IRS Trader Answers

Self-Employed Insurance Tax Deduction

Have you taken advantage of a self-employed health insurance deduction? Active traders may deduct health insurance premiums from gross income for a reduction in taxable income.

How the Self-Employed Health Deduction Works

As an active trader, you may deduct the cost of health insurance for yourself when filing tax forms.

• A health insurance plan must be established under your business to qualify for the self-employed health insurance deduction

How Do I Qualify for this Deduction?

Depending on your status as an LLC owner you can qualify, and based on profits in one of these types of businesses’:

• Single-member trader business LLC owners must report a net profit annually on Schedule C
• Received wages from an S corporation
• Practiced optional methods to figure in your new income from self-employment on Schedule SE

How Do I Get This Tax Deduction?

• Determine the cost of health insurance premiums for the year before your gross income is factored in
• Premiums for self-employed health insurance must be deducted from your gross income on your tax return
• If your health insurance is not through the marketplace, put into use the Self-Employed Health Insurance Deduction Worksheet from IRS Publication 535. If your insurance is through the marketplace exchange, you’ll need to use a different worksheet

Publication 535 is quite complicated, so we recommend having your tax preparer do this.

Deducting Long-term Care Insurance Premiums

You may deduct premiums you pay for a long-term care insurance policy. Although, deductions are limited to a premium dollar limit based on your age.

To qualify for a long-term care insurance premium deduction, you must pay premiums for a qualified long-term care insurance contract that satisfies specific requirements.

Are There Restrictions on this Tax Credit?

This insurance premium deduction is only available if your LLC makes a profit; if your business suffers a loss, you may not claim the deduction.

• It is only available to self-employed individuals, not corporate owners (who are not self-employed)
• Health care premium deductions are not possible if you and your spouse are eligible for health insurance for another employer

Read on to find out more about how IRS Publications can benefit you when it’s tax season time.

This publication explains the itemized deduction for medical and dental expenses that you claim on Schedule A (Form 1040). It discusses what expenses, and whose expenses, you can and cannot include in figuring the deduction. It explains how to treat reimbursements and how to figure the deduction. It also tells you how to report the deduction on your tax return and what to do if you sell a medical property or receive damages for a personal injury. Medical expenses include dental expenses, and in this publication, the term “medical expenses” is often used to refer to medical and dental expenses.

Publication 502 expands on the information given in Publication 17 regarding deducting medical and LTC insurance premiums as a self-employed person. Subject to a few exceptions, if you were eligible for your spouse’s medical or LTC insurance for part of the year, figure your allowable deduction using the Self-Employed Health Insurance Deduction Worksheet in the instructions to Form 1040.

This publication provides information on the tax treatment of investment income and expenses. It explains what investment income is taxable and what investment expenses are deductible. It explains when and how to show these items on your tax return. It also explains how to determine and report gains and losses on the disposition of investment property and provides information on property trades and tax shelters.

Concerning traders in securities, Publication 550 explains how to report your trading activity on Form 8948 and Schedule D, how to make the mark-to-market election and use Form 4797 to report trading gains and losses as ordinary income and losses rather than capital gains and losses. With mark to market accounting, you record the profit or loss on security as of the last day of the year, as if you sold and repurchased it on that day. In this way, you realize any gains or losses in the tax year, with no carryover into future years. In return, the IRS frees you from the constraints of the wash-sale rules and allows you to enjoy a favorable tax rate on transactions involving certain futures contracts. You will also learn about deducting your trading expenses on Schedule C rather than Schedule A. Publication 550 explains that fees and commissions are not separate expenses, but rather figure into the cost basis of your securities and thus your ultimate profits or losses. Publication 550 also clarifies that your investment interest expenses are not limited by your interest income, as is the case for investors, and that, as a trader in securities, you are not subject to self-employment tax.

The purpose of this publication is to provide information on figuring and claiming the deduction for business use of your home. The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse.

Anyone can deduct certain expenses whether or not you use your home for business, including mortgage interest, mortgage insurance premiums, real estate taxes and casualty losses. As a self-employed person, the IRS allows additional deductions for the business use of your home, including insurance, utilities, maintenance, and depreciation. The IRS doesn’t allow you to deduct the personal portion of any of these expenses.

This publication covers the general rules for filing a federal income tax return. It supplements the information contained in your tax form instruction booklet. It explains the tax law to make sure you pay only the tax you owe and no more. It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various types of credits you may be able to take to reduce your tax.

Publication 17 explains how self-employed individuals can adjust their income for (rather than deduct) amounts paid for medical and qualified long-term-care insurance for yourself, your spouse, your dependents and your children under age 27. This also applies if you are a general partner or receive wages from an S corporation in which you have a stake exceeding 2 percent.

The purpose of this publication is to provide general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees. This publication has information on trading business income, expenses, and tax credits that may help you file your income tax return.

As a securities trader, you report on Schedule C only securities for which you’ve elected mark-to-market accounting under Section 475(f) and foreign exchange trades taxed under Section 988. All others trades, including Section 1256, are reported through Schedule D Taxation.

This publication discusses common business expenses and explains what is and is not deductible. The general rules for deducting business expenses are discussed in the opening chapter. The chapters that follow cover specific expenses and list other publications and forms you may need.

Further detail is given on health and LTC policies subject to the self-employed adjustment to income. The insurance plan can be in your name or that of your business. For partnerships, it can be in the name of the partners, and either the partners or the partnership can pay the premiums, which requires the use of Schedule K-1. Publication 535 also lists the age-related limits on income adjustments due to qualified LTC policy premiums.

Every taxpayer, whether an individual or a business entity must figure taxable income on an annual accounting period called a tax year. The calendar year is the most common tax year. Other tax years are a fiscal year and a short tax year which is discussed later. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the: (a) cash method; and (b) accrual method. Under the cash method, generally you report income in the tax year in which you receive it; and you deduct expenses in the tax year in which you pay them. Under an accrual method, generally, you report income in the tax year in which you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur them, regardless of when payment is made.

Publication 538 specifies that as a self-employed individual, you must adopt the calendar year as your tax year unless you maintain your books and records on the basis of an adopted fiscal year. More complex rules apply to partnerships and S corporations regarding the use of a required tax year.

This publication provides supplemental federal income tax information for partnerships and partners. It supplements the information provided in the instructions for Form 1065, U. S. Return of Partnership Income, and the Partner’s Instructions for Schedule K-1 (Form 1065). Generally, a partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their individual tax returns.

For purposes of minimizing taxes, if you run your trading business as an LLC, you should establish it as a partnership. Publication 541 points out that unlike a regular partnership, an LLC partnership protects the LLC members from personal liability for its debts. If the LLC has at least two members, the IRS will treat is as a partnership by default. You can explicitly declare this using Form 8832.

This publication discusses the general tax laws that apply to ordinary domestic corporations. It explains the tax law in plain language so it will be easier to understand. However, the information given does not cover every situation and is not intended to replace the law or change its meaning.

Publication 542 explains that corporations generally figure and deduct net operating losses (NOLs) in the same way that individuals do. However, certain differences are pointed out with regard to the deductions, carryback and carryforward adjustments, and forms used when claiming NOL deductions. NOLs can be carried back two years and carried forward 20 years.

This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a recordkeeping system.

Publication 583 introduces the different business structures, including sole proprietorships, partnerships, qualified joint ventures, C corporations, limited liability companies and S corporations. Traders Accounting can give you customized advice on how to structure your securities trading business to maximize your after-tax income. Call today for a free consultation.

If you are an active trader, the IRS will provide you with some significant tax breaks, and special rules that can put more money into your account. But you have to first qualify as a trader in securities, otherwise, the IRS will treat you as an investor, and deny you all of the goodies available to day traders.

To be classified as a trader in securities, you must show that you are in the business of buying and selling securities for your account. You can show this by meeting certain conditions:

 You must try to profit from daily price movements of securities rather than from interest, dividends, and capital appreciation

 You must maintain substantial activity (usually taken to mean trading as a business daily, or at least a few times per week)

 Your trading activity must be continuous, and regular (you can’t decide to trade now and then actively)

The IRS may challenge your status as a trader in securities by examining the facts, and circumstances including:

 How long are the holding periods for the securities you buy and sell?

 What’s the frequency and dollar amount of trading throughout the year?

 How much do you pursue trading to make a living?

 How much time do you devote to trading?

The correct answers to these questions are not set in stone, but Traders Accounting is very familiar with what the IRS wants and can give you expert guidance to prove you are a trader in securities. By the way, calling yourself a “day trader” won’t cut it – that term has no meaning to the IRS.

The areas of concern addressed on this page assume you are a trader in securities. Note that you may keep a separate portfolio that would be characterized as investments – that’s OK as long as you maintain monthly bookkeeping for the two.