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II. Health Insurance Deduction
We next consider whether petitioners are entitled to deduct
self-employed health insurance expenses of $880. Section
162(l)(1) permits a self-employed individual to deduct 40 percent
of the “amount paid during the taxable year for insurance which
constitutes medical care for the taxpayer, his spouse, and
dependents.” The deduction, however, may not exceed the
“taxpayer’s earned income (within the meaning of section 401(c))
derived by the taxpayer from the trade or business with respect
to which the plan providing the medical care coverage is
established.” Sec. 162(l)(2)(A).
The term “earned income” is defined by section 401(c), in
part, as “the net earnings from self-employment (as defined in
section 1402(a))”. Sec. 401(c)(2)(A). Section 1402(a), in turn,
defines “net earnings from self-employment”, as relevant to this
case, as “the gross income derived by an individual from any
trade or business carried on by such individual, less the
deductions allowed by this subtitle which are attributable to
such trade or business”.
Because petitioners did not have net earnings from self-
employment within the meaning of section 1402(a), they did not
have earned income within the meaning of section 401(c), and,
consequently, are not entitled to a deduction for self-employed
health insurance expenses for the year in issue pursuant to
section 162(l)(2)(A).
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Last modified: May 25, 2011