The 12 Tax Days of Christmas: Day 6
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Rather than your true love sending you a partridge in a pear tree, wouldn’t you appreciate some money-saving tax tips? For my year-ending 12 Tax Days of Christmas series, I’ll dig back into the archives of previous topical columns to reiterate understandable, realistic and legitimate tax strategies that you need to implement now in order to have a much smaller tax bill come April 15.
For this fifrth tax day of Christmas, it's time to highlight the Health Reimbursement Arrangement (HRA), which essentially allows you to set up your own “benefit plan” for health care and reimburse yourself for all your health-care expenses. Most Americans don't get a tax deduction for extra medical expenses. They can't itemize (it's usually not worth the effort with AGI limits), or they don't qualify for a Health Savings Account. However, if you own a small business, the HRA could be the perfect fit. Just imagine if you could deduct 100 percent of these medical costs. It could be life-changing!!
The only challenge can be putting the right structure in place to allow the plan to work. Sometimes it takes a little extra business planning and some attention to bookkeeping to make it happen, but it can be very lucrative and worth the time spent.
Why Is It a Year-End Tax Strategy?
Well, if you implemented an HRA at the beginning of 2019, you want to add up all your qualifying medical expenses and "process" a reimbursement through the proper channels. If you don’t, then you can’t take the deduction. You can’t just say you reimbursed the medical expenses of your employee (even if it’s you) without being able to show the paper trail.
Regrettably, if you are operating as an S corp, you cannot adopt an HRA for yourself. Moreover, if you simply have rental property held by an LLC, you can’t use an HRA. There are very specific methods for implementing one, which differ depending on whether you are single or married.
Related: The 12 Tax Days of Christmas: Day 5
HRA Implementation for a Single Person
If you are single and have multiple businesses or an S corp for your operations, you must form a C corp and provide a payroll and HRA plan for yourself as an employee under this new C corp. Your other businesses can “lease” you from the C corp. If you have an S corp, your payroll requirement is now satisfied by leasing you from your C corp. Yes, this procedure requires you to form a new company and prepare tax returns for it; thus, it’s essential to do a cost-benefit analysis and make sure the procedure pays for itself.
HRA Implementation for Married Persons
If you are married, you will typically create a sole-proprietorship support company for your other businesses, including S corps, and hire your spouse. As part of your spouse’s compensation, he or she will receive an HRA covering all of their medical expenses and those of their dependents -- including you! So essentially, you “back door” yourself into an HRA through your spouse. Of course, there are a few details and particulars to implementing the plan, but they can be simple and affordable to put into place.
The beauty of the HRA is the spouse’s payroll is essentially the HRA amount. No need to issue a W-2. Also, this is not a "use it or lose it" plan, but a reimbursement plan that can allow a couple or family to deduct almost all of their medical expenses at any age.
On a cautionary note, keep in mind that if you have other employees in your businesses, you’ll have to carefully determine if you must cover them with the same plan. Remember these quick pros and cons of the HRA.
- You can deduct 100 percent of medical expenses in a solo entrepreneur plan.
- Self-administered with no health-insurance requirement.
- Great for the “unhealthy” (i.e. you have more than $4,000 in medical expenses per year, the tax benefits exceed the cost of implementing and maintaining the plan).
- You have no insurance with an HRA if your health gets worse (get insurance separate).
- Requires a family management company (sole prop) if married.
- Requires a C corp if you are single.
- No savings account option.
Related: The 12 Tax Days of Christmas: Day 4
In either case, whether married or single, add up how much you are spending on medical expenses annually (not including insurance), and see what the tax benefit would be on your return if you could legitimately deduct those expenses. If you are single, it’s required to use a C corp. See Chapter 11 of The Tax and Legal Playbook: 2nd Edition for more information on seven different tax- and money-saving strategies when it comes to medical insurance and health-care expenses, and determine if an HRA would make sense for you or your buisiness.