the S corporation are saying that they can get an advantage on on some of the self-employment taxes that you would be paying but it's a little bit it's a little bit messy of a scenario and it adds a whole lot of complexity if you're if your only reason going from a sole proprietorship to an S corporation is for that particular you know reason it might not be worth it but those are just a quick look at that the insurance plan must be established under your business your personal service must have been material income producing factor in the business so if you are filing a schedule C or F the policy can be either in your name or in the name of the business so that gets a little bit tricky as well because your sole proprietorship you might have a different business name or putting it in your name if you have another type of business entity you want to make sure like an S corporation that you're setting up your health insurance in such a way that's appropriate to make sure that you could get the benefit of the deduction related to it so if you are a partner the policy can be either in your name or in the name of the partnership so partnership situations similar to a sole proprietor but now you have two people a partnership so usually in a partnership there's a partnership and therefore you typically have another kind of return you have to file but it still flows through to your 1040 so flow through entity so you still have that social security and Medicare calculation self-employment tax situation so you can either pay the premiums yourself or your partnership can pay them and report them as guaranteed payments so 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 so if you are more are a more than 2% shareholder in an S corporation the flow through entity 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 as wages in box one of your form W2 in 2022 and you also report the premium payment or reimbursement as wages on form 1040 or 1040 SR line one so this where where it gets a little bit messy because the one of the the S corporation the flow through income still flows through to your form 1040 but the flow through amount usually isn't subject then at that point in time to self-employment tax which means the IRS kind of forces you to treat yourself as an employee of your S corporation so even if you set up an S corporation and you were like the only owner of the S corporation then you'd still have to kind of pay yourself an appropriate amount of wages because that's how the IRS is gonna get their social security and Medicare so that's where it gets a little bit a little bit messy so now you've got you paid yourself and you have the flow through of whatever excess income is going through the S corporation that's going to the 1040 so but if you were also eligible to participate in any subsidized health plan maintained by your or your spouse's employer for any month or part of a month in 2022 amounts paid for health insurance coverage for that month can't be used to figure the deduction so 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 2022 don't use amounts paid for coverage for that month to figure the deduction so in other words you want to also keep in mind the idea that like if your schedule see sole proprietorship or if you have your own business in whatever capacity and that's your only income then you're gonna have to be paying self-employment in that situation and dealing with it through your business somehow if however you also have access to health insurance through the W-2 income either from yourself because you have another job where you have access to health insurance or your spouse because typically if your spouse has access to health insurance then it's possible for the whole family to have access you want to make sure that that doesn't clash with your capacity to you know deduct health insurance if you have the ability to join you know a plan through an employer so example so 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 deductions medic Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction so 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 so for more details on that you can go to publication 535 on the iris website of course iris.gov iris.gov if you qualify to take the deduction use the self-employed health insurance deduction worksheet to figure the amount you can deduct obviously tax software is quite useful for that as well to kind of help you do the deduction and you can go through it and deconstruct it and make sure it makes sense to you so you can explain it and make sure it's correct exceptions 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 you are using amounts paid for qualified long-term insurance to figure the deduction so again software kind of is useful oftentimes to be selecting the proper return if you do the proper data input to apply the proper worksheet and then you can kind of back into it to make sure that it's filling things out in the right way use publication 974 instead of worksheet instead of the worksheet and these instructions if the insurance plan was considered to be established under your business and was obtained through the marketplace an advanced payment of the premium tax credit were made or you are claiming the premium tax credit so there's another kind of wrinkle in this whole kind of on this whole thing that being that usually for low to moderate income tax payers you might be able to participate in the marketplace this kind of was one into play with the Obamacare when when that happened you could see what what's happening with the health care you got people going in diam diametrically opposite directions trying to fix the health care so you can't really meet in the middle because they're actually going in opposite directions one direction is to say we're gonna completely basically have a single payer system mainly like centralized everything and part of the process on that is to get rid of the free rider effect and force people to pay into you know the policies so that we don't have this free rider problem the other direction is to say no what we really need to do is to have a more expanded marketplace so more people can enter into the market so you have more competition type of thing and what happened with the Obamacare kind of got split in the middle type of thing and so now we have this situation where you have a marketplace for the low to moderate income and if you qualify for that you might be able to get a credit related to the payments of the insurance premiums is kind of the bottom line which is usually an advanced credit which is a bit complicated in and of itself which will dive into possibly a little bit more in future presentations when we get to the credits but that's also going to muddy up the waters if you have a sole proprietor business and you're trying to to figure out if you get a deduction for the health insurance payments if you also get a benefit from the credit that you would have for paying it so if you're in that situation you can see publication 974