This question illustrates the fact that there are very few simple answers in taxation. Sometimes, answers must be inferred from the tax code and limited authoritative guidance.
When it comes to deducting a spouse’s health insurance via the self-employed health insurance deduction, enough loose interpretation exists to confuse professionals & taxpayers alike. There is also (surprisingly) little professional reference with which to research this seemingly simple question. So, I took some time to find an answer. Here are the results:
Quick Answer (in a long sentence): Whether a self-employed individual can deduct their spouse’s health insurance does not have definitive precedent or formal guidance to the affirmative, so the current correct answer to this question, with rare exception, is “NO,” a spouse is not entitled to deduct their spouse’s health insurance premiums as a self-employed health insurance deduction.
To be deductible as self-employed health insurance, a policy must be purchased in either the business name or the name of the business owner. My research has also revealed some level of required intent by the business to establish or adopt insurance existing in the owner's (not the business) name. Furthermore, policy premiums should be paid by the business (directly or indirectly).
Brief Overview of Related Research:
IRC §162(l) allows a self-employed individual to deduct health premiums for themselves, their spouse, dependents, and children. This deduction, however, is limited to the individual's earnings from his or her trade or business establishing the plan.
Chief Counsel Memo 200524001 (CCM) this CCM addressed the deductibility of insurance purchased in the taxpayers name and not the name of the business: “A self-employed individual who is a sole proprietor may deduct the medical care insurance costs of the sole proprietor and his or her family from the earned income of his or her trade or business when the health insurance policy purchased by the sole proprietor is issued in his or her individual name and not in the name of the sole proprietor’s trade or business.” The direct inference here is that health insurance is only deductible when in the business's or the business owner's name.
This CCM also states that the deduction is limited to the income of the business purchasing the insurance.
Hence, if the taxpayer has two businesses (Business A and Business B), and the policy was purchased directly or indirectly through Business A and Business A has a loss, but business B has a profit, the taxpayer cannot use income from Business B to offset A's loss and claim the SEHI deduction.
This creates the imperative that the policy in question have a close/formal relationship with a single business.
The (Maybe) Rare Exception: Chief Counsel Memo 201228037 addressed the deductibility of a self-employed owner's Medicare premiums, stating that premiums paid directly by the sole proprietor for Medicare coverage that covers their spouse and children may qualify as deductible SEHI when they otherwise satisfy the requirements of IRC 162(I)(1). This is a fuzzy and somewhat contradictory interpretation of the law that many believe creates an exception to the requirement that a qualifying policy be owned by the business or the business owner. Why? Medicare does not offer family coverage. So, based on the wording of Chief Counsel Memo 201228037 - in the rare event that the business owner directly pays the premiums for their non-self-employed spouse or child’s Medicare policy, these premiums appear to qualify for the SEHI deduction. This treatment, however, does not extend to other policies that are not owned by the business or self-employed spouse.
Erroneous Interpretations: CCM 201228037 was an attempt to clarify form instructions and ambiguity regarding the deductibility of a self-employed individual's Medicare premiums. Unfortunately, its vague wording and contradictory conclusion with regard to a spouse’s Medicare policy has led some to argue that the CCM makes other health insurance owned by a spouse (who does not own a business) deductible as SEHI.
A second rumor/opinion argues that the 2005 CCM allows for deductibility of a policy owned by the owner's spouse or family member when premiums are “constructively” reimbursed by the business owner.
In my opinion, both interpretations are incorrect. Neither CCM makes specific reference to either position, and no authoritative guidance exists to back either interpretation. Additionally, both interpretations run counter to the text, spirit, and intent of IRC 162(I)(1).
Conclusion: Deductible self-employed health insurance policies must be established through a particular business in either the business name or in the owner's name (with the possible exception of directly-paid Medicare mentioned above). Premiums should be paid (or reimbursed) by the business. Policies owned by or policies paid for by taxpayers who do not have self-employment income are NOT deductible as self-employed health insurance.
Ambiguity remains regarding policies existing in the owner's name before becoming self-employed. In this situation, a formal declaration may assist the owner in establishing a fact pattern for the adoption of the policy by the business.
Keep Learning: We hope this article has helped you better understand the Self-Employed Health Insurance Deduction. If you're a real estate agent and want to minimize your taxes, our Comprehensive Real Estate Agent Tax-Cut Library is for you. This searchable video library is the preeminent authority for real estate agents who are serious about cutting their tax due. It covers everything a real estate agent needs to know to maximize and substantiate every possible deduction real estate agents can take on their business tax return.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
I thought the course on 1120-h was excellent and have shared your website with other hoa board members. It was clear to me that Brett understood a volunteer HOA board that could not afford tax accountant guidance.- Terri S, Henrico, VA, 1120-H Basics Course
The 1120-H course is the second course that I’ve taken and both classes have been very informative and helpful. The courses have been easy to follow along with and if I have a question they are quick to get back to me and help me understand the issue. I would highly recommend OvernightAccountant classes.- George, York, PA, 1120-H Basics Course
Thanks for offering Overnight Accountant!- Josh, Charles Town, WV, 1099-MISC Basics Course
Join our email newsletter for $20 off of your first course!
Always Spam Free + Simple Unsubscribe