Are COBRA premiums tax deductible?

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Latest post 03-31-2013 1:51 PM by GregCPA. 13 replies.
  • 12-08-2010 4:01 PM

    • moonrock
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    Are COBRA premiums tax deductible?

    Here is the case:

    Laid off 12/31/09 (last day). Received severence pay in January & February 2010. Started a business as sole proprietor in January, and elected COBRA (qualified for subsidy), and have maintained that for all of 2010. Are the premiums paid deductible? The IRS publication is confusing. It states the policy needs to be in the name of the business. Does a COBRA policy qualify? It's a group policy through another company, but the insured is the sole proprietor.

    If it is deductible, are only the health insurance portions deductible, or do dental and vision qualify, as well?

  • 12-08-2010 4:25 PM In reply to

    Re: Are COBRA premiums tax deductible?

     

    Here is what Publication 17 - Your Federal Income Tax says about insurance premiums:

    http://www.irs.gov/publications/p17/ch21.html#en_US_2010_publink100033899

    Looks like dental and vision premiums are included and there is nothing saying that COBRA premiums aren't so I'd conclude that they are.

    Keep in mind, though, that you cannot deduct that part of your medical and dental expenses that are the equivalent of 7.5% of your Adjusted Gross Income. See schedule A.

    http://www.irs.gov/pub/irs-pdf/f1040sa.pdf

    Oh, I see what you are asking.

    The premiums you pay under COBRA go on Schedule A, not on Schedule C (gain or loss from business). 

    See Chapter 6 of Publication 545 - Business Expenses to see how business insurance expenses work.

    http://www.irs.gov/pub/irs-pdf/p535.pdf

    If I don't have that right, Taxagent will be along shortly to clarify.

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  • 12-08-2010 5:05 PM In reply to

    • moonrock
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    Re: Are COBRA premiums tax deductible?

    Thanks for the link on dental and vision.

    The publications make it sound like one can deduct, but the instructions for line 29 of 1040 is what raises questions. It says that the policy has to be under a business and goes on to say that "if you were also eligible to participate in any subsidized health plan maintained by your or your spouse’s employer for any month or part of a month in 2009, amounts paid for health insurance coverage for that month cannot be used to figure the deduction."

    Is COBRA considered "a subsidized health plan maintained by your or your spouse's employer?"

  • 12-08-2010 5:25 PM In reply to

    Re: Are COBRA premiums tax deductible?

    I'll give you a couple of scenarios to explain what I think it all means.

    1 - YOU were laid off. YOU continue to pay premiums for YOUR former employer's coverage under COBRA. YOU deduct those premiums on Schedule A.

    2 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family and your wife's employer did not provide health insurance of any kind. You deduct those premiums on Line 29, but only if you meet the qualifications for that deduction. Read ALL of the instructions for Line 29 starting on Page 30 of the instructions:

    http://www.irs.gov/pub/irs-pdf/i1040.pdf

    3 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family but your wife's employer does provide medical coverage, where she pays part of the premium for her and dependent coverage and the employer pays the rest. Her cost would be deductible on Schedule A. Your cost for the business coverage would not be deductible at all because you are eligible to be covered under her employer's subsidized plan.

    Again, I'm not the tax man here, so let's see what Taxagent says about my efforts. I am merely an apprentice to the master. Ok

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    • to keep and bear arms,
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  • 12-08-2010 11:57 PM In reply to

    Re: Are COBRA premiums tax deductible?

    adjuster jack:
    1 - YOU were laid off. YOU continue to pay premiums for YOUR former employer's coverage under COBRA. YOU deduct those premiums on Schedule A.

    Not quite. This is a situation that the IRS publications do not directly address, unfortunately. The basic rule for the deduction of self-employed medical insurance deductions is found in Internal Revenue Code (IRC) section 162(l)(1), which provides:

    "Allowance of deduction.--In the case of a taxpayer who is [self-employed], there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for--

    (A) the taxpayer,

    (B) the taxpayer's spouse,

    (C) the taxpayer's dependents, and

    (D) any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27."

    (I put the term "self-employed" in brackets to make the provision easier to read; the actual statute instead refers you to another code section which then goes on to define self-employed individuals.)

    There is, however, and important limitation on this deduction, in paragraph 2 of § 162(l), which states:

    "(B) Other coverage.--Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to--

    (i) plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and

    (ii) plans which do not include such coverage and are not such contracts."

    Note that it disallows as a self-employed health insurance deduction (a § 162(l) deduction) any premiums paid on an insurance plan subsidized by an employer. The term subsidized means that the employer pays some part of the premium cost. The normal COBRA plan requires that the employee pay 100% of the cost of the insurance plus a 2% handling fee. It is therefore not subsidized by the employer, and thus the premiums paid for that insurance is eligible for the § 162(l) deduction. This is something that IRS national office counsel noted in advice to a field attorney: "With respect to COBRA continuation coverage, we understand that in the typical situation a group health plan requires premium payments of 102 percent of the applicable premium, as permitted by section 4980B(f)(2)(C) of the Code. Therefore, an individual receiving COBRA continuation coverage from such a plan would not be receiving subsidized coverage within the meaning of section 162(l)." IRS FSA 1995 WL 1918547.

    There was, however, a program in which COBRA payments were subsidized 35% by the employer and then the employer claimed a credit for that from the government as part of the economic recovery effort. This was called the COBRA premium assistance credit, and it ended in May, 2010. Moonrock refers to his plan qualifying for a subsidy, and I assume this is the subsidy to which he refers. Thus, premiums he paid for any month in which the plan was subsidized (i.e. through May) would NOT qualify for the self-employed health insurance deduction. Premiums paid in any month that were not subsidized (from June onward) would qualify for the self-employed insurance deduction. So, moonrock will need to look at each month separately to determine which months were subsidized and which were not.

    adjuster jack:
    2 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family and your wife's employer did not provide health insurance of any kind. You deduct those premiums on Line 29, but only if you meet the qualifications for that deduction.

    Correct.

    adjuster jack:
    3 - YOU were laid off. YOU did not continue to pay premiums for YOUR former employer's coverage under COBRA. Instead, you bought medical insurance through your business for you and your family but your wife's employer does provide medical coverage, where she pays part of the premium for her and dependent coverage and the employer pays the rest. Her cost would be deductible on Schedule A. Your cost for the business coverage would not be deductible at all because you are eligible to be covered under her employer's subsidized plan.

    Correct, but there is something important to note here. The deduction under § 162(l) is not allowed if the taxpayer or his/her spouse are ELIGIBLE for employer subsidized medical insurance. Thus, if Moonrock's spouse was eligible for health insurance provided by his/her employer but the spouse declined to take it and they instead opted for Moonrock's COBRA coverage for the family, Moonrock will be ineligible for the § 162(l) deduction.

  • 12-09-2010 10:04 AM In reply to

    • moonrock
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    Re: Are COBRA premiums tax deductible?

    Thanks. Just to clarify some things. Yes, the subsidy I was referring to is the 35% program. Just to clarify, the subsidy is good for 15 months. I think the May 2010 may mean that it applies to those laid off up until May 2010. Regardless, the subsidy in this case applies to every month of 2010 and through March of 2011. I didn't realize it was structured where the former employer subsidized the insurance then got a tax credit. I thought it was directly subsidized in payments from the federal government. I wish I'd been right, as the current structure apparently means that I can deduct nothing.

    Based on that, going with an individual/family high deductible plan on my own may have been less risky than it appeared, as the tax deductibility of the premiums would have negated several thousand dollars of any insurance deductible that I *might* have paid during the year.

  • 12-29-2010 3:31 PM In reply to

    Re: Are COBRA premiums tax deductible?

    I've got a similar scenario and would like to get someone's input...My wife is leaving her job with whom she has had medical insurance through.  They have offered her COBRA, to be paid 100% by her.  She will be self employed this next year.  I do have insurance through my employer as well.  My premium is covered 100% by them.  We could elect to put my wife and son on the policy, but I would have to pay 100% of her premium (none of her portion would be subsidized).  This premium is paid before taxes, essentially not taxed.  The policy available to her through her previous employer provides better covereage. So we'd like to use it for her and our son.  The COBRA premium is only $30 more per month.  Will this premium be tax deductable at the end of the year, 2011?  If so, then it may be more beneficial.  If not, the amount paid for those premiums (including taxes) would not be worth the better coverage.

    The main question is related to the limition on the deduction....

    "(B) Other coverage.--Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to--

    How is subsidized defined?  My employer pays 100% of my portion, but 0% of any of my dependents.  I would consider this as non-subsidized (for their portion).  Can anyone clarify?

  • 12-29-2010 4:17 PM In reply to

    Re: Are COBRA premiums tax deductible?

    CONFUSED_CITIZEN:
    How is subsidized defined?  My employer pays 100% of my portion, but 0% of any of my dependents.  I would consider this as non-subsidized (for their portion).  Can anyone clarify?

    If ANY portion of the premium is paid by the employer, the plan is subsidized. The Code does not allow you to bifurcate the policy into a portion for yourself and a portion for your family. It's one policy, and the employer is paying part of the premium for it (the amount for self-only coverage) and thus the premium is subsidized. She could not claim the self-employed health insurance deduction for being added to your policy in any event because that is not paid by her through self-employment but is paid by you through deduction from your wages. So even if you paid 100% of your policy through your employer, that wouldn't be deductible.

    Indeed, you cannot deduct it either as an itemized medical expense deduction on Schedule A because the premium you pay is pre-tax, which effectively gives you the same benefit as a deduction--you'd be getting a double benefit if the law allowed for that. (And the medical expense deduction on Schedule A is only limited to medical expenses that exceed 7.5% of your adjusted gross income, meaning you'd need to have a large amount of medical expenses before you could claim anything for this deduction.)

    Note that your wife will be unable to claim a deduction for the self-employed health insurance deduction for the COBRA policy even though her employer will not be subsidizing that premium. That's because she is eligible to be included on your plan, which is subsidized. In short, whether you add her to your policy or she elects the COBRA policy, the premium won't be deductible as a self-employed insurance deduction. Putting her on your policy does provide the benefit that the premium is paid with pre-tax dollars, however, effectively gives you the same benefit as a deduction anyway, as I pointed out above. So, adding her to your policy will provide the greater tax benefit to you. Whether that benefit compensates for the lower benefits that your policy provides is something you'll have to weigh as part of your decision on which policy to take.

  • 12-29-2010 6:41 PM In reply to

    Re: Are COBRA premiums tax deductible?

    Sounds like the best option is to add her to my plan.  Thanks for your expertise and quick response! 

  • 01-13-2011 9:51 PM In reply to

    • edmccar
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    Re: Are COBRA premiums tax deductible?

    Please help another confused dad out. 

    I am self employed - my wife works part time as a nurse and receives health insurance through her employer for our family.  Because she is part time she receives no maternity leave and instead had to take short term medical leave at which time her employer did not offer health insurance and instead we were forced to elect for cobra through her employer.  We paid for 100% of COBRA for 3 months.  Are those payments tax deductable?  Based on the thread above I would assume yes - I am self employed with no health insurance and during those 3 months my wife's employer did not offer insurance.  Is that correct or am I missing something - if it is deductible where does that deduction go and is it subject to the 7.5% minimum?

    Thanks to anyone who can offer some insight.

  • 03-31-2013 11:43 AM In reply to

    • GregCPA
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    Re: Are COBRA premiums tax deductible?

    Taxagent,

    The above citations from Section 162(I)(1) and 162(I)(2)(B) are helpful, but you should also consider 162(I)(2)(A), which falls in between the two above citations that you listed:

    (A) Dollar amount.  No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.

    This specific wording has apparently been interpreted to mean that the insurance policy/plan must be established in the name of the business, or in the case of a Schedule C filer, in the name of the individual proprietor.  With COBRA, the policy/plan is in the name of the company that sponsors the health plan. Thus, it is understoond by many to mean that COBRA premiums (even if not subsidized by the former employer) are not deductible as self-employed health insurance premiums on the front of form 1040. Publication 535 (2012) says:

    "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."

    I would appreciate your comments.

  • 03-31-2013 11:46 AM In reply to

    • cbg
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    Re: Are COBRA premiums tax deductible?

    Well, of course, the first comment that comes to mind is that this thread is over two years old.

  • 03-31-2013 12:44 PM In reply to

    • LG81
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    Re: Are COBRA premiums tax deductible?

    GregCPA:

    I would appreciate your comments.

    Why?  The original query is more than two years old.  If your aim is to help the OP, the ship has long sailed.  If you have a question for your own practice, I sure hope you are seeking advice outside of this forum.  While many useful answers are provided here that can point you in the right direction, it is ill-advised to use any in your provision of CPA services.  (If representing a client in a tax proceeding, it's going to look unfavorable for you to say, "Well, I got this information from a website.")  It is important to adhere to the professional standards.

  • 03-31-2013 1:51 PM In reply to

    • GregCPA
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    Re: Are COBRA premiums tax deductible?

    Yes, the original post is 2 years old.  But, this is still a very real issue today. Any position taken on a tax return based on the OP and responses would still be "open" years.  My survey of legal and tax professionals (outside of this forum) indicates much uncertainty still exists on this issue.  The two sections of 162 appear to contradict each other, and I think a continuing discussion would be helpful at this point.  But, I really appreciate your efforts to "police" the website and lecture me on professional standards.  I'm sure other readers find that helpful too.

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