Deducting Spousal Medical Insurance, Spouse Tax Deductions

Deducting spousal medical insurance Two cases show how to do it: Case 1: Eyler owned a tiling business. His only employee was his wife, and he paid her fixed wages. His wife had health problems that made it difficult to obtain medical insurance. The taxpayer provided an unwritten health plan under which he would pay for medical insurance for his employee (his wife) and her spouse (Eyler himself). Eyler applied for health insurance under his own name to cover himself and his spouse and paid himself the premiums. He deducted the premiums on Schedule C as “Employee benefit programs.” The IRS denied the deduction. Held: For the IRS. Eyler did not produce records to show that the insurance premiums were paid either by him as employer or by him as the person who applied for and was covered by the policy. Helpful hint: Under a cafeteria plan, employees can pay their own health insurance premiums and be reimbursed tax-free—if they provide proof that the premiums were actually paid. Sole proprietors should follow the same policy when paying their own premiums or their spouse’s: obtain and retain proof that the premiums were paid. Case 2: Frahm, a farmer, had one employee: his wife. Her duties included field jobs, caring for livestock, helping with machinery repairs, keeping bookkeeping records, and doing other tasks usual and customary to the farming business. She was paid $3,000 a year, and FICA was withheld. Frahm signed a form authorizing a medical reimbursement plan for employees’ medical expenses and their spouses administered by a third party. He also applied for medical insurance covering himself and his wife and paid the premiums with checks from his wife's checking account. His wife submitted a reimbursement form for premiums paid, and he wrote checks from the business checking account to reimburse her. On Frahm’s Schedule F, the premiums were deducted as “Employee benefit programs.” The IRS denied the deductions. Held: For the taxpayer. The IRS argued that the taxpayer could not deduct reimbursements for a policy issued in his name. The court, however, held that the reimbursement plan provided for reimbursement of premiums employees paid on a spouse’s behalf for a policy issued in her name. Therefore, the reimbursements were deductible as if paid to an unrelated employee.

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Deducting spousal medical insurance

Two cases show how to do it:

Case 1: Eyler owned a tiling business.

Case 2: Frahm, a farmer, had one employee: his wife.