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 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 the health insurance premiums you paid to purchase health insurance for yourself on your Form 1040.*If you were in the new 22% federal income tax bracket this would save you $1,320 in federal taxes ($6,000 x 22% = $1,320). The $4,000 in other medical expenses could only be deducted as an itemized expense on Schedule A where there are limitations on how much you could deduct.
With an HRA
However, if you establish an HRA you could deduct the entire $10,000 as a business expense. This would save you 22% in federal income taxes and 15% in Social Security/Medicare taxes, or $3,700 ($10,000 x 37%). 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.
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.
* If you are eligible to be covered by medical insurance through an employer, you can’t deduct any of the insurance premiums unless you itemize on Schedule A.
Tom Copeland – www.tomcopelandblog.comImage credit: https://www.tasconline.com/
