How to Turn Your Family Medical Expenses into a Business Deduction

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One of the most significant ways a family child care provider can reduce her taxes is to hire her husband and set up a Health Reimbursement Account (HRA).

These plans are also known as a medical reimbursement plan or Section 105 Plan.

For every $1,000 of uninsured medical expenses your family has, you can expect to save between $300-$400 in taxes. This is because these expenses will reduce both your Social Security and federal and state income taxes.

Here’s how it works: You hire your spouse or your own child to help you do work for your business (cleaning, record keeping, help caring for the children, etc.).

Once you set up an HRA you can claim a business deduction for all uninsured medical expenses such as medical insurance premiums paid by your husband at work, drugs, copayments, diagnostic fees, examination fees, hospital bills, orthodontia, braces, hearing aids, wheelchairs, eyeglasses, contact lenses, etc.

Without an HRA

Let’s say your family spent $6,000 on health insurance premiums and another $4,000 on out-of-pocket medical expenses. If you were not eligible to purchase health insurance through your husband’s employer you could deduct half of the $6,000 on your Form 1040.*

If you were in the 15% federal income tax bracket this would save you $450 in federal taxes ($6,000 x 50% = $3,000 x 15%). The $4,000 in other medical expenses could only be deducted as an itemized expense on Schedule A to the extent they exceeded 10% of your adjusted gross income. For most providers this means they wouldn’t be able to claim any medical expenses on Schedule A.

With an HRA

However, if you establish an HRA you could deduct the entire $10,000 as a business expense. This would save you 15% in federal income taxes and 15.3% in Social Security/Medicare taxes, or $3,030 ($10,000 x 15% x 15.3%). If your state income tax was 5% you would save another $500.

Here’s a helpful brochure that includes a worksheet so you can estimate how much you would save.

The largest company that offers HRA plans is Total Administrative Services (TASC). Their HRA plan is called BizPlan. They have posted several informational videos here and here that explain BizPlan.

10% Discount!

You can receive a 10% discount on the first year’s cost of BizPlan (about $400 – 100% tax deductible) if you use this application form or mention my name and code TOMA when you enroll. 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.

Pay Wages?

BizPlan includes an audit protection guarantee and an employee payroll service. Although you are not required by law to pay your spouse wages to take advantage of the tax benefits of an HRA, BizPlan strongly recommends that you pay your spouse at least a minimal amount. If you choose not to pay wages, you will not be covered under their audit protection plan.

I won a US Tax Court case for a family child care provider who did not pay wages. There has also been an appeals court case (Shellito v. Commissioner) that says the same thing.

If your family has medical expenses of at least $1,000 a year that are not covered by medical insurance, you should seriously consider setting up an HRA.

I previously wrote an article “How Can You Deduct Family Medical Expenses.”

* If you are eligible to be covered you can’t deduct any of the insurance premiums.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.tasconline.com/



Categories: Deductions, Employees, Record Keeping & Taxes

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6 replies

  1. Tom,
    Question: In your example if you spend $10,000 in health care expenses including insurance premiums and your self employment taxes on schedule SE are $1,500, does setting up an HRA eliminate all $1,500 of my self employment taxes?
    Cathy

  2. Yes, plus it will reduce your federal and state income taxes.

  3. Tom,
    That is amazing! My healthcare expenses are almost as much as my net earnings from schedule C, so that means I will potentially pay no taxes.
    Cathy

  4. Tom,
    Our family get our health insurance through my husband’s employer. He’s enrolled in a high deductible insurance with HSA. So, the premium is relatively low but out of pocket can be significant. WIll I be able to take advantage of the HRA by hiring him?
    Yu-Ying

  5. Are we still eligible if we use my husband’s health insurance provided by his job and pay premiums from his checks or must we get separate health insurance for our business?

  6. You don’t need to get separate health insurance to be eligible for the medical reimbursement plan.

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