Author Archive
How to Deduct Medical Bills
Posted by: | CommentsMedical Bills Deductions
(under an employee benefit program), by Michael Hengst
We would like to bring to your attention a tax saving plan that is relatively unknown. This plan is for the sole proprietor of a small business or C Corporation. A partnership or S Corporation cannot successfully use this plan for its owners. The plan allows for 100% tax deductibility of health insurance premiums and uninsured medical expenses paid by the business. The deduction can be taken as an employee benefit program deduction, on Form 1040, Schedule C, Line 14 or on Form 1120, Line 25. Internal Revenue Code 105 & 106, along with Revenue Ruling 71-588 make this plan legal. This is not a Medical Savings Account (MSA), which tends to be quite cumbersome, hard to manage, and easily penalized by the IRS. The taxpayer has or sets up a small business and employs his wife or her husband. (For a C Corporation there is no spousal employment requirement.)
The employee/spouse performs duties needed to help operate the business and receives a reasonable salary for services performed. The salary paid to the employee/spouse is included on the couple’s federal individual income tax return. The spouse and dependents (including the employer/spouse) can also receive non-taxable medical reimbursements for qualified medical expenses. The reimbursement received is not included in gross income for the recipient (Code Section 105) and is fully deductible by the business. Although legally these plans do not have to be in writing, it is our opinion that they should be. We have a simple one page form at our office for you. This will help insure the law is properly followed. The plan cannot discriminate in favor of a certain employee(s) over others.
The benefits paid by the business along with the reimbursements make this a 100% tax deduction. Benefits can include: all uninsured medical expenses (deductibles, co-pays, uncovered expenses), Health Insurance, Disability Income, Long Term Care, Cancer Insurance, Term Life Insurance (up to $50,000 per year), Medicare Supplement, Indemnity Hospital, Indemnity Medical, and Vision/Hearing Insurance. The uninsured medical expenses that are not covered by insurance should be for the diagnosis, cure, mitigation, treatment, or prevention of disease.
A physician should prescribe the medications. Also deductible if not covered by the benefits is lodging while away from home while a spouse is in a licensed hospital or in a medical care facility. The lodging is limited to $50 for each night for each individual. A medical expense such as cosmetic surgery is not included unless the surgery is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. If you feel that you or your business may qualify for this plan, please contact us.
NEW FOR 2003!! According to the IRS’s new Revenue Ruling 2003-102 (9/5/03):
Over-the-Counter Drugs Can Be Covered by Health Care Flexible Spending Accounts. The Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee. See: http://www.irs.gov/pub/irs-drop/rr-03-102.pdf Note, that vitamins for “general good health” are not considered as non-taxable or excludable health benefits for these types of plans.
By Michael Hengst,
Michael Hengst
Medical Expenses of CCRC Residents
Posted by: | CommentsGOLD AT THE END OF THE RAINBOW:
MEDICAL EXPENSES AND BELOW-MARKET-RATE LOANS IN
CONTINUING CARE RETIREMENT COMMUNITIES
By Robert Atkins Walker, Ph.D., CPA and Chad E. Turner, CPA
Published in 18 Virginia Tax Review 1 (Summer 1998: The University of Virginia School of Law) under the title “Gold at the End of the Rainbow: Medical Expenses and Below-Market-Rate Loans in Continuing Care Retirement Communities,”
I. Introduction
A. Purpose
Residents of continuing care retirement communities (CCRCs) or their children, if the residents are the children’s dependents,1 face significant tax consequences associated with the fees they pay to a CCRC. On the positive side, they usually can take a large tax deduction for the medical expense portion of their entrance fee2 and may also deduct the medical portion of their monthly fees. Negative consequences may occur, however, if the CCRC is obliged to refund some or all of the entrance fee when a resident vacates or dies. The refundable portion of the fee may be treated as a below-market-rate loan in which case residents may have to report imputed interest income, and the CCRC, imputed interest expense, on the refundable portion of the entrance fee.3 Residents also may have taxable income on the refund if they took a medical expense deduction on the entire original fee. This article addresses these consequences and analyzes the methods CCRCs use in estimating the portions of the entrance and monthly fees allocable to medical care.
In many cases, the tax impact of moving into a CCRC may be very large, resulting in a medical expense deduction of $20,000 or more for the entrance fee and $3,000 or more annually for the monthly fees.4 Residents in assisted living units (ALUs) generally should be able to deduct 100% of their monthly fees. Nursing care residents also may deduct 100% of their monthly fees.
The IRS has provided little guidance regarding the mechanics of computing the deduction, the acceptability of the various rationales used by CCRCs in computing the medical expense percentage of their residents’ fees, or the tax effects on residents or their estates of an entrance fee refund. Furthermore, there is little consistency among CCRCs in advising their residents as to what is deductible or in their methods of computing the percentage of fees allocable to medical costs.
The need for consistent and proper treatment of the CCRC medical expense deduction is growing in importance. Since the 1970’s, the number of CCRCs has increased dramatically. In 1994 there were over 350,000 residents in nearly 1,200 CCRCs.5 This number is growing steadily and will accelerate after 2010 as the baby boomers reach retirement age.
To our knowledge, four articles to date have addressed the tax deductibility of CCRC fees. The first focused on nursing home residents,6 the second misinformed the readers,7 the third devoted only one paragraph to the issue,8 and the fourth discussed the effects of the Health Insurance Portability and Accountability Act of 19969 on deductibility of long-term care expenses and insurance.10 The second article stated, “[i]n counseling on the tax deductibility . . . of CCRC costs, you must first establish whether the principal reason for entry into the CCRC is the availability of medical and nursing care . . . .”11 This is wrong. As we discuss in section II.B.2., non-medical reasons for entering a CCRC will not prevent the deductibility of the medical expense portion of the fees.12
Our objectives are: (1) to clarify the tax deduction opportunities for CCRC residents, (2) to alert both the residents and CCRC administrators as to the potential tax effects of refundable entrance fees, and (3) to give CCRC administrators direction on allocating the medical expense fee portion properly so as to maximize their residents’ potential tax savings.
Regarding entrance fee refunds, we examine three issues: (1) whether the section 787213 below-market-rate loan rules will trigger imputed interest on the refundable portion of entrance fees, (2) whether an anticipated entrance fee refund must be subtracted from the entrance fee in calculating the medical expense deduction, and (3) whether the residents, their estates, or their heirs will have to recognize income in the year the refund is received to the extent of the previously deducted medical expenses attributed to the refund.
The following example of a CCRC resident related to one of the authors illustrates most of the issues involved as well as the magnitude of the tax savings available in properly taking advantage of the deduction.