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ashu-sharma-indi
Level 2

Self employment health insurance deduction when I could have COBRA also?

I have COBRA from my past employment. But my COBRA rates are going to increase from 1st Apr 2020. Having said that I am running my own LLC(single member LLC). Paying COBRA health insurance is almost around $1600 per month. Can i get any tax deduction for 2019?

From 1st Apr 2020- my COBRA rates are going to increase. Moreover I cannot buy dental or vision insurance(only health insurance as I rejected it during the time of separation). Having said that can i go for health insurance on my own for my family? I am the employer and I am the employee. OR i cannot go for it as I will be having COBRA from my past employer for another 15 more months? Please let me know. I was referring to these links - link1,

link2

and

link3

 

8 Replies
WillK
Level 9

Self employment health insurance deduction when I could have COBRA also?

Unfortunately, COBRA policies do not meet the requirements for claiming the self-employed health insurance deduction. Specifically, as the COBRA policy would have been setup under the name of your prior employer, it does not meet the requirement of the policy being setup under your name or your business's name. 

 

However, the premiums from your COBRA policy may be deductible as an itemized medical expense deduction on Schedule A to the extent that 1) your total out-of-pocket medical expenses are greater than 7.5% of your Adjusted Gross Income, and 2) your total itemized deductions are greater than your standard deduction. 

 

See the following from IRS Publication 535:

 

The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business.

  • For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.

  • For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

  • For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

 

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ashu-sharma-indi
Level 2

Self employment health insurance deduction when I could have COBRA also?

I think you got it wrong. I know if I am using COBRA I cannot file for deduction unless it exceeds 7.5% of AGI. My question is different. My last employment was over in Oct 2019. Since first week of November, 2019 - I got a contract job(without any insurance or benefits) so I opted to continue with my previous coverage from my previous employer(which is COBRA). I am eligible for COBRA for 18 months. COBRA cycle begins on 1st Apr 2019 and goes till 31st Mar 2020.

Now if I want to get my insurance on my own(as COBRA will be getting more expensive for me in the next cycle starting 1st Apr 2020) - can i do so? I provided few links which states that one cannot for another insurance if they are already covered? I will be having coverage in the form of COBRA but i don't want to continue it after 31st Mar 2020 due to higher cost. Can i go for separate insurance(terminating my COBRA)  from 1st Apr 2020 and take deduction for that in 2020 taxes? OR I am not allowed to do so as technically I still could have the coverage from the past employer(even though it is COBRA or slightly more expensive)?

AmeliesUncle
Level 13

Self employment health insurance deduction when I could have COBRA also?

You can always buy insurance from anywhere you want.  It does not matter if you currently have other insurance or not.  So if you want other insurance, go ahead and buy it and drop the COBRA insurance.

 

If you were to buy health insurance through the Healthcare Marketplace, there are restrictions on qualifying for a tax credit ('subsidy') if you are eligible for employer insurance, but if you quit COBRA coverage, that restriction does not apply.

 

As for qualifying for the deduction, in my opinion COBRA insurance DOES qualify for the Self Employed Health Insurance deduction (although it is a gray area).  The requirement is NOT that the "policy" has to be in the name of the business; the requirement is that that "plan" needs to be established under the business.  In my opinion (as well as other tax professionals), the business "plan" for insurance can be through your former employer's COBRA plan.

VolvoGirl
Level 15

Self employment health insurance deduction when I could have COBRA also?

Not sure about that.  My notes say....

Self-employed health insurance policies must be in the name of the business.  Sole Proprietors can meet this requirement if the policy is in their name.  COBRA policies are in the name of the former employer and do not qualify for the self employment health insurance deduction.

 

This says COBRA goes on schedule A

https://ttlc.intuit.com/community/entering-importing/help/where-do-i-enter-my-health-insurance-premi... 

WillK
Level 9

Self employment health insurance deduction when I could have COBRA also?

I believe what you referring to is the limitation where you can’t take the self-employed health insurance deduction for any month you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month, even if you didn’t actually participate. As COBRA is generally not subsidized by the employer, and because if you cancel your COBRA coverage you then immediately become ineligible to participate in that employer's plan, you are free to setup your own policy (under your name or your business's name) and that policy would qualify for the self-employed heath insurance deduction. 

 

I hope that clarifies my original response. 

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WillK
Level 9

Self employment health insurance deduction when I could have COBRA also?

@AmeliesUncle - Unfortunately, this is not a grey area. COBRA payments do not qualify for the self-employed health insurance deduction. To qualify, the insurance plan must be established, or considered to be established as discussed in the following bullets, under your business.

  • For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.

  • For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business.

  • For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business. 

 

For more information, please see: Deducting COBRA health insurance premiums and IRS Publication 535:

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AmeliesUncle
Level 13

Self employment health insurance deduction when I could have COBRA also?

@WillK   It is a gray area.  In my opinion it is deductible, and a number of other tax professionals agree with me.

 

See post #7 (which is quoted from a TaxAlmanac conversation), :  https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=8358

And: https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/25092-cobra-nonsubsid...

ashu-sharma-indi
Level 2

Self employment health insurance deduction when I could have COBRA also?

Thanks for all the responses. I was also thinking on the similar lines. Drop COBRA by end of Mar 2020 and have the health insurance under the Business name or my name(whatever is needed). I will contribute 100% from the employer side to have this insurance and get the deduction in the 2020 tax returns.

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