Save Money on Self-Employment Taxes with the Medicare Deduction

In a seeming reversal of previous tax policies, the IRS has been advised that the self-employed may deduct Medicare premiums to lessen tax payments.

According to the Office of Chief Counsel, the new Medicare deduction has been enabled since the 2010 tax year and following years. But even the self-employed professionals who have previously filed their taxes can claim the deduction until the statute of limitation expires. The tax change effected just one line of the standard 1040 Form, but the small change saves self-employed professionals on their overall tax payments.

Medicare Deduction

Prior to 2010, the 1040 form specifically addressed the cost of Medicare premiums. Line 29 stated that these premiums “cannot be used to figure” any deduction for self-employed health insurance costs. Since health insurance costs are a business expense for the self-employed, these costs are deductible – but the form excluded Medicare from this common deduction. Following 2010, however, line 29 of the form changed. Now, the line reads “Medicare Part B premiums can be used to figure the deduction.”

Tax Deductions

Tax deductions of any kind are confusing, even without the complicated language used in official tax forms. Many self-employed professionals take their paperwork to a professional accountant or tax preparer because the laws are so confusing, and there are a lot of details that need to be addressed in self-employed finances. But with a basic understanding of how tax deductions work, anyone can figure out what they need to know to claim these expenses and save themselves some money.

Self-employed professionals who work at home have no travel expenses when they’re working, but they do have other expenses. A work at home mom who makes her own jewelry to sell on Etsy, for example, has to purchase craft supplies. The cost of these supplies, plus shipping fees, can be deducted. How does she do it?

To make a tax deduction, that work at home mom (or any other self-employed professional) simply subtracts the cost of business expenses from the total self-employment income earned during the calendar year. Deductions are subtracted from gross income; the remaining income is subject to self-employment and income taxes (which are based upon percentages). Any deduction, no matter how small, takes a little chunk of taxable income away from the grand total. Anyone who’s ever had to pay their year-end self-employment taxes and income taxes knows just how valuable deductions can be.

But deductions cannot be made at will. Self-employed professionals who make deductions must prove they actually exist. Save receipts, and print receipts from online expenses, and include this paperwork in tax returns. Without the proper paperwork, those deductions aren’t legal and may not be legally applied.