This edition we are talking about deducting Medicare Premiums, Retirement Accounts, a Year-End Tax Strategy, and Current IRS Hot Buttons!
As always our tax plan for business owners or investors bundles this knowledge and MUCH more into account to create your individualized tax plan to be used for YEARS. Feel free to text, email, or call us to see how a tax plan could benefit you.
Deducting Medicare Premiums
Individuals currently on Medicare and paying monthly premiums can potentially take advantage by deducting the premiums against their taxable income, more on qualifying below. Medicare is often used by individuals 65 years of age or other individuals that qualify. This is not the same as the Medicare tax paid by employers and employees.
Usually, you can only deduct Medicare Premiums as a medical deduction only if all medical expenses exceed 7.5% and you itemize. Instead of the limitation, you will be able to take the full amount as an adjustment to income to reduce your taxes.
To qualify you must be self-employed (Sole Prop, Partnership, S-Corporation) and take the proper steps when making premium payments.
Consider which type of retirement account is best for your business. As a business owner, you have the option between a Traditional IRA, Roth IRA, 401k, SEP, SIMPLE etc.
Businesses netting less than ~$50,000 annually may want to consider a simple Traditional or Roth IRA. These are fairly simple accounts that can be set up with a financial advisor or at certain brokerage firms with little to no additional cost.
Another option is the Simplified Employee Pension (SEP). A SEP allows a business owner to contribute up to 25% (or 20% depending on entity) of annual compensation into a retirement account and is considered a business deduction. There is a limitation of $58,000 a year and with a 25% cap you reach the max at an income of $232,000.
401k plans have many variations. One that can be great for self-employed individuals are solo 401k plans. These plans allow you to contribute more per dollar if your income is below the $232,000 max. With a solo 401k plan you’ll be able to deduct up to $19,500 as an employee of your business and an additional 25% of your compensation as an employer. The limit currently is $58,000 but you can reach that limit at $154,000 instead of $232,000.
Every retirement plan comes with its own set of benefits and drawbacks. Talk with our recommended financial professional about those drawbacks.
Year-End Small Tax Strategies
This month our DIY tax strategy is to hire your spouse.
On occasions, we give a small DIY tax strategy for those individuals that may not want the full income savings of a tax plan. Our goal is to give a quick strategy that may not need a tax professional to facilitate or oversee. We do recommend sitting down with us for a tax plan to dive into these topics more and determine what more advantageous strategies are available to you.
Hire a spouse
This strategy can benefit you in multiple ways depending on your entity structure. This has quite a few benefits but to name two, hiring your spouse can allow for larger retirement account contributions. Bringing your spouse on payroll means you can now contribute the same amount to their retirement account as you do your own. You can also give your spouse life insurance on the company’s dime. There is a limit here of $50,000 but it is smart to have additional coverage especially if you’ll get a tax deduction for it.
Current IRS Hot Buttons
- The IRS is on the lookout for taxpayers and firms fraudulently claiming the research and development credit
- S- Corporations taking a very small salary or no salary at all
- C-Corporations paying personal expenses with business funds
- Tax-exempt organizations are in the view of the IRS as many are not properly used