Learn how to deduct medical costs as a business expense.

Hi June,

I'm a software/controls/simulation engineer. Indie for 6 months.

Your web site has been a fantastic resource for me. Thank you. I read recently about deducting medical expenses and I contacted TASC about setting up a plan, which I expect will save me a good chunk on taxes.

I wanted to let you know your link is not working on your page http://junewalkeronline.com/index.asp?sPG=80.

Here's a link that works: https://www1.tasconline.com/buytasc/bizplan/page/whatisbizplan.

Thank you for the great web site !

Regards,
Rob
Pleasanton, CA


Hi Rob,

The guys to talk with at BizPlan are John Gill and Marino Alcorta-Narvaez.

How much you'll save depends on your total medical costs. There have also been some changes due to the new small business tax act that may have an impact on medical insurance deductions.

Thanks about the link -- been fixed -- and for your generous comments about my site.

Please let me know how BizPlan works out.

I just signed with Xynergy to develop my a new website and online marketing. Hope to have things up and running by Christmas or earlier. As a one-person info source I need to figure out how to spread the word more efficiently.

-- June

Don't abandon sole proprietorship. There are many benefits.

June --

I am a Computer IT consultant 4 years. Just came back to being a contractor again after several years of W2. I have a TIN and a name but never did the LLC. At age 60 I am most interested in what structure will allow me to put away the most retirements money and allow me to deduct my HUGE monthly health insurance premiums.

Thanks,
Jeri
Eden Prairie, MN


Dear Jeri,

You have a "TIN." For the acronym-averse, that a Tax Identification Number. Also known as an Employer Identification Number [EIN] or Federal Identification Number. They all refer to a business's identification number, similar to a person's social security number. [There are other purposes for an EIN.] More on tax ID numbers here EIN-employer identification # .

An LLC is a Limited Liability Company. There's a lot of info on LLCs right here business entity -- LLC. Did I say a lot? Well, yes, really a lot. Read those posts. In them you will learn that an LLC is a legal way of forming your business. An LLC does not determine tax structure as does a corporation or a partnership or a sole proprietorship.

The pension laws were changed a while back so that now a sole proprietor has more of a choice on pension structure than does an employee. For instance, you may choose a Defined Benefit pension, that will allow you to contribute enormous amounts to your pension. Example: $100,000 contribution on $350,000 net self-employed income. A more modest and more flexible plan is a UNI-k. Think of it as a one-person 401-k.

Health insurance premiums are deductible as an adjustment to income whether you are a sole-proprietor, partnership, or S-corporation. Deducting them as a C-corporation is a bit different.

Think things through carefully, and get as much accurate information as you can before you abandon the advantages of self-employment for a different structure.

Best,

June

Health Insurance Deductions / Income: Indies Be Careful!

Hi,

I'm a freelance writer/consultant in San Francisco, finishing my taxes, and would greatly appreciate a small bit of help/clarification.

As a full-time freelancer with no employer health plan, can I deduct the full cost of my health insurance payments? I have no access to a partner's plan or COBRA.

Last year I deducted one-fourth of health insurance as a business expense, but can I deduct the full amount?

One more question if I can: do I need to report any payments under $400 from clients, if I didn't get a 1099?

Thank you very much for your assistance,
Chris


Hello Chris,

There's a special place in my heart for writers. My husband is a writer. Many friends are writers. So here's my special caution to you.

A writer's accuracy is his credibility.

Everything you do goes out with a byline. I assume you are sure of the facts before you put your name on something you offer for publication.

You don't say whether you're a sportswriter or science writer or a generalist. If you're a sportswriter you sure as heck better understand the game. If a science writer you'd better be comfortable in a physics or chemistry lab.

Just as being a specialist in any field requires education and experience so too does tax preparation for indies require education, research, experience.

Your tax return is a document that you sign, attesting to the accuracy and truthfulness of what's on that paper. You must know what you're signing.

Your two questions point out why indies should not do their own tax returns. Your questions are Indie Tax 101.

Health insurance premiums are not a business expense deduction.They are deducted as an adjustment to income. Same place you'd deduct alimony payments.

Payment to you for your freelance writing is taxable. All of it. Whether you get a 1099 or you're paid in cash and nobody sees the transaction or you're paid in chickens. And if you don't claim the income it's fraud.

Don't mess yourself up by getting into trouble with the IRS. Learn more. Read. A good place to start your education: Go to your library and check out my book Self-employed Tax Solutions .

Best,
June

Medical Insurance Deduction for Indies

Hi June,

I like how you write, it's fresh and easy to understand.

I have a question. I'm considering quitting my job and working for myself doing free-lance technical writing at home. My big fear is the cost of health insurance. Any tips?

As a sole proprietor, can I deduct ALL my health insurance premiums and out of pocket expenses? If yes, then basically does that lower my taxable income? Can you give me an idea if that would make my health insurance premiums about equal (after all taxes paid at year end) to what I would have paid working for my current employer? Currently I spend $130/month, but I received an estimate of $250-$400/month from Blue Cross/Blue Shield as an independent person (depending on the type of health plan chosen).

Is there any other way to recoup that insurance premium besides a tax deduction, too?

Thanks.
Holly from Warrenville, IL


Hello Holly,

Let me give an overview of how medical deductions work.

If a taxpayer is not self-employed then medical insurance premium costs and all other medical costs are deducted as a personal expense in what I call "the guts" of the tax return. If these medical expenses do not come over a certain minimum or if the taxpayer's income is so high that the medical expenses don't meet another threshold, then the deduction for medical expenses is lost.

If a taxpayer is self-employed, here's the difference: Medical insurance costs are deducted on "the front" of the return and immediately reduce taxable income. Other medical costs are still deducted as a personal expense in "the guts" of the return. No medical expense is a direct deduction from business income.

There is no way, without analysing your personal tax return and projected income, to tell whether your new premiums would actually cost you any money. Why not calculate as if you simply had an additional $270 [400 - 130] cost per month and see if you could handle that?

Glad you like my writing. Thanks!
June

Indie Health Insurance -- somebody is trying to help

Take a look at the Small Business Times based in Milwaukee. Our representatives in congress are trying to help us self-employeds with health insurance.

Self-employed need level playing field in health care
The "Equity for Our Nation's Self-Employed Act" (H.R. 3660) was recently introduced in the U.S. House of Representatives by U.S. Reps. Ron Kind (D-Wis.) and Wally Herger (R-Calif.) to help put self-employed businesses on equal footing with large corporations by permitting health-insurance premiums to be deducted from both their income and payroll taxes .......

Ron Kind's Web Site: www.house.gov/kind.
And, Wally Herger's Web Site: www.house.gov/herger .

Let them know that we support their efforts.

More about Medical or Business Expense

Hello June,

I have a wonderful therapist who is very expensive! I understand that it's fine to deduct psychotherapy. Now this therapist also happens to be a great bodyworker, and occasionally he does bodywork and other kinds of body-oriented psychotherapy on me. Even though I know "massage" isn't deductible, I still deduct this. Is that kosher? How about herbs that I buy from him?

I also get lots of massages and body treatments for myself--no way of making that deductible, though, right?

Finally, even though I teach "raw culinary arts," a lot of my students have health related questions, so I'm up on a lot of things regarding herbs, supplements, yoga, and exercise. Can I deduct expenses related to these things as "business research" related expenses such as yoga, DVDs and classes?

Thanks.
Jenny


Hello Jenny,

If the body-oriented psychotherapy is part of your medical therapy treatment, the same way that, for instance, art therapists may work with children, then I would consider it a medical deduction. However, you need to ask your psychotherapist whether he classifies it as a medical treatment, that is whether he has a code # for health insurance reimbursement.

You are correct. Massages and body treatments are not medical deductions. Wish they were! See Medical or Business Expense on whether you may deduct the cost of yoga.

Yes, the costs of DVDs and classes that better prepare you to answer your students' questions are deductible business expenses.

Best, June

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Freelancers Union has worked for a long time to bring its dental insurance nationwide, and now it's here! Freelancers in all 50 states will be able to get dental coverage (Freelancers Union usual eligibility requirements apply).

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.

Best,
June

Medical or Business Expense

June,

I have been a personal trainer for 2 years. I am a veteran working in the health/fitness industry and have needed alternative and out-of-pocket medical treatments (acupuncture, physical therapy, massage) for a service-connected orthopedic problem (for which I do have a disability rating).

Working with these other health care professionals has also been a help in furthering my skills in working with my clients. How/which of these should be taken as medical expenses and/or training/education for my work?

Thanks a bunch, "Ron"


Hi Ron,

Wish I could give a different answer but ... it all is medical expense. Especially since you have a disability rating. Were you "healthy" and had decided to do 10 sessions with another pro as training or some other learning experience then I'd OK the business expense.

Best,
June