If you operate your business as a sole proprietorship and have no employees, you man hire your spouse and adopt a Health Reimbursement Plan and deduct insurance premiums and medical expenses on your business form instead of the itemized deduction schedule. This strategy will work for sole proprietors and farmers.
The term of art is a Section 105 plan. The benefits of the plan are best for sole proprietors and farmers that have no eligible employees.
How does a Section 105 Plan work.
* Hire your spouse to do work for your business
* Institute a Section 105 Plan which allows your Schedule C or Schedule F business to reimburse the spouse for insurance premiums and deductibles and Co-payments the spouse pays
* Do the reimbursement monthly backed up with documentation
* Have the spouse file with the business weekly signed time sheets
* The reimbursements may be considered spouse's total compensation
* If medical reimbursements are the total pay, Form W-2 is not required
* If a Section 105 Plan is established, it must include all eligible employees, thus, it works best where the spouse is the only eligible employee
What are the benefits of a Section 105 Plan ?
* The business may deduct the reimbursement on Schedule C or in the case of a farm Schedule F.
* The deduction reduces income for both income tax purposes as well as self-employment ( FICA and Medicare) purposes
* The employee - spouse does not report the reimbursement as income
* Medicare premiums may also be reimbursed
* Dental and eye care are medical expenses
* Mileage reimbursed at the applicable rate per mile is also a medical expense
* Medical expenses incurred on behalf of the employee spouse, the employee-spouse and dependent qualifies for reimbursement, children up age 27 do not need to be a dependent to qualify for reimbursement
If you were an eligible individual under the "Last-Month Rule" at the first day of each month during the year. (To refresh your memory as to definitions of terms, please refer to our blog "How a Health Saving Account Can Save You Income Taxes" dated July 06, 2016 at www.creasmanfp.com) The "Last Month Rule" means you were an eligible individual on December 1, thus, you may contribute up to $ 3,350 or $6,750 depending on whether your's is a single plan or family plan. You have until April 15, 2017 in which to make the contribution. The contribution is deductible on your 2016 tax return. You may contribute an additional $1,000 if you are age 55 at year-end. However, if you take advantage of the "Last Month Rule", you are subject to the "testing period" provision. The testing period provision is best explained by an example:
You take advantage of the "Last Month Rule" when you contribute $ 3,350 to your Health Saving Account on April 1, 2017. You are under age 55 at December 31, 2016 so the additional $1,000 contribution is not available to you. You deduct the contribution - $3,350 - on your 2016 tax return. If you meet the "testing period rule", there is no downside for taking advantage of the last month rule.
The testing period runs from December 1, 2016 through December 31, 2017. You must maintain your Health Saving Account throughout the testing period.
What if you fail to do so ? You take advantage of the last month rule for tax year 2015. You maintained your HSA until June, 2016. Since you did not meet the testing period provision, you will report as income the deduction taken in 2015 for the amounts allocated to the months during 2015 that you were not an eligible individual. In this scenario 279.17 X 11 months = $3,071 would be included in your 2016 tax as income. Additionally, the $3,071 income would result in a ten percent penalty - $307.
So, you should look before you leap.
Your dependent children may be hired by you if you operate your business as a sole proprietorship. The same is true if the business is a husband-wife partnership.
* Until the child reaches age 18, you are not required to withhold FICA (social security) or medicare taxes from child's wages.
* Neither are you required to "match" these taxes as is required for other employees.
* The amount paid to children as wages reduces your earnings generated by the business. Thus, your income tax, FICA and medicare taxes are reduced.
* Since the child has earned income, he or she can contribute to a traditional or ROTH IRA.
* It is mind boggling how much the amount contributed by the young grows to at child's age 65. Money earned on money, etc. is the ingredient responsible for the accumulation of wealth. When one starts investing at a younger age, the money invested is a small percentage of the final account balance. Additionally, the earning invested in either a traditional or ROTH IRA is not eroded by income taxes until funds are withdrawn.
* There must be established an employer - employee relationship - Time worked records.
* Child must actually perform services and you must pay a fair wage for the services.
* To determine a fair wage Google - "Salary Guide" 2016.
* You must comply with child Labor Laws. The Fair Labor Standards Act provides that youth younger than 16 years of age working in a business solely owned by their parents can work anytime of day and any number
of hours. This exception doesn't apply if the business is engaged in manufacturing, mining or that are involved in activities determined to be hazardous by the Department of Labor.
* Have the child complete a time record daily and submit a weekly record of time worked.
Children are entitled to a standard deduction equal to their amount of earned income (e.g.,wages) up to $ 6,300. A child with earned income may contribute up to $ 5,000 to an IRA account. Combined $ 11,300 of business income may be moved from the parent's income taxed in the parent's income tax bracket, FICA and medicare to the child's zero tax bracket. The child is allowed to draw from his/her IRA account to finance higher education cost without incurring the 10% penalty normally imposed of early withdrawals from IRA accounts.
1. Examination to determine the correct amount of taxes owed
* Self assessment
* Document matching
* Return examination (Audit)
2. Collections Function
* Collects the amount assessed
* Collections personnel are not interested in debating the accuracy of the assessed amount
The taxpayer has the right to be represented by an authorized representative. Authorized representative are:
* Attorneys, Certified Public Accountants, and Enrolled Agents.
* These are authorized to represent taxpayers before both the examination and collection functions
* The taxpayer authorizes representation through signing a Power of Attorney ( Form 2848 ).
* The IRS is required to honor a filed Form 2848
* Quickly answer any notice you receive from the IRS
* Most taxpayers deal with the Automated Collection System (ACS)
* ACS is located at the National Computer Center, Martins bury, W VA.
* The ACS sends notices that are generated by computer
* The ACS usually handles cases that involve $ 100,000 or less in dispute.
* These cases are handled through telephone calls, bank levies, wage garnishments and recording of Federal Tax Liens on all property owned currently or to be owned in the future.
* If your case meets certain critera, it will be sent from ACS to a field (local) Revenue officer. That is a good thing in most cases since you will then be dealing with a person rather than
computer generated notices. When dealing with the ACS, telephone wait time is long and you seldom speak with the same IRS person.
* Revenue officers (ROs) want to close the cases as soon as possible. However, ROS try to settle a case in the best interest of the government and the taxpayer.
Many times they are helpful in finding a better solution to your problem, thus, be cordial and quickly answer all notices and request for information.
* Often the RO will request information that you have earlier sent to ACS. Resend the requested information via certified or registered mail.
* Keep a log of all contact you have with collections. Date, name and employee number of the person you talked with, and a summary of your discussion.
* Also, keep copies of all documents and information sent to the IRS. It is highly likely that you will need to resend it at a later date.
Qualifying for an HSA
Basic requirements to qualify for a Health Savings Account
1. You must be covered under a high deductible health plan on the first day of the month
a) Self-only plan The plan must provide for a minimum deductible of $ 1,300 ( 2016 )
b) Family coverage (Two or more insured) minimum deductible of $ 2,600 (2016)
2. The high deductible health policy is the only insurance coverage the insured has. There are limited exceptions
3. You are not enrolled on medicare
4. You cannot be claimed as a dependent on someone else's tax return for the year.
The benefits of owning a health savings account (HSA)
1. The amounts you contribute to an HSA are tax deductible
a. Maximum 2016 deductible contribution
(i) Self-only plan - $ 6,450
(ii) Family plan $ 13,100
b. The contribution is deductible whether you itemize personal expenses or not
2. The contributions remain in your account until they are withdrawn. Unlike a flexible spending account, HSAs are not a "use it or lose it" trust account
3. Your employer can establish a plan for its employees. The contribution limits are the same for the employer as for you. The limits apply in the cases where
employer contributes less than the maximum and you contribute more.
a) Employer contributions are excluded from income
b) Your cafeteria plan contributions are considered as though made by the employer
4. The income generated by your HSA is not subject to income tax
5. Distributions from your HSA used to pay medical expenses are tax free. Of course, these expenses cannot be used as itemized medical deductions
6. Your HSA is portable even if your employer established and funded the account
7. Maximum annual deductible and out-of-pocket expenses you pay before the insurance policy must start paying (stop-loss limits).
a) Self-only coverage $ 6,550
b) Family coverage $ 13,100
8. Certain preventive care benefits and screening services can be p-aid from your HDHP before you meet the HDHP deductible. Examples are tobacco cessation programs
and obesity weight-loss programs.
Distributions from an HSA
You will generally pay medical expenses during the year without being reimbursed by your high deductible health plan until you reach the annual deductible
for the plan. You may ask the trustee of your HSA to send you funds from the HSA to cover the annual deductible. Although you received a deduction for your contribution or the employer's
contribution was excluded from income, your withdrawal from the HSA are not taxable income if used to pay qualified medical expenses
Distributions from your HSA used for purposes other than qualified medical are taxable income. In addition, there is a 20% penalty imposed on amounts withdrawn that are not used to pay qualified medical expenses
What are qualified medical expenses ?
Medical expenses that are deductible as such if you itemize your deduction. These include doctor, dental, eye care, prescription drugs, insulin, but, generally not health care insurance premuims
paid while you are unemployed.
The medical expenses must be incurred by you and your spouse, dependents you claim on your tax return, and any person you could have claimed as a dependent on your tax return except that
1. The person filed a joint return
2. The person had gross income of $ 4,000 or more, or
3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's tax return