How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lev Your Own Question
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
870116
Type Your Tax Question Here...
Lev is online now
A new question is answered every 9 seconds

Good afternoon! My 49 year old client started a Schedule C

Customer Question

Good afternoon! My 49 year old client started a Schedule C business in 2011, but earned no self employed income in 2011. He also received a W2 from another Employer in 2011. He was terminated end of 2011 from his W2 job. In 2012, he was working his Schedule C looking for clients, but obtained none and earned no money. He received his first contract (and money) in April 2012. During the period (January thru April) of unemployment and no Schedule C income, the taxpayer withdrew prematurely from his 401K. The 10% penalty will apply for the early withdraw. However, I would like to deduct 4 months of health insurance premiums in the amount of $2,356 from the penalty ($589 x 4 mos). May I do this and if so, may I still deduct the full 12 months self employed health insurance premiums on Form 1040 page 1? Basically he was running his business, but not receiving income because he had no clients during Jan-April and he lost his job in November of 2012.
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

Lev :

Hi and welcome to our site!
Exclusion from 10% penalty and deduction for income tax purposes are not directly related - same expenses may be used for both purposes as long as all requirements met.
Specifically to qualify for exclusion from penalty - the taxpayer must have distribution above unreimbursed medical expenses during the year minus 7.5% of his/her adjusted gross income for the year.
See for reference - http://www.law.cornell.edu/uscode/text/26/213
However - according to IRS publication 590 page 56 - http://www.irs.gov/pub/irs-pdf/p590.pdf
You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040).
Thus - because self-employment insurance deduction is NOT considered for figuring a deduction for medical expenses on Schedule A - it is also may not be used for 10% penalty exclusion.
However - if you choose to deduct health insurance premiums on schedule A - they are eligible for 10% penalty exclusion. You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.

Expert:  Lev replied 3 years ago.
Just in case you were not able to use the chat - I am switching to Q&A mode and posting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

Exclusion from 10% penalty and deduction for income tax purposes are not directly related - same expenses may be used for both purposes as long as all requirements met.
Specifically to qualify for exclusion from penalty - the taxpayer must have distribution above unreimbursed medical expenses during the year minus 7.5% of his/her adjusted gross income for the year.
See for reference - http://www.law.cornell.edu/uscode/text/26/213
However - according to IRS publication 590 page 56 - http://www.irs.gov/pub/irs-pdf/p590.pdf
You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A (Form 1040).
Thus - because self-employment insurance deduction is NOT considered for figuring a deduction for medical expenses on Schedule A - it is also may not be used for 10% penalty exclusion.
However - if you choose to deduct health insurance premiums on schedule A - they are eligible for 10% penalty exclusion. You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.