Eligibility to take self-employment health insurance deduction in 2025 as a federal retiree who is receiving health insurance benefits

[user17741895302]

Hi,

Is there any guidance on whether a person who retired from the federal government and then starts a solo proprietorship in which significant income was earned can deduct his federal health insurance premiums as self-employment health insurance deduction on Schedule 1 of form 1040? 

The instructions to form 7206 say that premiums may not be deducted that are "amounts for any month you were eligible to participate in a health plan subsidized by your employer or your spouse's employer or the employer of either your dependent or your child . . .." 

The instructions also say not to deduct amounts of $3000 or less that have been excluded from gross income "if you are a retired public safety officer. . . if the amounts (1) were paid by your retirement plan directly to the insurer for qualified health insurance premiums or (2) were received by you from that retirement plan and used to pay those premiums."  The fact that a retired public safety officer who is receiving a subsidy for health insurance may deduct premiums subject to certain limitations makes it sounds like retirees are different from employees so that a retiree may deduct the premiums he or she has paid for retiree coverage.  But I am not sure.

Health insurance benefits for federal retirees are partially paid by the government, so, for purposes of the "eligible to participate in a health plan subsidized by your employer ..." they would appear to be subsidized.  However, once a person retires from the federal government, he or she is no longer in the status of "employee".  The question is whether federal retirees are considered "employees" for purposes of form 7206?  If there are any IRS rulings or guidance that provide a clear answer, it would be much appreciated.  the instructions to form 7206 are not clear, and prior similar questions in this forum also did not answer this precise question.

Separately, federal retirees can also enroll in Medicare; they then have both coverages.  Can both the Medicare premiums and the federal health benefits be deducted as self-employment health insurance?  Can neither be deducted because the retiree is "eligible to participate in a health plan subsidized by your employer"?  Or can the Medicare premiums alone be deducted?  

Thanks for any guidance that can be found on this.

[RobertB4444]

Any health insurance premiums that are paid for out of your self-employed earnings are deductible as self-employed health insurance coverage.  That's why your federal health insurance benefits may not be deductible.  If they're being subsidized by your retirement plan then you are seen as already receiving a benefit.  And certainly your health insurance is theoretically more affordable as purchased from the federal government.  

So, while you can deduct the cost as a medical expense on schedule A, you can't take a self-employed health insurance deduction for it.

[user17741895302]

Thank you very much.  Can you advise if there is an IRS case or other IRS guidance or any legislative history that definitively establishes this? 

[user17741895302]

For example, I understand that there is an IRS ruling that says that Medicare (which is federally subsidized too) payments are deductible, but I couldn't find it.  Is there an available link to it?   But other evidence would also be much appreciated.

[DaveF1006]

The most accessible link to this information is IRS Publication 502 (Medical and Dental Expenses). Under the section titled "Insurance Premiums," it explicitly lists which Medicare premiums are deductible. You will find this in a section titled "What Medical Expenses are Deductible." 

[user17741895302]

Thank you.  It looks like Publication 502 is about itemizing deductions on Schedule A; I am asking about the self-employed health insurance deduction on form 1040, Schedule 1, line 17.  I'm not sure if there's a difference.

Assuming they should be treated the same, the insurance premiums section of Pub. 502 says: "Don't include in your medical and dental expenses any insurance premiums paid by an employer-sponsored health insurance plan, unless the premiums are on your Form W-2 Wage and Tax Statement."  My question is whether "an employer-sponsored health insurance plan" applies to the situation of a retiree (who as a result doesn't receive a W-2)?  Is there any IRS guidance, IRS decision, or legislative history on a Schedule C filer deducting retiree health insurance premiums where the former employer also contributes to payment of the premium?

[Vanessa A]

Yes.  It still applies.  Even though you are now retired, it is still an insurance plan through your employer that is from the benefits you gained while being an active employee.  Employer includes previous employers.  The IRS in pub 502 does not make a distinction between former employee and employee.  

The plan is still through the employer, it is not an independent plan. 

[user17741895302]

Thank you.  The AARP tax supervisor at my local library had the same view about federal health benefits.  She did say that the Medicare premiums paid in addition are deductible.  Do you concur?

[DianeW777]

Yes, you can deduct Medicare premiums (Parts A, B, C, and D) as a self-employed individual, using form 7206. These are treated as a self-employed health insurance deduction and can be claimed on Schedule 1 (Form 1040). However, you cannot take this deduction if you were eligible for an employer-subsidized plan.

• Limitations-Instructions Form 7206
• No Other Coverage: If you are eligible for an employer-subsidized plan through your own job or your spouse’s job, you cannot take this deduction.

@user17741895302 

[user17741895302]

If you have a subsidized health insurance plan and Medicare both, you cannot?

[ThomasM125]

Correct, since you have a plan that is subsidized by your employer, you do not qualify for the self-employed health insurance deduction.