Tax Tip Tuesday No. 1: Your Tax Accountant Can Help You Work With Your Spouse!
by Ken Smith
Tax Tip Tuesdays Strategy No. 1: Sole Proprietors – Hire your Spouse with Tax-Saving Results
Would you and your spouse make dynamic duo in the workplace? There have been many successful and famous Husband and Wife work partnerships. Irene & Frediric Curie won the Nobel Prize for Chemistry for discovering artificial radioactivity. Lucy & Desi, were stars of stage and screen. Gracie & George Burns, were famous on radio, vaudeville, movies, and television.
Perhaps you can be the next successful husband and wife team! Let the expert tax accountants at Brown CPA Group, Ltd. help make it possible. Sole proprietorships and single-member LLCs (SMLLC) can take advantage of IRC Sec. 162(l), which generally allows an above-the-line deduction for 100% of qualified medical insurance premiums to cover the owner, spouse, and dependent children.
For those unfamiliar with the term “above-the-line”, above-the-line deductions are deductions which are subtracted from Gross Income to arrive at Adjusted Gross Income (AGI). Adjusted Gross Income is the income at the bottom of the first page of the Individual Form 1040. Deductions on the first page of the individual 1040 are above-the-line, deductions on the second page of the Individual 1040 are not.
Owners of sole proprietorships and single-member LLCs (SMLLC) can Increase the insurance deduction by hiring their spouse as an employee, then set up a Section 105 medical expense reimbursement plan.
To implement this tax saving strategy, hire your spouse as a legitimate employee of your sole proprietorship or single-member LLC either full-time or part-time. Then contact BCPA to assist in the installation of a self-insured Section 105 medical expense reimbursement plan.
Self-insured means paid for out of the earnings of the business. The reimbursement plan, which must be in writing, is provided as a tax-free fringe benefit to the employee-spouse. BCPA can assist you in preparing this required written document.
The reimbursement plan covers uninsured medical costs for the employee-spouse and her spouse (the business owner) and her dependent children because the spouse is an employee of the business.
The required written plan document will define uninsured medical costs. Uninsured medical costs covered by the Section 105 medical expense reimbursement plan include family medical and dental insurance premiums, out-of-pocket insurance deductibles and copayments, prescriptions, and most other uninsured medical, dental, and vision care expenses.
The amount of medical expense reimbursements provided to the employee-spouse must be reasonable in relation to the work performed by the employee-spouse per [IRC Sec. 162(a)(1)]. It is generally prudent to enlist the help of a professional from BCPA to draft the reimbursement plan document to include a “reasonable” annual reimbursement cap on payments. The cap can be adjusted annually or whenever the employee-spouse’s work arrangement changes.
The Section 105 medical expense reimbursement plan payments are received tax free by the employee-spouse because the payments qualify as a tax-free employee fringe benefit. A business owner can deduct 100% of the reimbursement payments as an expense on Schedule C. The Schedule C gives the business owner a double tax break, reducing both federal income tax and self-employment tax.
In summary, the employee-spouse and Section 105 medical reimbursement plan tax reduction strategy provide the business owner a write off on the Schedule C which includes 100% of premiums for family health coverage plus 100% of family out-of-pocket medical expenses. The Section 105 plan can also reimburse the employee-spouse for qualified long term care (LTC) insurance premiums to cover the employee-spouse, the business-owner, and their dependents. The LTC premiums can be reimbursed in full, and deducted in full by the client’s business.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.
