Income taxes and rising healthcare costs rank as two of the top financial concerns for self employed taxpayers. Unfortunately, it’s really difficult to deduct medical expenses under the new tax reform rules. But Realtors who know how to write off a child’s braces as a deductible business expense gain a double benefit.
As a general rule, American taxpayers must itemize deductions (rather than taking the standard deduction) in order to deduct medical expenses on their Form 1040 Tax Return. If you do itemize (and only about 10% of us still do, under tax reform), then the total cost of all your co-pays, deductibles, and other out of pocket medical expenses must exceed 7.5% of your Adjusted Gross Income (AGI) to be able to lower your tax.
Here’s what this means for a taxpayer with an AGI of, let’s say, $80,000. His or her out of pocket medical costs must exceed $6,000 ($80,000 x 7.5%) in order for the first dollar of those medical expenses to be deductible.
Which is exactly why most taxpayers don’t qualify to write-off their medical expenses.
For more information on deducting medical and dental expenses, see IRS Publication 502.
But wait, because our story doesn’t end here.
There are two ways Realtors can use take advantage of their self-employed status to reduce Uncle Sam’s tax bite.
The IRS code gives a tax break to Real Estate Agents and other 1099 professionals who pay self-employed health insurance premiums. You can claim these costs as a Self Employed Health Insurance adjustment on Schedule 1 of Form 1040.
And it doesn’t matter how much commission income you earn; you get a dollar for dollar reduction in your taxable income, regardless of your AGI.
So that certainly helps as far as writing off health insurance premiums goes. But what about co-pays, deductibles, and other out of pocket healthcare costs?
A little-known strategy with big tax advantages
There’s a little-known strategy Realtors can use to write-off these costs as a deductible business expense, and it’s outlined right in Section 105 of the Internal Revenue Code. Section 105 has been around since 1954, and allows for reimbursement of medical expenses under an employer-sponsored health plan.
In reality, this allows the self-employed Real Estate Agent or Broker to deduct his/her family’s health costs–including co-pays, deductibles, and even health insurance premiums–from federal, state, and FICA/Medicare taxes!
Note that a Section 105 plan is an “employer sponsored” benefit plan. That means somebody needs to qualify as your employee. The problem is, if you run your business as a sole proprietorship or Single Member LLC (80% of all Realtors operate this way), then you’re considered “self-employed,’ and you can’t get benefits from the plan. So you have to figure out another way to qualify. Hiring your spouse is the way to qualify.
Here’s how you implement this strategy:
- Hire your spouse, paying him or her as a W-2 employee in your business
- Establish a Medical Expense Reimbursement Plan (“MERP”), otherwise known as a “Section 105 Plan”.
- Reimburse your employee (ie., your spouse) for all the medical costs he or she incurs for (a.) himself/herself, (b.) his or her children (ie., your children or step-children), and (c.) his or her spouse (ie., you!).
Now you’ve avoided that 7.5% floor that disqualifies most taxpayers from taking medical expense as an itemized deduction, and have converted those non-deductible healthcare costs into deductible business expenses.
This strategy works for more than just the cost of braces.
A Section 105 Plan also allows a qualified taxpayer to deduct:
- Health insurance and dental insurance premiums for eligible employee(s) and family.
- Qualified long-term care insurance premiums.
- Out-of-pocket medical, dental, and vision care expenses for eligible employee(s) and family.
- Life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).
With this tax strategy you get a double tax benefit. You not only deduct every penny of medical expenses against your taxable income; you also offset your self-employment taxes with the expenses. For many Realtors, this translates into a $400 tax savings for every $1,000 of medical expenses you deduct under you Section 105 plan.
Today, Section 105 plans are widely accepted, with over 50,000 small business owners taking advantage of this tax deduction.
For more information on how to qualify for, and set-up, a Section 105 plan, please contact me directly. I’m here to help.
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