As small business owners, we have more options than any other group of Americans to save on health care costs. We ALSO have to keep up with the changes. Every year, another aspect of ‘ObamaCare’ changes or ‘TrumpCare’ changes the rules and options.
All I know is that if one takes the time to learn a little, health care tax planning and well as cost-saving strategies can be phenomenal. It simply takes a little bit of study and consulting with sometimes several different 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’. Some call it ‘KohlerCare’…ok…that’s what I call it-
9 Steps to Save AND Create Wealth through Health Care Planning!
1. Try to avoid any and all taxes under The Affordable Care Act (“ACA”) if possible. It really comes down to your income level AND type of income. But here is the easy answer: If you make less than 200k single or 250k married filing joint, then you won’t pay any ACA taxes!! If you make more than that amount, some planning might help.
Essentially, there are two taxes to be aware of and understand the significant impact they can have:
– Net Investment Tax is a 3.8 percent income tax that most people won’t see coming. Essentially, you will owe this tax calculated on the lesser of your net investment income or your modified adjusted gross income exceeding $200,000 for single taxpayers and $250,000 for Married. ‘Investment Income’ includes interest, dividends, royalties, annuities, net rents and sale of real estate (unless you are a real estate professional). It doesn’t include S-Corp income, SE Income or Retirement income!
– Medicare tax of .09% also kicks in on single individuals with wages or self-employment income of $200,000, and married couples with the same income over $250,000. The new legislation makes payroll planning and the use of an S-corporation for the small-business owner even more advantageous. If you are an S-Corp owner, you will try and keep your payroll under the applicable wage level where ACA applies. The rest of your pass-thru income escapes ACA and can also take advantage of the new pass-thru deduction under Tax Cuts and Jobs Act.
2. Choose the Right Health Insurance. Understand the “Metal” health insurance plans and the differences between each one. Essentially, you will have to choose between a Platinum, Gold, Silver or Bronze plan with different benefits, deductibles, and of course, premiums. Generally, the Platinum plans provide the greatest benefits and lowest deductibles, and on the other extreme the Bronze plans are high deductible and the most affordable. Keep your anticipated health in mind as you try and choose the right type of plan for your situation.
– To Exchange or not Exchange. Be aware of what enrollment options are available in your area. Are you using a State Exchange or HealthCare.gov? Also, don’t feel you are stuck with these exchanges either. 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.
– The “Network” is the real issue. As you look closer, you will be surprised to see the wide range in premiums between the different types of “Metal” plans. The reason isn’t just the benefits, but 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, like dental or vision care.
– Bet on your health. It’s important to consider high deductible insurance plans while shopping. If you’re healthy and want to self-insure yourself in the future, you can often get a lower premium with a higher deductible and fund a Health Savings Account (“HSA”). It can be a perfect fit to take a tax deduction and fund your HSA while the account grows tax-free and can be withdrawn at any time tax free for health care expenses (More below).
3. Don’t Pay the insurance penalty. Well, this is an easy one. Under the new Tax Cuts and Jobs Act passed in late 2017, the penalty for not carrying insurance ends after 2018. Thus, you NEED to carry health insurance in 2018- or pay the penalty. Starting January 1, 2019, there is no more penalty!
4. Deduct Your Health Insurance. Health Insurance is 100% deductible for the small business owner. This is a huge benefit for the small business owner that the average American can’t take advantage of. A non-business owner would have to try and itemize to no avail. Make sure your CPA is aware of any and all health insurance premiums you are paying and that they are properly accounted.
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.
5. Take advantage of the Small Business Health Care 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, 2018, and make sure you qualify for the tax credit.
6. Health Savings Accounts. 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 2018, the tax deduction is up to $3,450 for singles and $6,900 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. Read this article for more information on Health Savings Accounts. 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.
7. The Health Reimbursement Arrangement (HRA) is a fantastic strategy for those with higher than average medical expenses. Now this strategy must be used by a small business owner, and again the average American can’t even dream of doing this. The HRA is essentially a Section 105 plan that 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% write-off for all of your medical expenses. The only challenge can be the structure you need to use in order to make the plan work. Read this article here with diagrams and more information on the HRA. Sometimes it takes a little extra business and certainly some attention to bookkeeping to make it happen, but again, it can be very lucrative and worth the extra time.
NOTE #1 – Don’t even try and simply “Itemize”. If it wasn’t bad enough that 97% of Americans try to write-off their health care and are unable to do so, under current tax law, only medical expenses above 7.5% of your adjusted gross income will be deductible as an itemized deduction. Now, under the Tax Cuts and Jobs Act, the increase in the Standard Deduction to 24k for married couples and 12k for singles, is directly meant to reduce the number of people itemizing. This means don’t try to itemize your health care expenses. We try to steer our clients away from this anyway because there are better options for small business owners.
NOTE #2 – Long-term Care Insurance can be paid for out of your HSA or HRA. I want to be completely independent when I say that Long Term Care Insurance is something everyone over 50 needs to carefully consider. I make sure ALL of my clients are writing-off their health care expenses; this includes long-term care insurance! Those with an HSA can pay for the premiums directly out of the HSA. Those with an HRA can get reimbursed as a business write-off for their long-term care premiums. Read this article for more information on this strategy of deducting long-term care insurance. HOWEVER, the catch is that there are ‘limits’ on how much you can write-off. The limits range from $350 – $4,370 annually. For more information on the rules for long-term care as a medical expense, please see IRS Publication 502.
As you can see, this is a BIG topic, but I break this down in Chapter 7 of my book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. Don’t give up and keep learning!! There are a lot of variables to consider when designing your healthcare strategy. The savings around every corner.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.