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The Tax and Trade Relief Extension Act has created a great deal of misspent anticipation for the year 2003, when, according to the law signed by President Clinton in 1999, self-employed individuals will be able to deduct 100 percent of their health insurance premiums.  Many of the filers eagerly awaiting the tax relief provided by the Act, as well as the tax professionals, financial and insurance counsellors who advise them, are unaware that this deductions (and more) is available today through Section 105 of the Internal Revenue Code.

Section 105 was enacted in 1954 to legitimize family employment under tax law.  The code applies to individuals in business for themselves, including farmers, whose spouses assist with the venture in any way, even on a part-time basis.  In such cases, where a legitimate employer-employee relationship exists between family members, Section 105 allows a 100 percent deduction of the family's health insurance premiums, as well as non-insured medical, dental and vision care expenses on federal, state and self-employment taxes-which is a better deal than that provided by the Tax and Trade Relief Extension Act of 1999.

Trends Toward Self-Employment

Current trends in self-employment in the U.S. have created a pressing need for affordable healthcare solutions for this growing and increasingly important segment of our economy.

The U.S. Small Business Administration's Office of Advocacy notes that from 1966 to 2006 self-employment as a primary occupation is expected to increase by about 50 percent, a trend attributed to growth in the labor force.  From 1976 to 1996 the number of self-employed in the U.S. grew by more than 3 million to 10.5 million.  The number is expected to level off at 11.6 million in 2006, representing eight percent of the total civilian workforce.

Self-employed individuals tend to be older than wage and salary workers, with nearly half falling between the ages of 45 and 64 years of age, according to the Office of Advocacy.  And because they tend to be more educated than wage and salary workers, self-employed individuals typically would command benefit packages from employers that include health insurance coverage.

Many self-employed business owners give up healthcare coverage because it is too expensive; sometimes as much as four times what large companies pay through group health plans.  The situation on America's farms is particularly bleak, with farmers and ranchers increasingly dropping their health insurance to cover their bills in the face of falling commodity prices.  It is estimated that one in five rural Americans lack health insurance and farm household members are increasingly seeking non-farm employment because of the health insurance benefit it offers.

Clearly, these entrepreneurs and family farmers not only need, but deserve, affordable health care.

The Price of Ignorance

It is rare for the spouses of these business owners not to be involved in the venture in some way, whether it is a minor role, such as ordering supplies, or a major contribution, such as bookkeeping or scheduling.  However, due to a lack of awareness of the provision, only about one percent of the nearly 7 million business owners eligible for Section 105 deductions actually make the claim, resulting in millions of dollars in lost income each year.  This money would effectively narrow the gap between the yearly healthcare coverage costs of an independent business owner and those of a corporation employee.  In effect, Section 105 increases the percentage of the business owner's income that can be used for family expenses or reinvested in the business.

A Case in Point

John Krings of Wisconsin credits saving resulting from Section 105 to keeping his farm going during lean years.  Over the past decade, Krings deducted almost $60,000 in taxes using Section 105.  Krings used this money, which otherwise would have gone to state and federal governments, to maintain and update his farming equipment.

From 1976 to 1996 the number of self-employed in the U.S. grew by more than 3 million to 10.5 million.  The number is expected to level off at 11.6 million in 2006, representing eight percent of the total civilian workforce.

The situation on America's farms is particularly bleak, with farmers and ranchers increasingly dropping their health insurance to cover their bills in the face of falling commodity prices.

For Krings, a cash farmer unable to rely on a steady income throughout the year, the tax relief allowed by Section 105 makes long-term care insurance affordable, at the same time providing a financial bridge during uncertain times on the farm that his family has managed for nearly a century.

Third-Party Administration of Section 105 Claims

The use of Section 105 requires strict compliance with regulations set by the Internal Revenue Service and the Department of Labor and Employee Retirement Income Security Act (ERISA).  A third-party administrator, such as TASC, works with tax and financial service professionals to secure a proper and legal deduction for filers.  TASC backs its products with an audit guarantee and allows taxpayers to apply their Section 105 claims retroactively, meaning that any plan adopted by the end of the year will cover costs incurred all the way back to January 1.  In 2000, the company's AgriPlan and BizPlan helped 45,000 farmers and small business owners save an average of $2,450 on their taxes.

The Future of Section 105

Full implementation of the Tax and Trade Relief Extension Act in 2003 has raised a question about the long-term viability of tax-savings products based upon Section 105: "Won't the Act effectively negate the benefits of Section 105?" Simply speaking, no.

While the Act gradually increases the deductibility of health insurance for the self-employed, even the "full deductibility" promised in 2003 falls considerably short of the total tax savings offered by Section 105.

The Tax and Trade Relief Extension Act applies only to health insurance premiums, whereas Section 105 covers that as well as uninsured medical expenses, employee disability and term insurance.  Further, by using these medical expenses as an employee benefit under Section 105, the employer saves on taxes at the federal, state and social security levels.

The following table demonstrates the potential savings for a self-employed individual who pays $3,600 annually in health insurance premiums and, in addition, incurs $2,000 in annual out-of-pocket expenses not covered by insurance between now and full implementation of the Tax and Trade Relief Extension Act.