Since the inception of the income tax, people have been developing methods of shifting income within family groups in order to reduce excessive taxation. The concept is simple: Spreading income among several people, especially among those in lower tax brackets, is much cheaper when it comes to paying taxes, than having one person pay tax on all the income. Thus, income shifting is a technique wealthy people often use to protect valuable assets from over taxation. But income shifting is not just for the rich; anyone can take advantage of various aspects of this tax-saving strategy — married people, single people, single individuals with children, it doesn’t matter.
Hire Your Spouse in Your Business
If you are a sole proprietor, partnership, C Corp, or LLC, and you employ your spouse in your business, remember that all wages you pay your “employee” spouse are subject to Social Security tax (FICA) — taxes that can eat into your business profits. The best way to avoid all those extra taxes is to pay your spouse a minimum wage and then give him or her as many tax-free fringe benefits as possible. But remember, the hiring of your spouse must be legitimate and you must be prepared to provide evidence of actual work performed.
Pay Your Employees’ Medical Expenses
Once you have legally hired your spouse, take advantage of their employment with a plan to pay his or her medical insurance premiums and deductibles and your children’s medical expenses. That way you can deduct 100 percent of your family’s medical insurance expenses.
Here’s how it works: Suppose you are a sole proprietor paying $400 a month for a high-deductible, catastrophic medical insurance policy, the only policy you can get as a small self-employed business owner. If you do not hire your spouse and set up a medical benefit plan for her, then you can only deduct 60 percent of your family’s medical expenses, which is $240 per month out of the $400 monthly premium. In order for you to get a tax deduction on the remaining 40 percent, those expenses must exceed a certain threshold. Unless you have lots of medical expenses in a year, it’s doubtful that the remaining 40 percent of your $400 a month premium will be deductible. But what if you hire your wife part-time? Even if she has a regular W-2 job but works for you as your bookkeeper, she is still considered an employee of your business by the IRS. As your employee, you make her the primary insured on your medical plan and select to have her covered along with your children on that plan. Now 100 percent of your medical insurance premiums are deductible. Why? Because these premiums are now considered a business employee expense; the IRS gives you a tax-free benefit for such premiums paid out through the business that it would not give to you if you were simply to take them as an itemized deduction as an individual on your Schedule C tax forms. In this way, you are deducting the expenses as an employee fringe benefit, and not as a regular itemized medical premium.
What if you aren’t married? You do have some options for taking advantage of this medical deduction:
- You can hire your kids, if you have children, and pay for their medical premiums, thus qualifying you to take these as a business expense at 100 percent.
- You can incorporate as a regular non-Sub”S” corporation (either as a regular C Corp or as an LLC) and deduct all the premiums. (Remember that if you are structured as a Sub S corporation, you cannot deduct 100 percent of your medical insurance premiums by hiring your spouse. You must either be a sole proprietor, a partnership, a Limited Liability Corporation, or a regular “C” corporation. In fact, if your business is structured as a regular “C” corporation, you don’t even have to hire anyone from your family to take advantage of this medical deduction.)
Set Up a “Medical Reimbursement Plan”
A Medical Reimbursement Plan is a written plan whereby the employer (you) hires an employee (spouse) and reimburses that employee and any of his or her family members (your children), for medical expenses not covered by medical insurance. Some of the healthcare needs that you and your family might have that are not covered by a standard medical insurance policy include: eyeglasses, contacts, co-pays, orthodontics, preventive care, well-baby care, acupuncture, prescription drugs, hearing aids, insurance deductibles, dental work, routine exams, and pre-existing conditions. These expenses can be written off using a self-insured plan. You get a deduction and your spouse gets that reimbursement money tax-free. For more information on tax saving, contact me: firstname.lastname@example.org.