ExpertHard1 markMultiple Choice
CPA · Question 26 · Area IV: Individual Taxation
A self-employed taxpayer had net earnings from self-employment of $100,000. They paid $12,000 in health insurance premiums for themselves and their family. They were not eligible to participate in any subsidized health plan maintained by an employer of their spouse. How is the $12,000 treated?
A self-employed taxpayer had net earnings from self-employment of $100,000. They paid $12,000 in health insurance premiums for themselves and their family. They were not eligible to participate in any subsidized health plan maintained by an employer of their spouse. How is the $12,000 treated?
Answer options:
A.
Fully deductible as an adjustment to arrive at AGI.
B.
Deductible on Schedule C, reducing self-employment tax.
C.
Itemized deduction subject to the 7.5% AGI floor.
D.
Not deductible.
How to approach this question
Self-Employed Health Insurance = Adjustment to Income (Above the Line). It is NOT a Schedule C expense (doesn't lower SE tax) and NOT an Itemized Deduction (unless you want it to be, which is worse).
Full Answer
A.Fully deductible as an adjustment to arrive at AGI.✓ Correct
A
IRC §162(l) allows self-employed individuals to deduct 100% of health insurance premiums for themselves and dependents as an adjustment to income (above-the-line). It is not deducted on Schedule C and thus does not reduce self-employment tax.
Common mistakes
Putting it on Schedule C (wrongly reducing SE tax) or treating it as an itemized medical expense (subject to floor).
Practice the full CPA REG Practice Exam 3
72 questions · hints · full answers · grading
More questions from this exam
Q01A CPA is preparing an original tax return for a client who is claiming a refund based on a positi...HardQ02A practitioner is representing a taxpayer in an IRS examination. The taxpayer has a 25% ownership...HardQ03A tax return preparer willfully attempts to understate the tax liability on a client's return by ...HardQ04Which of the following scenarios would most likely result in the assessment of a penalty for fail...HardQ05Regarding the disciplinary authority of State Boards of Accountancy, which of the following state...Hard