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How to resolve Lacerte diagnostic ref 468 - taxpayer's self-employed health insurance premiums were not deductible

by Lacerte Tax 2023 Updated 3 months ago

This article will help to resolve the following diagnostic:

  • Taxpayer's self-employed health insurance premiums were not deductible due to the lack of self-employment income.  They have been included in full as an itemized deduction on Schedule A.. (ref. #468)

Reasons and steps to resolve this diagnostic starting in tax year 2023:

The SE income and SE premiums are designated to different people.

  1. Review the taxpayer and spouse radial buttons on these screens:
    • Screen 16, Business Income (Sch C)
    • Screen 18, Rent and Royalty Income (Sch E)
    • Screen 19, Farm Income (Sch F/4835)
    • Screen 20, Passthrough K-1's.
  2. Make sure the insurance is entered in the corresponding column (Taxpayer or Spouse) in the SE Health Insurance section of Screen 24, Adjustments to Income so the deduction is taken against the income for the same individual.

A greater than 2% shareholder in an S corporation received a W-2 and a K-1, but the two are not linked together.

  1. Go to Screen 10, Wages, Salaries, Tips.
  2. Scroll down to the Other Information section.
  3. Select the box More than 2% shareholder in S corporation.
  4. Go to Screen 20.2, S Corporation Information.
  5. Scroll down to the Part II - Information About the Shareholder section.
  6. Select the same W-2 activity in Name or number of W-2 received by greater than 2% owner.
    • Self-employed health insurance can be entered on Screen 20.2, S Corporation Information in Self-employed heath insurance premiums, under the Line 17 - Other Information section; or
    • They can be entered in Screen 24, Adjustments to income in the section SE Heath Insurance (7206).
    • Make sure the Form and Activity Name or Number subsection is linked to the correct K-1.

A greater than 2% shareholder in an S corporation also has self-employment loss which is reducing the SE income from Screen 20, Passthrough K-1's.

  1. Go to Screen 24, Adjustments to Income
  2. Select the SE Health Insurance (7206) section.
  3. In the Form and Activity Name or Number subsection make sure it is linked to the correct K-1.
  4. If there are multiple business make sure the Net profit of business under which plan is established [A] is filled out.
    • The entries above will specify that only the K-1 activity should be taken into account when computing the SE heath insurance deduction on Form 1040, line 29.

A greater than 2% shareholder in an S corporation that also received a W-2 needs to have the SE health insurance computation include the income from the W-2, not the K-1.

  1. Go to Screen 24, Adjustments to Income.
  2. Select the SE Health Insurance (7206) section.
  3. In the Form and Activity Name or Number subsection select form W-2 - SCorp S/H ( > 2%) in the field Form (Ctrl+T) and the W-2 employer name in the field Activity name or number.
    • If necessary, enter the amount of SE income associated with the SE health insurance in the field Net profit of business under which plan is established [A].

For Self-employed minsters that received a W-2 that needs to have the SE health insurance computation include the income from the W-2 and other scenarios:

  1. Go to Screen 24, Adjustments to Income.
  2. Select the SE Health Insurance (7206) section.
  3. Find the Net profit of business under which plan is established [A] field.
  4. Enter the amount of SE income associated with the SE health insurance.

Reasons and steps to resolve this diagnostic:

The SE income and SE premiums are designated to different people.

  1. Review the taxpayer and spouse radial buttons on these screens:
    • Screen 16, Business Income (Sch C)
    • Screen 18, Rent and Royalty Income (Sch E)
    • Screen 19, Farm Income (Sch F/4835)
    • Screen 20, Passthrough K-1's.
  2. Make sure the insurance is entered in the corresponding column (Taxpayer or Spouse) in the SE Health Insurance section of Screen 24, Adjustments to Income so the deduction is taken against the income for the same individual.

A greater than 2% shareholder in an S corporation received a W-2 and a K-1, but the two are not linked together.

  1. Go to Screen 10, Wages, Salaries, Tips.
  2. Scroll down to the Other Information section.
  3. Select the box More than 2% shareholder in S corporation.
  4. Go to Screen 20.2, S Corporation Information.
  5. Scroll down to the Part II - Information About the Shareholder section.
  6. Select the same W-2 activity in Name or number of W-2 received by greater than 2% owner.
    • Self-employed health insurance can be entered on Screen 20.2, S Corporation Information in Self-employed heath insurance premiums, under the Line 17 - Other Information section; or
    • They can be entered in Screen 24, Adjustments to income in the section SE Heath Insurance.

A greater than 2% shareholder in an S corporation also has self-employment loss which is reducing the SE income from Screen 20, Passthrough K-1's.

  1. Go to Screen 24, Adjustments to Income
  2. Select Schedule K-1 (1120-S) in the field "Form (Ctrl+T)" and the K-1 Entity name in the field "Activity name or number" in the subsection Net Earnings (if multiple businesses) of the section SE Heath Insurance
    • If necessary, enter the amount of SE income associated with the SE health insurance in the field "Net earnings from self-employment [A]." The entries above will specify that only the K-1 activity should be taken into account when computing the SE heath insurance deduction on Form 1040, line 29.

A greater than 2% shareholder in an S corporation that also received a W-2 needs to have the SE health insurance computation include the income from the W-2, not the K-1.

  1. Go to Screen 24, Adjustments to Income.
  2. Select form W-2 - SCorp S/H ( > 2%) in the field Form (Ctrl+T) and the W-2 employer name in the field Activity name or number in the subsection Net Earnings (if multiple businesses) of the section SE Heath Insurance.
    • If necessary, enter the amount of SE income associated with the SE health insurance in the field Net earnings from self-employment [A].

For Self-employed minsters that received a W-2 that needs to have the SE health insurance computation include the income from the W-2 and other scenarios:

  1. Go to Screen 24, Adjustments to Income.
  2. Select the SE Health Insurance section.
  3. Find the SE health insurance deduction [O] field.
  4. Calcualte and enter the amount of the SE health insurnace deduction.
Lacerte Tax

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