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Dear Tax Talk,
I am self-employed and my company provides health insurance to all my employees. Last year my wife worked
until November, and then went on leave to have a baby. Per her company's policy, because she only for worked
for them for a short time, they would not subsidize any part of her health insurance when she continued her
insurance with COBRA.
At the time we decided not to switch her over as a dependent under my policy because she
intended to go back to work after her three-month leave of absence. She eventually decided to become a
stay-at-home mom and not go back to work for the time being. We also put the baby under her policy because
her policy's benefits were much better than mine.
We had then decided to make her and our baby dependents under my policy, but the insurance
carrier tells us that deciding to switch away from COBRA is not a good enough reason to make a policy change
in the middle of a policy year. Had we added the baby within 30 days of the birth and added my wife the day
she went on leave, then we could have made a policy change at that time.
So, my question is, because my wife is unemployed and her policy is not subsidized in any way
by her former employer, can I also take her policy as part of the self-employed health insurance tax deduction
for this coming tax year, because I am the one who is paying for the policy out of my own pocket?
-- Reed
Dear Reed,
A self-employed individual is allowed to deduct 100 percent of qualifying health insurance premiums as
adjustment to gross income. All individuals can claim health insurance premiums paid throughout the year
as an itemized medical deduction. An individual's medical expenses, including insurance, must exceed 7.5
percent of your adjusted gross income, or AGI, to receive a tax benefit. The self-employed health insurance deduction is clearly more
advantageous.
To qualify, the policy cannot be subsidized by an employer, as you point out, and must be established under
the business that gives rise to the self-employment income. A recent clarification by the IRS (Notice 2008-1
and Chapter 6 of Publication 535) has allowed policies issued in an individual's name to be considered
established under a business.
Based on my experiences in Florida, COBRA coverage is usually established under the employee's
name when terminated. After the 18-month COBRA continuance, the individual is allowed to continue under an
individual policy. If the former employer changes health insurance providers, it does not affect the coverage
offered to the former employee. I'm not sure if the IRS changes go far enough to address the deductibility
of COBRA coverage, but it certainly begs clarification from IRS.
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