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Deducting COBRA payments


Dear Tax Talk,
Are COBRA health-care family payments tax deductible? -- Steve

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Dear Steve,
COBRA health insurance payments are payments made to continue health insurance that was previously provided to you by a former employer. COBRA does not refer to a snake, but instead to the Consolidated Omnibus Budget Reconciliation Act that created the law that requires employers of a certain size to allow employees to continue their health insurance coverage for a period following termination of employment. Usually COBRA is offered for 18 months; in certain cases and certain states it can be extended or converted to an individual or family plan.

Health insurance payments are generally allowed as a medical deduction if you itemize your deductions and your total medical expenses, such as premiums, co-pays, deductibles, transportation and medication, exceed 7.5 percent of your adjusted gross income.

A self-employed individual is allowed to deduct health insurance coverage as an adjustment to adjusted gross income rather than as an itemized deduction subject to the AGI limitation. This means that a self-employed individual can benefit on his or her tax return from the payment of health insurance coverage without regard to itemizing deductions or exceeding the threshold. However to qualify for this deduction the insurance plan must be established under your trade or business. Since the COBRA coverage was not established under your trade or business, the health insurance payments would appear not to qualify for this above-the-line deduction to arrive at AGI.

In my experience, it's difficult if not impossible to obtain coverage for a one-person health insurance plan, so even though your coverage under COBRA is not a deduction as an adjustment to AGI, you're better off hanging on to it and if possible converting it. If you quit your job to become your own boss, don't look to deduct your COBRA payments as an adjustment to AGI. Instead, you'll need to claim them as an itemized deduction.


-- Posted: June 1, 2004




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