Great Tax Deduction

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Triple Tax Advantages: Reimburse Your Employee ­Spouse for Health Insurance If you are self ­employed or a single member LLC taxed as a proprietorship and you have your spouse as your only eligible employee, you can gain significant tax savings by reimbursing your employee spouse for an individual health insurance policy purchased through a public health insurance exchange (including family coverage that covers both spouses and dependents). Structuring the reimbursement correctly creates a business expense deduction, saves on employment and income taxes for the business and the spouse, and helps the owner and spouse avoid tax penalties under health care reform. With health care reform’s individual mandate now in full force, every U.S. citizen must carry health insurance coverage (called “minimum essential coverage”) or risk paying a tax penalty. Individuals may obtain that coverage through employer plans (called group plans), government­ sponsored programs (like Medicare, Medicaid, or military insurance), or through newly formed state health insurance exchanges. Big Picture Health care reform has created significant obligations—and a ton of confusion—for everyone. Not only has it added the obligation that all individuals obtain health coverage, but it has created restrictions and requirements for insurers and employers that provide coverage. For the self­ employed and single­ ember limited liability companies taxed as proprietorships that have their spouses as their only eligible employees, the business reimbursement of the employee­ spouse’s health insurance coverage obtained on a public health insurance exchange means up to four tax benefits (three for sure). 1. The employee­ spouse does not recognize income on the reimbursement itself. 2. The owner avoids the super large ($100­a­day) penalty for reimbursing an employee for individually purchased health insurance. 3. The owner takes a tax­favored business deduction for the reimbursement payment. 4. The spouse might qualify for a premium tax credit, and potentially purchase a subsidized exchange plan that covers the spouse and the owner (and other dependents). Advantage 1: Tax­Free to Employee­ Spouse The tax code allows employers to reimburse or otherwise pay medical­ related expenses of an employee, the employee’s spouse, and the employee’s dependents without including those amounts in the employee’s gross income.6 This is big. The family medical reimbursement is not W­2 income to the employee spouse. Accordingly, the employee­ spouse does not pay any federal employment taxes on the reimbursement. And you, the employer, also do not pay any federal employment taxes (FICA, Medicare, or federal unemployment). Advantage 2: Escape the $100­ a ­Day Penalty Health care reform generally prohibits the practice of reimbursing employees for individual policies.7 But that prohibition does not apply to a plan that covers fewer than two eligible employees.8 So the proprietorship can reimburse the employee­spouse without including the reimbursement in the spouse’s gross income, while also saving on employment taxes and avoiding penalties that apply to businesses with two or more eligible employees. Advantage 3: Business Deduction In addition to the exclusion from federal payroll taxes, the owner takes a Schedule C business deduction for the medical reimbursement payment.9 The business deduction does two things: · First, it reduces the owner’s self ­employment taxes. · Second, it reduces the owner’s income taxes. And remember, the spouse received the medical reimbursement as a tax ­free fringe benefit. The bottom line is that the medical reimbursement is deductible by the proprietor and not taxable to the employee spouse. Advantage 4: Government Subsidy The fourth advantage relates to the spouse’s ability to still qualify for premium subsidies in the exchange. As mentioned above, generally speaking, if an individual is eligible for an employer sponsored group health plan, the individual is not eligible for a premium tax credit. In this instance, however, because the plan covers only one employee, the arrangement falls outside the definition of an employer ­sponsored plan.10 Therefore, the reimbursement, by itself, does not cause the owner or spouse to lose eligibility for the premium tax credit. If the spouse qualifies for the premium tax credit, you as a Schedule C business owner can reimburse the spouse for the net cost of the health insurance. In effect, this gives you and your spouse both the tax ­deductible reimbursement from the business and the subsidized premium tax credit from the federal government via the exchange. Of course, you may well have income that exceeds 400 percent of the federal poverty line (the actual dollar amount depends on the location of the individual and the number of dependents). With income too high, there is no government subsidy, but the tax­deductible business reimbursement remains. Putting the Plan in Place Your first step is to put your medical reimbursement plan in writing. You need to do this to comply with IRS Regulation 1.105­11(b), which defines a self­insured medical reimbursement plan as a separate written plan for the benefit of employees that provides for reimbursement of employee medical expenses referred to in section 105(b).11 To help you put your plan in place, here’s a sample Section 105 medical reimbursement plan document (click here). This document is for 2015, and it works for 2016, as no new legislation has changed the rules. Four things to keep in mind about the plan: 1. Make the plan cover the employee­ spouse. 2. Make the plan a family plan. 3. Require the employee­ spouse to submit medical expenses on a monthly basis. 4. Reimburse the employee spouse for every medical expense on a monthly basis (monthly makes the plan business­like). Also, to help you get your arms around this great benefit, take a moment to read the following articles: · Does Your Section 105 Plan (HRA) Work for You after Obamacare? · Shellitos Win Their Section 105 Medical Reimbursement Plan Deductions · Is a W­2 Wage Needed to Create an Employee­ Spouse 105 Plan? Takeaways When you implement the employee­ spouse health reimbursement strategy: 1. Your proprietorship deducts the reimbursement as a business expense. 2. Your employee­ spouse does not report the reimbursement as income. 3. Your business saves on employment taxes. 4. Your spouse saves on employment taxes. 5. You avoid the significant penalties that apply to reimbursing individually purchased health insurance. 6. You and your spouse avoid tax penalties under health care reform’s individual mandate. 7. You and your spouse potentially save money through premium tax credits in the exchange. If you can employ your spouse in your Schedule C business and you have no other employees, start saving money now. Employ your spouse and get all the tax advantages, obtain the health insurance coverage you need, and avoid health care reform penalties. Please call us if you have any questions. Tax season is here. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.