Tax Musings of a Burbank CPA: Can’t Deduct Medical Expenses? Maybe You Can!

As most of you know, because of the 10% of AGI limitation, it has become harder and harder to deduct medical expenses on your individual tax return.  Well, in certain circumstances you can still get a medical deduction.

If you have a business where you are self-employed, you have an option to deduct your medical insurance on page one of your 1040 instead of as an itemized deduction.  This is the “self-employed health insurance” provision of the tax code.  There are some provisions you have to follow to get the deduction as follows:

1. YOU ARE A SOLE-PROPRIETOR OR A SINGLE PERSON LLC:   If your business generates a profit, you can deduct your health insurance expense for you and your dependents on line 29 of your 1040 up to the profit of your business on line 12.

2. YOUR BUSINESS IS A PARTNERSHIP OR A REGULAR LLC:  The health insurance should be paid or reimbursed to you through the entity you are a partner of.  Once again, you can deduct the insurance on line 29 up the the profit from the business on your form K-1.

3.  YOUR BUSINESS IS AN S-CORPORATION:  If you are a shareholder of the corporation and your company has a group insurance plan, you have to jump through some hoops (you have to take the insurance as a taxable fringe benefit on your W2), you can then reduce the W2 on line 7 by the self -employed health insurance deduction on line 29.  The effect is to reduce the S-Corporation profit by the insurance.  If you have a plan of reimbursing health insurance of the shareholder, there are other restrictions, it is best to check with your tax preparer to see if you still qualify to deduct the insurance.

4.  YOUR BUSINESS IS AN C-CORPORATION: The corporation will be able to deduct your insurance directly, so you may be able to adjust your payroll to cut your tax liability.

If you qualify to deduct your insurance this way, you may be able to further your deduction by increasing your insurance costs by reducing copays and total out of pocket costs of your policy (you will have to look at the tax benefit of the additional premium and whether you would save money by reducing those items – this will require some planning based on previous medical expenses.)

Making a few changes could result in some tax savings, so it may be worth taking a look at. 

 

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