Medical expenses can be a major family expense.
There are three ways a family child care provider can deduct such expenses to reduce her personal federal income taxes.
There are two ways you can use medical expenses as a business deduction.
1) You can set up a Health Reimbursement Account (HRA), also known as a medical reimbursement plan or Section 105 Plan that will allow you to deduct medical expenses as a business deduction. These medical expenses can be for you, your spouse, and your children. These expenses must not be already covered by insurance. They can include medical insurance premiums paid by your husband at work, drugs, co-payments, diagnostic fees, examination fees, hospital bills, orthodontia, braces, hearing aids, wheelchairs, eyeglasses, contact lenses, etc.
For every $1,000 of uninsured medical expenses, you can expect to save between $300-$400 in taxes because they will reduce both Social Security and federal and state income taxes.
To take advantage of this medical reimbursement plan, you must set up your husband as your employee. However, you do not have to pay him a salary and worry about paying payroll taxes. I won a US Tax Court case for a family child care provider on this issue. There has also been a recent appeals court case (Shellito v. Commissioner) that says the same thing.
To meet all the requirements of setting up a medical reimbursement plan properly, I strongly recommend that you hire someone to set this up for you. (The cost of setting one up is 100% tax deductible.) The largest national company that sets up such plans is called TASC (Total Administrative Services Corporation). They call their plan BizPlan.
Here’s a helpful brochure that explains how you can save money by using BizPlan.
If you use this application form or mention my name and use code TOMA when you enroll, you will receive a 10% discount on the enrollment fee. Call 888-595-2261 (ext. 17732) for more information.
I will receive some compensation from BizPlan if you take advantage of this discount. I decided to endorse BizPlan because they are the leader in providing HRA services to family child care providers and I have been
in contact with them for many years.
Note: You can establish BizPlan without having to pay your husband. If you do so, however, BizPlan will not offer the same IRS audit protection. Talk to your representative for details.
If set up a medical reimbursement plan and hire your son or daughter (but not your husband) to do work for your business, you could only count medical expenses for your children, not for yourself or your husband.
Many tax professionals are set up to offer BizPlan for their clients. Ask your tax professional about this. You can also find other companies who set up medical reimbursement plans by Googling “Section 105 Plan” and the name of your city.
I’ve written another article that describes medical reimbursement plans in more detail: “When Hiring Your Husband Makes Sense.”
2) If you incorporate your business, you become an employee of the corporation. The corporation can then offer medical benefits to you and your family and deduct these expenses. The medical benefits would not be considered income to you. Although this is a significant tax benefit (similar to the medical reimbursement plan), in my opinion it’s not worth setting up a corporation to take advantage of this benefit. There are many downsides to incorporating that I have discussed in other articles.
1) You can claim medical expenses on IRS Form 1040 Schedule A Itemized Expenses. Unfortunately, these expenses must exceed 10% of your family’s adjusted gross income before they will count. For example, if your adjusted gross income is $80,000, the first $8,000 of your medical expenses cannot be deducted ($80,000 x 10% = $6,000).
2) You can deduct 100% of your health insurance premium (on IRS Form 1040, line 29) if you meet the following conditions: you must not be eligible to purchase health insurance through an employer health plan and you must purchase insurance on your own. Let’s say you are married and your husband has a health plan through his employer. If you are eligible to participate on his plan, you can’t deduct your health insurance premiums on Form 1040. This would be true even if you didn’t sign up for his plan, for whatever reason.
3) If your husband works for an employer that offers a flexible benefit plan, he can set aside some of his salary for medical expenses. The salary set aside is not taxed, reducing your family’s income taxes. Unlike a medical reimbursement plan, you would not get the benefit of reduced Social Security taxes.
As we can see, the medical reimbursement plan is the only practical way, for most child care providers, to be able to deduct medical expenses as a business expense.
Tom Copeland – www.tomcopelandblog.com