The Three IRS Approved Methods For Deducting Medical Expenses
Now let’ s delve a little into the tax laws to see the various ways the IRS allows for the actual write off of medical expenses. The IRS code basically provides three methods for the deducting of these expenses. They are:
1. The FSA( Flexible Spending Account)
A business offering group insurance can work with their health insurer to offer what is called a cafeteria plan wherein an employee can have a certain amount of money withheld from his paycheck before taxes and can use the money to cover a host of out-of-pocket medical expenses. There is one major defect with this plan and that is if the employee does not use all of the money he had withheld from his paycheck, he will lose that money at the end of the year.
Potential Tax Savings: Under this plan, the employee can reduce his taxable income resulting in a lower tax liability. The business owner can write off all cost which will reduce the business owner’ s taxable income as well.
2. The HRA( Health Reimbursement Arrangement)
This is a written plan instituted by the business agreeing to reimburse all of its employees for any and all medical or health care related costs they might incur throughout the year. This is a reimbursement plan and not an account that you can lose if you don’ t spend it during the year. It is self-administered. The business does not have to open an account anywhere and you don’ t even need to have health insurance. The critical part is that you have to have a small business operation. The HRA can only be used by a C-corporation or surprisingly, by a sole-proprietorship.
Potential Tax Savings: The business can then write off 100 % of the medical and health care costs and the employee does not have to claim the reimbursements as income thus lowering the taxes for everyone.
16 | September 2011 www. DotComSecrets. com Image © Shutterstock. com / Gunnar Pippel