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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Farmer's Health Insurance Reduces Self-Employment Taxes!

Jan 21, 2011

We had a reader ask the following question:

"Is it true that for 2010 we can reduce our net self-employed income on Schedule SE line 3, by deducting the amount of our self-employed health insurance from line 29 of Form 1040? My husband and I farm side by side so will only his half of the self-employed health insurance qualify for this deduction as his name is the one listed on the top of Schedule SE or can we deduct the total amount that we have listed on line 29 of Form 1040?"

 

There are several questions from the reader.

First, for 2010 only (unless Congress extends the law), a farmer is now allowed to deduct the self-employed health insurance deduction shown on line 29 of form 1040 in arriving at net self-employment income for self -employment tax purposes.  This means that for most farmers who have health insurance premiums ranging around $10,000 for them and their family, the self-employment tax savings would be around $1,500.

On the second question, the amount allowed as a deduction against SE income is the amount shown on line 29 of form 1040.  If the health insurance premiums are in his name and covers him, his spouse and the family, then normally the whole amount would be allowed as a deduction against SE income.  However, if the premium is only for him and there is a separate premium for the spouse and the spouse is not employed by the farm, then her premium MAY not be deductible against his SE income.  It is hard to tell from the question which fact pattern is correct, however, our discussion would cover most of the options.

A way to correct this is for the farmer to pay wages to the spouse and then the premiums for her would be deductible as an employee benefit on the farm's schedule F.  If the net income of the farm is under the wage base of $106,800 for 2010, then the only extra payroll tax would be the possible FUTA tax on her wages.  To take advantage of this, the spouse must be performing actual services for the farm and a bona fide arrangement.  The IRS has challenged several of these arrangements, losing some cases and winning others.

These situations must be discussed with your tax advisor since the interplay of tax rules can be complex.

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