Thursday, January 25, 2007

 

After reading the Post, you may want to consult your tax advisor

In a Post article discussing the potential ramifications of the President’s health care proposals, we read this little nugget:

Other winners include the 17 million people who buy health insurance on the individual market, who would for the first time enjoy a tax break on the money they use to pay health premiums.” Experts Examine Bush Health Plan - washingtonpost.com

You know, with all the the so-called "Experts" examining the Plan, you think the Post would have had at least one of them know something about taxes. And with all the whining we read from the Post about tax cuts for the rich and all, I’d have expected at least a passing knowledge of what the code says by the editors. Instead we are treated to this embarrassingly inaccurate analysis foisted off on us as news.

*Ahem*The 17 million people who buy their own insurance already can deduct their health insurance premiums under certain provisions – At a minimum, assuming no self-employment income, they must itemize their deductions (use Form 1040) and their medical expense deduction is limited to the amount over 7.5% of Adjusted Gross Income. Read more at Publication 502 (2006), Medical and Dental Expenses

If you read the Post article, I would also question the math and assumptions included in their Tax-Proposed Scenarios. For example Family A – self-employed at $60,000 – should be able to currently deduct medical health insurance premiums on line 29 of Form 1040. To the extent those costs can’t be deducted there, they would then be deducted on Schedule A - subject to the calculation of whether using the standard deduction or itemizing is more beneficial (…and by more beneficial I mean in the ordinarily understood sense that it allows you to keep more of YOUR money).

Again from the IRS:

Health Insurance Costs for Self-Employed Persons

“If you were self-employed and had a net profit for the year, were a general partner (or a limited partner receiving guaranteed payments), or received wages from an S corporation in which you were a more than 2% shareholder (who is treated as a partner), you may be able to deduct, as an adjustment to income, all of the amount paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, and dependents.”

I hope this has helped.

Comments:
The Post's analysis was correct but for a smaller segment of the population.

I think they are distinguishing the purchase of an individual plan as against a plan through one's business, which is under other tax and non-tax regulations and statutes. The 17 million number is wrong, though, for that category.

It is very difficult to get 7.5 percent of income cleared for health insurance and unreimbursed medical expenses. Most families who can afford the premiums are earning more than 13.3 times the premiums gross, thus deducting none of it. Families earning less are likely to run into a cash crunch and miss payments, losing coverage and there effectively the deduction.

The tax bias in favor of employment-based plans must end and this proposal goes a long way in that direction. In my strange line of work, COBRA is a nasty reality due to the project-based nature of the work; being able to exclude deduct COBRA payments just like a 125 pre-tax withholding is only fair. Substance over form.
 
thanks Bruce - I know the 7.5% hurdle can be tough but it is there - and I maintain that their Example A is just wrong on several counts - even accepting over 10% of the income goes to Health Insurance - that gets you over the 7.5% AGI minimum for deductibilty but they totally ignore it.

All such proposals instinctively worry me because it seems we're ensnaring 100% in attempt to pick up the final 10-20%.
 
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