Tuesday, October 16, 2007

Indie Health Insurance Deduction: An unfair regulation!

Hi June,

I have some questions about deducting health insurance premiums:

Would COBRA payments qualify as health insurance premiums I can deduct as a an indie? (I am not talking about the personal deduction which must be 7.5% of income.)

If COBRA does not qualify, would another plan qualify given the fact that I do have COBRA available to me and there is a rule that you can only deduct if another plan such as an employer or spouse's employer is not available to you?

Thank you so much, Alexis from Santa Monica, CA

Hello Alexis,

Often getting the same tax advantage for indies that goes to employees is just a matter of research and interpretation. Not so with this situation. It is unfair! Even the IRS researcher that I spoke with this morning agreed with the assessment of the indie getting the short end of the stick.

A little background for my readers: If a self-employed's business has a profit [not a loss] then health insurance premiums may be deducted on the tax return as an adjustment to income -- also said as "deducted on the front of the return." This placement for the deduction saves much more tax than taking the cost of health insurance premiums as a personal deduction inside the tax return.

You cannot deduct the premiums on the front of the return if you were eligible to participate in a health plan subsidized by your employer or your spouse's employer.
*** Here's the scenario:
You have a job as well as an indie business. Your employer offers you a health plan inferior to one you could get on your own. You purchase your own health coverage. You cannot deduct the premiums that you pay on the front of the return. The deduction gets stuck -- and often lost -- inside your return.

The same applies to COBRA. COBRA came about in 1985 and requires most employers to provide group coverage to terminated employees for up to 18 months. [That's an oversimplification, but is accurate.]

*** So here's another scenario:
Your employer fires you. You start your own indie business. You buy your own health insurance, superior to the COBRA offer. For 18 months you cannot deduct the premiums on the more advantageous part of your return. There's a good chance you get no deduction at all.

Thanks for the question Alexis. I think it's time for all of us to take a careful look at the various healthcare plans offered by the current candidates.


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