Today TaxMama hears from Elaine in the TaxQuips forum, who tells us. “I have a client that is retiring now at age 55. He will receive $185,000 in deferred compensation. The company will withhold 1,000 for lifetime medical insurance for him.
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Can the whole $111,000 be deducted in the year paid?”
Wow! Double WOW!
Hey, who knows if the insurance company is even going to be in business for his whole life? This is SO not cool.
Your client is having to pay the premiums himself? Then why pay it all up front. If it’s not too late, advise your client to rethink this arrangement. Why shouldn’t he use the money during his lifetime, and just pay his few thousand each year?
He’s really only getting about $75,000. Yet, this increases his AGI needlessly. It probably puts him into AMT – needlessly.
Even IRS won’t let you deduct a lifetime’s worth of premiums all at once. You will have to amortize them each year.
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(Scroll down to Prepaid Insurance Premiums in the link to IRS Publication 502)
The ONLY justification I can see for the prepaid premiums is that they are part of some kind of pre-tax plan that reduce the client’s taxable income. See if that’s what it is. Then, you won’t need to worry about deducting the premiums.
Even so…he’s better off with the money and getting the special COBRA credit for 18 months (or whatever the limit is) and paying the full annual premium afterwards, with the money he’s banked.
I hope you can catch this before your client gets the short end of the stick…unless I’m missing something?
And remember, you can find answers to all kinds of questions about prepaid expenses, and other tax issues, free.
Where? Where else? At TaxMama.com.
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- TaxQuips Forum :: Where you can comment on this question
- IRS Publication 502 :: Medical Expenses
- TaxQuips Forum :: Where you can ask your own questions
- TaxQuips Post :: Information about the COBRA credits