This article is part of the End of Year Tax Tips Series from tax and legal expert Mark J. Kohler.
Many entrepreneurs don’t realize it, but as small-business owners we have more options to save on healthcare costs than any other group of Americans. The tax-planning and cost-saving strategies can be phenomenal. It simply takes a little bit of research and consulting with professionals to create the perfect plan for you.
Here are some healthcare updates and strategies to consider that can help you save thousands of dollars when you build your plan of attack.
Claim a health insurance deduction.
This is a huge benefit for small-business owners that cannot be taken advantage of by average Americans. Health insurance is 100 percent deductible for a small-business owner, whether you cover your other employees or not. A non-business owner would have to try and itemize this expense -- and to no avail. However, if you own and operate your business as an S-Corp, it’s required and critical that you report the payment of your health insurance in a specific manner. Your W-2 as a shareholder/employee needs to indicate the amount of health insurance paid by the company on the shareholder's behalf. If it doesn't, the IRS can disallow the deduction.
YEAR END TIP: S-Corp owners issuing their final W-2 for the year need to indicate the amount of health insurance paid by the company in order to take the deduction.
Take an employees' health insurance tax credit.
If you actually do pay for some portion of your employees' health insurance premiums, the Small Business Healthcare Tax Credit for Small Employers is ripe for the taking. This little gem is a literal dollar-for-dollar tax credit against any taxes you owe and up to 50 percent of any healthcare premiums you pay for on behalf of your employees. There are a number of rules that really aren’t that bad, but they do require you to cover at least half of the cost of single (not family) healthcare coverage. In addition, you must have fewer than 25 full-time equivalent employees, and those employees must have average wages of less than $50,000 a year.
YEAR END TIP: Re-evaluate your healthcare plan for your employees that begins January 1, 2017, and make sure you qualify for the tax credit.
Don’t try and simply “itemize.”
Most Americans have given up trying to deduct their medical expenses because they "phase out" of the write-off on their personal return. In fact, more than 97 percent of Americans phase out of any substantive healthcare expenses on the Schedule A itemized form. Moreover, others, especially young Americans, are SHOCKED to discover that medical expenses typically aren't deductible -- unless you get creative!
Use the Health Savings Account (HSA) strategy.
This strategy is as strong as ever and a huge opportunity for the small-business owner. Although non-business owners can use a HSA, as a small-business owner you have much more control over your health insurance plan and can utilize creative strategies to acquire the right type of insurance to allow for an HSA. In order to qualify, you have to enroll in a high-deductible health plan (HDHP), and if you’re generally healthy, this is a great chance to save on premiums and avoid the doctor as much as possible.
In the meantime, your HSA are deductible from your gross pay on the front page of your tax return, potentially putting you into a lower tax bracket. In 2016, the tax deduction is up to $3,350 for singles and $6,750 for families. The funds grow tax-free and aren’t a "use it or lose it" plan. Grow and build the account for your future healthcare needs. You can also spend the money tax-free on qualified medical expenses, and you can invest the money in much the same way you invest an IRA. You can even invest HSA funds in real estate.
There is an important distinction regarding the deadlines to take advantage of an HSA in 2016 or 2017. There is the set-up deadline and the funding deadline:
- Dec. 1, 2016 – Deadline to have a HDHP in order to qualify for a contribution and deduction in 2016. (Keep in mind the open enrollment begins Nov. 1, 2016.)
- April 15, 2017 – Deadline to contribute to your HSA for 2016 and receive the tax deduction on your 2016 tax return.
Consider the Health Reimbursement Arrangement (HRA).
This is a fantastic strategy strictly for business owners, and it really benefits those with higher-than-average medical expenses. The HRA allows you to set up your own “benefit plan” for health care and reimburse yourself for ALL of your health care expenses -- thereby getting a 100 percent write-off for all of your medical expenses.
Now, this strategy must be used by a small-business owner, and again, the average American can’t even dream of implementing this strategy. The only challenge can be the structure you need to use in order to make the plan work. Sometimes it takes a little extra business planning and structuring -- and certainly some attention to bookkeeping -- to make it happen. But again, it can be very lucrative and worth the extra time.
YEAR END TIP: Adopt your Health Reimbursement Plan by January 1, 2017, so it is effective for the entire year of 2017.
With a little bit of tax planning with a CPA that understands the HRA, you can take massive tax deductions for your healthcare expenses over and above your health insurance.
Choose the right health insurance plan.
Finally, it’s now become an important year-end issue with the advent of the "enrollment period." We need to be thinking about the right type of insurance plan for next year -- now and while we consider our tax strategies.
The first step is avoiding the insurance penalty. Keep in mind that the penalty for not having valid health insurance in 2016 jumps to $695 per adult and $347.50 per child, and it maxes out at $2,085 per family. The income-based penalty rises to 2.5 percent and is the greater of the two. The open enrollment period for business owners is Nov. 1 to Jan. 31, so make sure you have your application in and don't delay.
Make sure also to understand the types of “metal” health insurance plans and the differences between each one. Essentially, you will have to choose from platinum, gold, silver and bronze plans, with different benefits, deductibles and, of course, premiums. Generally, the platinum plans provide the greatest benefits and lowest deductibles. On the other extreme, the bronze plans have high deductibles opening the door to the HSA and are also the most affordable. Keep your anticipated health in mind as you try and choose the right type of plan for your situation.
Be aware of what enrollment options are available in your area. Are you using a state exchange or HealthCare.gov? Don’t feel you are stuck with these exchanges. They can be a great place to start, but shop around to understand your options and then seek out a provider directly or through an insurance agent. Also, don’t forget the open market. The private marketplace for insurance is still alive and well.
Finally, many shopping for insurance don’t realize that the “network” is the real issue. As you look closer, you will be surprised to see the wide range in premiums among the various types of “metal” plans. The reason isn’t just the benefits -- it's also the network of doctors that come with a particular plan. Many people don’t realize that the savings under certain policies are because the insurance company provides a smaller network of doctors under the plan, and it may be stripped of additional benefits, such as dental or vision care.
Bottom line, it’s important to have a coordinated plan for your taxes and your healthcare expenses. They are related to each other more than you may realize. Don’t leave it to chance. Plus, if you have more than $5,000 a year in out-of-pocket medical expenses, e.g. co-pays, deductibles, prescription drugs, dental, eye care, chiropractic, etc., then chances are, you could benefit from some additional planning. Just imagine if you could deduct 100 percent of these medical costs -- it could be life changing.Mark J. Kohler is a CPA, attorney, radio show host and author of The Tax and Legal Playbook: Game Changing Solutions For Your Small Business Questions and What Your CPA Isn’t Telling You: Life Changing Tax Strategies from Entrepreneur Press. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.