How to Turn Your Family Medical Expenses Into a Business Deduction

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. BizPlan also offers a payroll tax service that can handle all the payroll tax forms involved inpaying yur husband.

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 through an employer sponsored plan you can’t deduct any of the insurance premiums.

Tom Copeland – www.tomcopelandblog.com

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



Categories: Deductions, Record Keeping & Taxes

4 replies

  1. Just verifying what was said above…so if my husband is on my payroll I can deduct the medical insurance premiums that are taken out of his fulltime job’s paycheck? I already have an HSA acct through his work but we are only allowed Rx and other medical expenses. Please let me know if my understanding is correct. Thank you.

    • This medical reimbursement plan that my article describes will allow you to deduct medical expenses not otherwise covered by insurance and not covered by an existing HRA plan through his employer. So, if he pays medical insurance premiums that are not part of his HRA plan, then you can include them in the medical reimbursement plan I describe.

  2. Does this only apply to family members? What if my fiancée and I are not married yet, would we benefit from an HRA? He has more than $1000 in medical expenses each year because he has opted for a high deductible insurance plan through his employer.

    • You could hire your finance but then you could only include his medical expenses in the HRA, not yours. So, it would still be worthwhile.

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