How to Make the Most of Medical Benefits on Taxes

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It’s always wise to optimize the tax efficiency of medical benefits. But it’s even more crucial during a pandemic. Here’s how to keep your returns as healthy as possible.

The year 2020 may mean that more people have high medical expenses, with millions of Americans having tested positive for the coronavirus. On top of those stresses, many individuals are grappling with reduced income and preparing for their tax burden in April 2021. 

It’s never been a better time to try to make the most of medical benefits to avoid overpaying. The IRS allows for certain deductions related to qualified medical expenses, including insurance premiums, in some cases. This article covers:

  • Deductible medical expenses
  • When you can deduct insurance premiums
  • How to know whether to take the standard deduction or itemize your deductions
  • Why you should work with a tax professional

Here’s a brief overview on making the most of medical benefits on your tax return.

What medical expenses are tax-deductible?

Medical expenses are only deductible when you pay out-of-pocket, including insurance premiums, in specific situations.

If you pay for a federal marketplace plan and don’t receive subsidies on your premiums, you can deduct the full payments on your federal return. If you receive subsidies, you can only write off the portion of the total you paid yourself.

However, premiums paid under an employer-sponsored health plan are not tax-deductible since the payments are already taken out from paychecks pre-tax. Health savings account and flexible spending account contributions, which are also paid pre-tax, are also not tax-deductible. These amounts are already exempt from federal taxes.

COBRA insurance, a plan that continues your employer-sponsored coverage after you leave a workplace, is paid entirely by the individual after-tax, so premiums are tax-deductible. Medicare premiums for Parts B, C, or D with Medigap are deductible. Part A isn’t if Social Security covers the premiums.

To deduct medical and dental expenses, you must itemize your deductions on your tax return. You can only count the total medical expenses that exceed 7.5% of your adjusted gross income (AGI), which was lowered from 10% at the end of 2019.

According to the IRS, deductible medical expenses include:

  • Physician and nontraditional medical practitioner fees
  • Inpatient hospital care or residential nursing home care costs
  • Acupuncture or addiction treatment costs
  • Prescription drug payments, including birth control
  • Costs of transportation to medical care
  • Dentures, eyeglasses, contacts, hearing aids, crutches, wheelchairs, and the like
  • Therapy expenses
  • Medical testing costs
  • Costs of long-term care
  • Other qualifying expenses

Items like burial costs, nonprescription drugs, toiletries, cosmetics, or cosmetic surgery are not deductible. Remember that you also can’t write off any bills that insurance covers—only out-of-pocket expenses.

Standard deduction or itemized deductions?

Now, you may be wondering whether you should take the standard deduction when filing your annual return or if your medical expenses make it smart to itemize instead.

The standard deduction for 2020 taxes is as follows:

  • $12,400 for single filers
  • $18,650 for heads of household
  • $24,800 for married, filing jointly

If your deductible medical expenses are lower than these numbers, it benefits you more to take the standard deduction. But if you have higher costs than the standard deduction, itemize to save some money. 

Taxpayers can use form Schedule A 1040 to calculate expenses. And keep in mind that your approach can change from year to year, so you can decide to itemize one year and take the standard deduction the next, depending on the medical expenses you incurred. 

Get expert help with your taxes

Tax laws sometimes change, and new regulations could have significant impacts. For example, a range of tax benefits were instituted to ease the burden of individuals and businesses during the pandemic. It’s helpful to work with a professional to be sure you’re calculating and reporting everything correctly and that you’re taking advantage of every credit and deduction for which you qualify. If you still have questions about your medical benefits and qualifying expenses—or any business expenses—get help when you start running the numbers. 

At Provident CPAs and Business Advisors, we offer tax and business services to help you minimize taxes and focus on your financial health. Whether you’re self-employed or are running a small- to mid-size business, we can step in to help you save now and plan for a successful future. 

Get in touch with our team of experts to learn more about our services.

Switch Your Structure, Transform Your Taxes

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Are you forming a business? Thinking of switching your structure? There are pros and cons to each option, so understand which will help you meet your goals and pay less tax.

The structure of a business can make a big difference come tax time. How can you best shape your enterprise for optimum tax efficiency? In addition to taxes, there are crucial venture capital and operational considerations to take into account, too.

Let’s dive into the different business structures, how they impact your taxes, and other pros and cons of each one. Here’s what we’ll be covering:

  • Sole proprietorships
  • Partnerships
  • LLCs
  • Cooperatives
  • C Corporations
  • S Corporations

Sole proprietorship

If you run a business on your own, you are likely operating a sole proprietorship. This means that you and your business are one and the same, financially speaking. When you pay taxes each year, all of your business income is reported on your individual tax return. Keep in mind that this means you are responsible for business liabilities since you and the organization are the same entity.

To file taxes, you’ll use Schedule C and Form 1040. You’ll probably have to pay self-employment tax, which comprises the amounts of social security and Medicare taxes typically covered by an employer.

And a final, important note about sole proprietorships: estimated taxes. When you don’t receive a W-2 from an employer, you have to pay estimated taxes quarterly, in addition to the annual return.

Pros:

  • Low tax rate when compared to other business structures
  • Easy and inexpensive to form and run
  • Only file one tax return

Cons:

  • Personal liability
  • Estimated taxes

Partnership

A partnership is created when two or more people share ownership of the business. You can have a general partnership, where everything is divided equally, or a limited partnership or limited liability partnership.

The partnership itself is not a taxable entity. However, it still must file an annual return to report operations information, though it does not pay income tax. Instead, business income is reported as pass-through income to partners, and they are taxed on that income through their individual tax returns.

Pros:

  • Easier to get capital than with a sole proprietorship
  • Share the financial burden
  • A partnership doesn’t pay income taxes

Cons:

  • Partners are personally liable for other partners’ debt

Limited liability company

A limited liability company (LLC) is a common business structure because it’s somewhere between a partnership and a corporation. The business owner could be a single member, or it could have multiple members.

As with a partnership, members report their business income on their personal tax returns, but they may still have to pay self-employment taxes.

Pros:

  • Income is passed through
  • Some liability protection
  • More opportunities to raise capital
  • Income that’s considered surplus is not taxed

Cons:

  • Members may have to pay self-employment tax

Cooperative

Cooperatives, or co-ops, are legal entities that are operated by the people they serve. Members vote on business decisions by owning shares, and they all benefit from the profits. Even though co-ops are operationally similar to corporations, income is still passed through to the members, and they pay taxes on their personal returns.

Pros:

  • Surplus earnings are not taxed
  • May apply for government grants
  • Pass-through tax structure

Cons:

  • Owners may not see as much profit

C corporation

Many people decide to form a corporation to take advantage of the limited liability benefits, meaning that the entity protects the owners from both legal and monetary responsibility.

Unlike the other business structures, corporations have to pay income taxes on profits since they are taxable entities. This fact can lead to double taxation for owners in some instances—the corporation pays taxes on profit and then again when shareholders receive dividends.

Pros:

  • Liability protection
  • Easier to get funding
  • Corporate taxes can be lower than individual taxes

Cons:

  • Double taxation
  • Individuals don’t have as much control

S corporation

S corporations are separate legal entities, but they are treated like a partnership or LLC in that they are not taxable themselves. Income is passed through to owners who report the income on their personal returns.

Pros:

  • No double taxation
  • Liability protection
  • Owners are separate from the company

Cons:

  • Cannot have more than 100 shareholders
  • Not as attractive to investors as C corporations

Find the right fit with the help from a tax professional

There are numerous options when forming a business. You have to consider how you’ll generate capital and whether it’s essential if a structure will attract investors. And each possibility is treated differently when tax season rolls around, so it’s important to weigh the pros and cons.

If you’re unsure what’s right for you, work with the team at Provident CPA and Business Advisors. We’ll provide guidance on structuring a business in the most tax-efficient manner possible.

Contact our team of professionals to get started.

How to Avoid (or Survive) an Audit from the IRS

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A tax audit can be the worst nightmare for many business owners. But there are proactive ways to prevent an audit and get through it if it does happen.

A tax audit may sound daunting and expensive. Many business owners fear the IRS and potential penalties and fees incurred if they do something wrong.

The good news is that audits are rare, and the IRS audit rate has even fallen in recent years. In 2019, the IRS audited just one individual taxpayer out of every 220; 10 years ago, the rate was 1 in 90.

Still, it’s important to know how you can avoid an audit from happening in the first place. And if you do end up getting audited, learn how to get through it without too much headache.

Preventing a tax audit

First, let’s talk about how you can avoid an audit altogether. The tax returns that the IRS audits are generally very complex, and audits usually occur to ensure that all income was reported and that you only took legal credits and deductions. 

Fortunately, there are a few specific steps you can take that will reduce your risk of experiencing. These include:

1. Be honest.

The number-one way you can prevent a tax audit is by telling the truth. Many taxpayers try to cheat the system, whether by leaving off income or stretching a deduction, but this only increases the chances of a lengthy audit that could end them in trouble or with significant fines. Be completely truthful about expenses and income, even if you don’t think you’re at risk for an audit.

2. e-File.

According to the IRS, paper returns have a 21% error rate, while e-filed returns have a 0.5% error rate. Thus, consider filing electronically for greater accuracy.

3. Be careful with credits and deductions.

This is an important one, especially for the self-employed. Deductions like luxury entertainment items that are ostensibly used for business purposes can turn into a red flag for the IRS. Whatever you claim as a business expense has to be used for business purposes. Be reasonable with claimed deductions—make sure you’re actually eligible, and all numbers are accurate.

4. Maintaining records.

Sometimes a tax return is inaccurate because a taxpayer has failed to maintain tight records. Keep all of your receipts for business expenses and ensure you’ve accounted for every channel of income. Track your purchases as well as assets. Store everything in one place, so it’s easier to complete your return when the time comes.

5. Get tax help from a professional.

The last tip for avoiding an audit will essentially help you with all the above steps. Work with a professional who understands tax laws. Your best bet in getting your taxes done right is to hire a qualified CPA who will walk you through best practices and deductions for which you are eligible.

Surviving an audit

If you’ve done everything you can and are still facing an IRS audit, there are ways to get through it. Here are some audit best practices to help you along the way. 

1. Look at your recordkeeping system.

Reevaluate your books. You need an efficient method for tracking business costs and expenses. Your accounting system should be tight and straightforward so that all transactions are accounted for. Everything should be organized so it can be presented well for the audit.

2. Respond quickly.

Most audits are conducted by mail but, in rare cases, they’re done at an IRS office or your home or business. When you receive a notice in the mail, it’s crucial that you respond immediately to avoid penalties. You will likely be asked to provide additional documentation to support the claims on your tax return. Deliver everything following the agency’s specific instructions.

3. Be prepared to advocate. 

The IRS may then start to ask additional questions, and they may not agree with something you provided on your return. Be prepared to present all the facts and advocate for your return if you know you have done everything correctly. 

Your best bet for getting through an audit is to follow all instructions closely, respond immediately, be as transparent as possible, and be willing to work with the IRS to get the matter resolved. The case will eventually be closed, either with the IRS proposing no changes to your return or specifying adjustments. If you disagree with the decision, you can appeal within 30 days of receiving their summary. 

Work with experienced tax professionals

Whether you’re trying to avoid an audit or facing one, work with a tax professional who will help you understand tax law and everything you’re eligible to claim. They will be there to support you during the audit to ensure you’re responding promptly and are working out all details to avoid penalties and further issues. And with the right advice, you’ll likely avoid this scrutiny altogether.

The team at Provident CPA and Business Advisors is ready to assist you with your tax or business questions. Contact us today to get started.  

Making the Most of C and S Corporations

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Both types of corporations give certain tax benefits, including additional deductions. Learn how they differ and why using both may provide you the best of both worlds.

When you’re running a business, you have a few options for creating a business structure, including a sole proprietorship, partnership, corporation, or LLC. Each of these options has its own set of pros and cons related to taxes and liabilities, so factor in where you see the business going and your goals. 

Do you imagine the business scaling? Who is involved? What tax benefits are most important for your situation?

Going the corporation route is a smart option for many different organizations. Whether you choose to form an S corporation or a C corporation will depend on factors like tax advantages, the way you pay shareholders, and deductions. 

Let’s look at why you would form a corporation in the first place and the differences between S and C corporations.

Why choose a corporate business structure?

S and C corporations provide additional benefits from some other business structures. Incorporating is a good option if you:

  • Need to create more investor interest
  • Want additional liability protection
  • Want to establish more credibility
  • Want the business to have an unlimited life
  • Want to have a public company eventually

Corporations provide additional protection so that your business has a bit more authority in the market, and you can separate more of the corporation’s liability from your own. For example, in a sole proprietorship, the owner and the business are considered the same legal entity, so you’d be liable for business-related debts.

When you form a corporation, it will automatically be a C corporation unless or until you elect S corporation status. Here’s a deeper dive into the primary tax implications and other benefits of these two structures.

C corporation pros and cons

The biggest disadvantage of a C corporation is the potential double taxation factor. The corporation pays corporate income tax on income, and its shareholders must also pay personal income tax on dividends from the corporation. 

However, they can also offer fringe benefit deductions and allow you to avoid the alternative minimum tax (AMT). C corps have a full deduction of benefits like employees’ health insurance, life insurance, and long-term care premiums, and fringe benefits like vehicle costs and public transportation passes are deductible.

Additionally, C corporations can give you lower tax rates. For example, your first $50,000 in taxable income is taxed at 15% instead of the top marginal rate at which S corporations would be taxed (35%).

S corporation pros and cons

A significant benefit of an S corporation is pass-through taxation (as with a partnership), meaning the corporation doesn’t pay federal corporate taxes. Income is passed through to shareholders, who then report it on their personal tax returns and avoid double taxation seen with the C corporation. Shareholders also don’t have to pay self-employment tax on their share of S corporation profits.

Additionally, you could qualify for the pass-through business income deduction of 20% since an S corporation is a pass-through entity. But this only applies to allocations of S corporation profits that are pass-through income, not compensation that the S corporation pays to you. 

A disadvantage of an S corporation is that most fringe benefits the corporation gives to employee-shareholders owning more than 2% of the corporation are taxable as compensation. 

Why create both a C and S corporation?

When you’re unsure which corporation to form, you can actually take advantage of both. Many owners choose to get the best of both worlds by creating a C corporation and using a pass-through entity such as an S corporation. You just need to set up two entities for different aspects and functions of the business. 

For example, you can use the C corporation for administration or marketing and the S corporation for operational costs or non-deductible expenses like client entertainment. You can then take advantage of the additional tax deductions of a C corporation as well as the pass-through taxation benefits from the S corporation, and your assets will be protected. 

Working with tax professionals

If you’re weighing the pros and cons of C and S corporations and are unsure how to proceed, work with an experienced tax professional who can review your situation and guide you forward. The experts at Provident CPA and Business Advisors are ready to assist. We help you understand each business structure and its benefits and how you can pay the least amount of tax legally possible. 

Contact our team to learn more about how we can help your business succeed.