TIP #10: Medical Expenses are Less Painful with a Deduction
There seems to be a lot of misunderstanding regarding medical expenses these days. So lets see if we can make it a little bit clearer.
There are two rules for deducting medical expenses. One is for health insurance premiums and the other is for deducting medical expenses or procedures.
Health insurance premiums are fully deductible if you are self employed. However, there are a few small rules.
- You cannot claim the deduction for any month in which you or your spouse were eligible to participate in any employer provided health plan. So if you are self-employed but your spouse’s job makes you eligible to receive health insurance then you cannot deduct any extra premiums you might have.
- Deducting your premiums cannot create a loss in your business. If your business generates a loss, that is to say your deductions are greater than your revenues, then you cannot deduct your premiums.
- If you are in a partnership or an LLC with other members and are taxed as a partnership, and you pay for your own health insurance premiums, you can claim a deduction. However, if the partnership or the LLC pays for the premiums then there are special tax reporting rules and you should talk to your accountant about them. You still have to meet the two rules above.
Medical expenses and procedures however are not automatically deductible. They also have a few rules. Normally they are not deductible unless the expenses are greater than 10% of your adjusted gross income.
For most people this is not realistic. This means if your income was $50,000, then in order for anything to be deductible, the expenses would have to exceed $5,000 for the year.
- The expense must treat a medical condition or illness. If you wanted a nose job just to look differently, this would not qualify.
- Over the counter drugs can be qualified if you get a doctors prescription for them.
Bottom line: You must have a lot of medical expenses in a single year to qualify. However, there is a better way to deduct medical expenses.
Avoiding the Threshold Rules
The HSA Account: This is like a special bank account that you can deposit money into tax free that you only use to pay for medical expenses not covered by insurance. It can be used to pay deductible, co-insurance, braces for your kids, etc.
You must have a high deductible plan however and there are limits on how much you can contribute. We won’t go into too much detail about them here but you should talk with your financial planner or your financial institution to evaluate your options.
Self Insured Medical Reimbursement Plan: This is a unique situation that could allow you to deduct medical expenses without the 10% threshold. You should seek the advice of a competent accountant to help you set this up. Here are the basics of how it works:
- You hire your spouse in your business and make them the primary insured on the plan. (Note: they must actually work for you and you must pay them a reasonable wage for what they do).
- Your spouse elects “family coverage” to cover you and dependents.
- The business now pays for spouse’s medical expenses and gets to deduct them. They are not being deducted as medical expenses. Instead they are deducted as a fringe benefit for your employees.
Note: A self-insured medical reimbursement plan must be non-discriminatory. Thus, if you have any full time employees who work for you over 25 hours a week, you must also cover them under the same plan. However, you can require employees to work for the business for up to 3 years before they would qualify.
The sum of the wages plus the medical expenses paid for through the plan must be reasonable. For example, if your spouse works 25 hours a week and you deduct $100,000 in medical expenses this would not be reasonable unless that was similar to a wage you would have to pay an outside agency to do the same work for you.
Please seek competent advice from a professional to see
if you could qualify for one of these plans.