Self employed, taxes, healthcare and aca question

Ive been self employed this entire year and will likely remain so atleast through 2019 as well.

As i understand it, i can either claim my health insurance premiums on my taxes, which will lower my tax burden, or claim the aca subsidy towards premiums but not both. Am i correct in that assumption?

I took the subsidy to lower my monthly premiums (because who the hell can afford to essentially pay rent 2 times in a month!) this year and signed up for the same for next, so im assuming i cant take the deduction this or next year.

How does other health care costs play into this? My insurance has a high deductible so my out of pocket costs for doctor appointments, dental procedures and checkups, copay, and drugs was several thousand dollars this year, and likely next too. Are those deductible in some way? Do I list them as a business expense if so, or is there as special place to list them on tax forms?

Thanks for your help!

I believe for a write off the medical expenses have to exceed a certain percentage of your adjusted gross income. It was 7.5% but I believe that was raised. 10% maybe?

This is where consulting a CPA becomes money well spent. I suggest anyone self-employed spend the money on a certified public account at least the first year to do their taxes and to set up a system to track and organize finances. Those are the folks who make it their business to keep up with various tax laws and regulations.

It’s sure as hell cheaper than getting into trouble with the IRS.

Sound advice. I own a business on top of having a job. My tax return looks like the bible. Especially since my wife is legally my employee. I turn everything in to our accountant and let them handle it.

There was only one year we could write off medical expenses because we had both had surgery that year and the out of pocket exceeded the 7.5%. But that was well over 10 years ago. I thought they raised it since then.

I’m puzzled where you got this idea.
Unless I have been totally misinformed, you may still take the self-employed insurance deduction for what you paid after the ACA subsidy. This is an above-the-line deduction (adjustment to income) that reduces your AGI. You do not have to itemize and it’s not subject to the 7.5% reduction.

The only problem is that Congress made a bad mistake writing the law and because of political problems can’t amend it. You can only deduct the portion of the premium not paid by the subsidy. But the amount of the subsidy you are entitled to depends on your AGI which in turn depends on how much self-employed insurance premium you deduct.

The IRS has issued two alternative ways to figure this out. Refer to Publication 974 if you are interested.

You cannot list personal medical expenses as a business expense. You can, however, list them as an itemized deduction on Schedule A. As others have pointed out, your medical expense deductions are subject to a 7.5% of AGI reduction. And you also have to have a total of itemized deductions that exceeds the standard deduction which is much higher starting in 2018. But your self-employed insurance premium deduction will help lower your AGI,

Yes, they did raise it to 10% for people under age 65. But at the last moment the TCJA (the new tax law passed in December 2017) lowered it to 7.5% for 2017, 2018, and 2019.

That’s right, the deduction for net self paid health insurance cost for self employed people is not subject to the temporarily 7.5% threshold. Net as in what you paid after ACA subsidy if any. So you can’t both get the ACA subsidy and deduct the full cost of the health insurance, you deduct what you paid net. The reason to get ACA subsidy is was mentioned, cash flow, to not have to come up with a rent-like unsubsidized premium each month and then wait to get it back later in a tax savings/refund.

That threshold will apply though to out of pocket costs though.

The other important related thing is that some ACA plans are compatible with a Health Savings Account. Money you put in the HSA up to applicable limits is also an ‘above the line deduction’ from income. IOW they let you pay for those OOP’s with pre tax money, pretty much the same as eliminating that 7.5% income threshold. Or even better. There’s nothing stopping you from using the HSA as a long term savings vehicle to even cover Medicare premiums decades from now, if you can spare the cash now.

A related question. I retired early, but I have started doings some self-employed part-time consulting work (paid on a 1099) earning a few thousand dollars a year. A major motivation is that I don’t have enough Medicare credits. For 2019, I need at least $5440 in earnings to get the maximum 4 Medicare credits.

I can in principle deduct my ACA health insurance premiums (paid myself, no subsidy). But that might take my net earnings below the $5440 level. Are my Medicare credits based on gross earnings, or the net after deducting health insurance?

I’m not a tax attorney, but FICA taxes are separate from income taxes. Deductions apply to income taxes and shouldn’t affect what you pay in FICA taxes (which is the tax to fund social security & medicare).

Also for a 1099 you should be paying the full FICA taxes yourself, which is about 15.3% of gross income.

Technically I think it’s not FICA, it’s Self-Employment Tax when you pay it yourself.

But looking at it, I think it’s the same. I see that there’s a line to put the deduction for health insurance premiums directly on your 1040 (line 29 in 2017). So if the deduction doesn’t go on Schedule SE where you calculate your self-employment tax, it looks like it won’t affect it, and therefore won’t affect Medicare credits.

Need not be a CPA. An enrolled agent or other professional will be more than enough. I agree, most who make more than trivial self-employment income should probably have an accountant.

If high deductible.

Not based on net.

This is correct. Medicare will get reported the amount of earnings you pay Medicare tax on. The fact that you can only deduct - for income tax purposes - the health insurance premiums from a business that has at least that much net income does not affect how much will be reported to the SSA as Medicare earnings. At least, I don’t see why it would. SSA would only get reported what’s on Schedule SE; they would have no idea you took the deduction for income tax purposes.

As usual, the Teeming Millions have answered a tax question correctly and thoroughly before this CPA reads the thread. I also recommend that if you feel at all uncomfortable with doing your own taxes that you pay a professional to do so. They know what questions to ask and what things you might be missing. Enrolled Agents are probably just as good as CPAs when it comes to taxes (I don’t know for sure, as I don’t know what EA training is like), though I would hesitate to go to someone without a professional license.

Thanks for the confirmation.

Another HSA trick: you can add money to it AFTER paying an expense with it, and then reimburse yourself for that expense. You can even add the money the next year, before tax deadline I think. Near as I can tell you should never pay taxes on expenses that can be legally covered with HSA funds: this includes all OTC and prescription meds as well as Band-Aids as well as all co-pays and deductibles.

The OTC meds eligibility varies: your HSA administrator should have a list. Mine says:

Not that the government has any way of verifying much of this, but then HSA expenses are only an issue if you’re audited.

I recently learned that if you use an HSA credit card at CVS, it will accept the amount which is generally HSA eligible and skip the rest which you can use a different card for, very handy.

Yep, it’s 10% now (it may be less if you’re over 65). So the OP’s deductible / copays would fall into that bucket, but his health premiums would NOT (as far as I understand it). We have only once been able to itemize medical, and it was for a few hundred dollars that year.

We’re going to be able to itemize this year, due to my daughter spending 6+ months in a therapeutic residential community. The IRS computers are going to have a heart attack when they see us deducting that large a percentage of our income. I expect we will be audited.

You can pay health premiums with HSA money. $3,450 for an individual and $6,900 for a family are the contribution limits.

So apparently you can get an HSA if you have a “high deductible” health plan. Even if self employed. Not sure how the math on it works, I have an HSA plan and my deductible is $1500.

And on top of that, apparently you can get a qualifying health plan, then contribute to the HSA tax free, then pay the premiums for the health plan from the HSA?!

Sigh. If this works like it sounds it’s just another little way some of us enjoy a financial advantage over the rest of us. A couple thousand bucks in taxes saved every year isn’t nothing.

There are two types of pretax health savings accounts. One is the annual one, where the money goes away at the end of the year - I think those are called HCSAs.

The other type is used in conjunction with a high-deductible plan - I think those are called HSAs. That’s the sort we have now. You don’t have to spend that money that year, and you can let it build up basically indefinitely.

Some stores (or maybe card processors) are set up so that HCSA cards cannot be used for non-eligible purchases; I’ve run into that once or twice. The newer software at the stores may well be able to split the purchases as you’ve noted; 4+ years ago, it could not.

HSA cards, on the other hand, don’t have any restrictions on how they’re used - hell, you can use them to withdraw cash from an ATM. But you’d better be able to document valid expenses if you get audited. I accidentally used ours to buy a pair of shoes last year because I pulled the wrong card out of my wallet! When I discovered it, I had two choices: 1) do nothing (as I’d paid plenty of expenses out of pocket), or 2) return the money. I chose option 2, as we’re deliberately letting that balance build up.

For the OP: if you have the ability to set up an HSA in your situation (you may not be; I’m not familiar with self-employment tax rules) you can put aside enough to cover most / all of your deductible / copayment expenses.

Looks like HCSA is another name for a healthcare FSA.

But I assure you that I have a “real” HSA, and it made me do 2 transactions when I bought a pack of gum or something alongside a prescription drug.

That’s not really any different, in effect, than me having my health premiums paid pretax because of payroll deductions. Worse, actually, because in my case, the HSA money put aside is all available for spending on deductibles etc., while with the scenario you describe, most of your money is gone on premiums.

It’s something that only a subset of people can participate in, true. A lot of things that allow for pretax anything are much the same. People who grumble “We’re subsidizing all the poor people” forget all the tax subsidies they get by way of mortgage deductions, pretax spending accounts, etc. as well as roads and other public things. But that’s a different topic for a different thread.