Deducting health insurance costs

Money Talk

Your Money

March 14, 2004|By MATT LUBANKO

ARE THE health insurance premiums that I paid in 2003 fully deductible on my federal income tax return?

- K.C., Oak Park, Ill.

It is mainly certain self-employed taxpayers who can fully deduct the health insurance premiums they paid in 2003. Others can deduct a portion, and some might have to look elsewhere for deductible expenses.

Here are three hypothetical cases.

Case 1: Let's assume you were self-employed in 2003. You elect to report your self-employment income on Schedule C (the tax form labeled "Profit or Loss From Business," with "Sole Proprietorship" in parentheses). Your 2003 net income reported on Schedule C - accounting for all expenses, including contributions to an SEP-IRA - totaled $44,000.

We also will assume that, through your business, you paid $8,500 to Aetna Inc. for a one-year health insurance policy.

In this simplified case, the net income ($44,000) from Schedule C would be reported on line 12 of Form 1040. And your $8,500 health insurance premium would be reported as a deduction on line 29 of Form 1040; line 29 is in the section of Form 1040 labeled "Adjusted Gross Income."

Case 2: You were self-employed in 2003. Through your industry trade group, you paid $8,500 for a health insurance policy in 2003. But you reported only $7,000 in net income on your Schedule C; you would therefore be able to deduct only $7,000 as a business-related expense.

"Other expenses can contribute to a net loss on your Schedule C, but health insurance is not one such expense," said Mark Luscombe, principal analyst with CCH Inc., a tax software and publication company in Riverwoods, Ill.

Case 3: You are 72 years old. In 2003, you cobbled together $35,000 in adjusted gross income from part-time work, investments, Social Security benefits, withdrawals from your IRA and pension payments from a company where you once worked for 25 years. You also happened to pay $5,000 in 2003 for a health insurance policy.

Let's also assume you will choose to itemize your deductions (See Schedule A) for your 2003 federal tax return. Aside from the $5,000 you paid for health insurance, let's also assume you had no other health care-related expenses in 2003.

The health care-related expenses that equaled or fell below 7.5 percent of your adjusted gross income ($2,625 for someone who earned $35,000 in 2003) would be excluded as a deduction. The health care-related expenses in excess of 7.5 percent of your adjusted gross income could be deducted: See lines 1 to 4 on Schedule A, said representatives of Jackson Hewitt Tax Service.

To learn more about medical expenses you can deduct, carefully review the rules spelled out in IRS Publication 502: Medical and Dental Expenses (Including the Health Coverage Tax Credit), or IRS Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). You will find these booklets at many public libraries or you may download copies from the www.irs.gov Web site.

My daughter is 34 years old and lives in our home. She lost her job in March 2003, and we have been paying most of her bills ever since. Can we claim her as a dependent on our 2003 tax return?

- K.H. Northbrook, Ill.

It's possible to claim an adult child age 24 or older as a dependent, but you must first answer "yes" or "no" to five questions.

Did, for example, your 34-year-old daughter take in $3,050 or more in gross income (before taxes and deductions) in 2003? If she did, you're out of luck. If she didn't, you have four more questions to answer.

To review the other questions (too lengthy to repeat here in detail), consult IRS Publication 501, titled Exemptions, Standard Deduction, and Filing Information. Or see page 21 of the IRS instruction booklet on filling out Form 1040, both of which can be downloaded from the www.irs.gov Web site or reviewed at many public libraries.

Quick tip: Many single parents (be they widowed or divorced) can claim the "head of household" filing status if they have adult children living at home, said Dianne Besunder, a spokeswoman for the IRS in New York. This change in filing status can save some taxpayers thousands of dollars in a given year. But, once again, there are conditions to be met. See pages seven and eight of IRS Publication 501 to review the legal hurdles you must clear to claim head of household status.

Matthew Lubanko is a financial columnist for The Hartford Courant, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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