Medical Insurance Deductions on Schedule A of your 1040 have been problematic for a long time. They’re subject to a limitation of 7.5% of your Adjusted Gross Income (AGI).
In order to explain the problem, let’s go through an example.
Joanne B. Owner owns an S Corp and has an AGI of $350K. Her company has a group medical policy for its employees and pays $20K annually for Joanne’s medical coverage.
In addition to this, between co-pays and other medical expenses, she has another $4K in deductible medical expenses. This brings her total possible medical deduction for the year to $24K.
But Schedule A Medical Deductions are limited to expenses in excess of 7.5% of her AGI. That puts her limitation for the year at $26,250.
In order for her to get a deduction of $1, she would have had to spend $26,251. Since she only has $24K in medical expenses, she gets no deduction at all.
But it’s now possible for her to receive a full deduction for the amount her company pays for her family inside its group policy.
In order to do this, we must piggy-back the self-employed health insurance deduction offered to Sole Proprietors on Schedule 1 of her 1040. The amount must be included on her W-2.
It’s added to Box 1 of her W-2 but not added to boxes 3 or 5 which would add to her Social Security and Medicare Costs. Doing this doesn’t increase any tax expenses whatsoever.
It’s deducted as Officer Wages on her entity return, picked up as W-2 income on her 1040, then deducted under Self Employed Health Insurance. In other words, it’s picked up as income once and deducted twice, giving her a full health insurance deduction.
If Joanne had done this, she would have received a deduction for the $20K of group medical coverage, but still lost the deduction on the additional $4K in medical expenses that’s still subject to the limitation on her Schedule A. Since she’s in the 35% income tax bracket at the Federal Level and 5% for Illinois, this bypass saves her $8K in tax on her 2024 returns.
Did I mention that she just saved $8K on her taxes. OMG Chris, you’re wonderful…
Let me leave you with this…
Doing this isn’t easy. It’s highly advanced income tax work. Getting a payroll service to pick this up properly on a W-2 is almost impossible.
Most of the people working at payroll services are minimum wage employees. They wouldn’t know a tax law if it jumped up and bit them on their unmentionables.
We’ve asked several of the largest payroll services to do this and were quite unsuccessful. Normally this leads us to being forced to amend the Fourth Quarter Payroll Tax Returns along with a W-2 Correction.
But this allows us to get that full deduction even for upper income taxpayers where a health insurance deduction would normally just be a pipe dream.
This is the third in my informational series of trying to get my clients ready for their December Tax Planning Sessions. If you have questions, please don’t hesitate to call.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Schedule a Free Consultation, please click here.
Watch our Introduction Video here.
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.