Correct rules for deducting med insurance costs.

Correct rules for deducting med insurance costs

The skyrocketing cost 11 of medical insurance is a growing concern to all individuals and businesses. The horror stories of premium increases are well known and do not have to be repeated here. However, since these costs are subject to varying degrees of tax deductibility, it is important for any individual or organization that pays these costs to be aware of the tax treatment.

The tax deductibility of medical insurance premiums depends on the tax status of the payer of these costs, as follows:

* An individual can include medical insurance costs with his/her other medical expenses (net of reimbursements) and claim the total of these expenses, subject to a limitation of 7-1/2 percent of adjusted gross income, as an itemized deduction on his/her personal income tax return. * A self-employed individual can deduct 25 percent of his/her medical insurance as a deduction to adjusted gross income. This deduction cannot exceed the amount of net income earned from the business under which the insurance plan was established. This deduction is not permitted, though, if the self-employed individual or spouse is eligible for coverage under an employer plan. The cost for other employees is a business expense. * A partnership can deduct the costs for its employees. However, the costs of the partners' insurance must be handled in one of tow ways. The partnership can treat the costs as a partnership deduction and then include in each partner's income the portion of the cost that relates to his/her coverage. Alternately, the partnership could decide not to deduct the costs. * An S corporation can deduct the costs for its employees' coverage as well as those of shareholders who own 2 percent or less of the corporate stock. The cost of the coverage as well as those who own more than 2 percent of the stock should be reported on the respective W-2 forms and thus would be included in income on their personal tax returns. These W-2 amounts are also subject to employer payroll taxes. * A C corporation can deduct the costs for all its employees, regardless of stock ownership.

Since most real estate and real estate-related businesses are owned in partnership or S corporation format, the rules on the deductibility of medical insurance costs for business owners become significant. As described above, these costs are essentially not deductible. Partners should keep in mind that their share of the partnership income that has to be reported for tax purposes may exceed what they believe to be their share of the income. Likewise, this applies to S corporation shareholders who may have to report unexpected W-2 amounts.

It is important to fully understand these rules when doing individual tax planning, determining company coverage or deciding which spouse should provide coverage. It also is a significant factor when an enterprise chooses which entity format to use. If deductibility of these costs is an overriding issue, then C corporation status should be considered since full deductibility can be achieved. All other business structures provide for partial or no deductibility of these costs.

Jeffrey Stavin specializes in the tax and accounting aspects of real estate ownership, operation and development. He has served on real estate and tax committees of the New York State Society of Certified Public Accountants.

Friedman Alpren & Green has responded to inquiries regarding previous articles and is pleased to discuss these and other tax questions of the readership of Real Estate Weekly. Any such questions should be directed to their office at 1700 Broadway, New York, New York.