If you're self-employed and receive Medicare, you may be able to deduct all your Medicare insurance premiums. The IRS has recently ruled that Medicare recipients who have self-employment income may deduct the premiums they pay for Medicare coverage, the same as the premiums for any other type of health insurance.
Medicare Part B premiums are about $100 per month, so this deduction can really add up.
This comes as unexpected good news because, before 2010, the IRS said that Medicare premiums were not deductible under the self-employed health insurance deduction. Then, in 2010, the IRS said that only premiums for Medicare Part B were deductible. But now the IRS says that premiums for all forms of Medicare are deductible (Parts A, B, C, and D).
You can use this deduction only if you own a business as a sole proprietor, partner in a partnership, limited liability company member, or S corporation shareholder who owns more than 2% of the company stock.
This is a special personal deduction that applies only to your federal, state, and local income taxes, not to your self-employment taxes. Moreover, you may deduct only as much as you earn from your business. If your business earns no money or incurs a loss, you get no deduction. If your business is organized as an S corporation, your deduction is limited to the amount of wages you are paid by your corporation.
If you have more than one business, you cannot combine the income from all your businesses for purposes of the income limit. You may only use the income from a single business you designate to be the health insurance plan sponsor.
Because the self-employed health insurance deduction is a personal deduction, you take this deduction directly on your Form 1040 (it does not go on your Schedule C if you’re a sole proprietor). If you itemize your deductions and do not claim 100% of your self-employed health insurance costs on your Form 1040, you may include the rest with all other medical expenses on Schedule A, subject to the 7.5% of Adjusted Gross Income limit on deducting such expenses. You would have to do this, for example, if your health insurance premiums exceed your business income.
If you've been paying Medicare insurance premiums for the past several years, you should amend your past year's returns to claim this deduction. You can file an amended return up to three years after the date you filed your original return for the year (April 15 or October 15 if you obtained an extension to file).
If, like most small business owners, you are a sole proprietor, you amend your income tax return by filing IRS Form 1040X, Amended U.S. Individual Income Tax Return. When you file Form 1040X to obtain a refund of taxes you’ve already paid, it is called a “claim for refund.”