Making healthcare a tax savings strategy
March 30, 2019
As a Business Advisor and Tax Consultant, I speak to hundreds of clients every year. I love saving money for my clients, but it seems to be getting tougher every year to do so. One of the biggest ways to help people build their business and build their wealth is by minimizing the taxes they pay. We all know we need to pay our fair share of taxes but many of us are paying far more than our fair share. Much more! There are many strategies out there to help save on taxes. Some work for one group and some will work for another, but I'd like to share a strategy with you that will work for just about everyone. It doesn't matter what your age is or whether you are married or single if you have kids or don't have kids. It has to do with healthcare.
So here's the scoop, even when you have health insurance you're still going to have dental, eye doctor and other medical expenses. With insurance, there are co-pays, deductibles and other out of pocket expenses that millions of Americans don't get to write off. But there is good news! There are two incredible loopholes that can save you thousands of dollars. Think about it. You know you are going to go to the doctor or dentist or need to buy some new glasses and how great would it be if you could write it off? What about the vet bills for your service dog?
These strategies with healthcare can cover a lot of expenses that up to now have been out of pocket.
The first one is a Health Savings Account or HSA. The HSA works like an IRA on steroids. Instead of saving for retirement you save for future medical expenses. So how does it work? Like an IRA you fund your account with pre-tax dollars. Also, like an IRA that money can grow without being taxed, and here's the best part, you can withdraw that money tax-free when paying for qualified medical expenses. That's right, there's no tax going in, it grows tax-free and you can access it tax-free! Wait, it gets better yet. You can take half of that money and invest it to create even more growth in the account and you don't need to wait until you're 59 and a half!
This year as a single person you can contribute $3,500. As a married couple or Head of Household, you can contribute $7,000.
You don't need to be a small business owner and you can do it any age. It doesn't matter if you are rich or poor. The key is you must have a "high deductible" insurance plan that is HSA compatible.
Many of my clients are healthy, paying for insurance and then not using it. Why not pay less with a high deductible plan, and then save in an HSA just in case. Think about it, if you can lower your premium and then save for your future, that's a win-win!
You can put the money in your account today and get a tax deduction, then access it tomorrow to cover your co-pay at the doctor. It can even be used to pay the vet bills for your service animal. Sounds good? Well, it even gets better; say you're a real estate investor. How about funding your HSA with rental properties?
Oh yes, you can! I have a client that purchased a little rental property in Oildale for $45,000 using his HSA money as a down payment. The monthly rent goes back into the HSA account and has now funded braces for two of his kids. You don't like real estate? Well, you can buy stocks, bonds, mutual funds or you name it.
If your Tax Pro isn't sharing strategies like this with you, it might be time for you to rethink what you are doing.
So how much is the deductible on a "high deductible" health plans? If you're single it's $1,500 per year or $3,000 per year if you file married or head of household.
The HSA is not to be confused with the Flexible Savings Plan. The FSP is a use it or lose it plan. If you don't use up your contributions in an FSP by the end of the year that money will be lost forever. But the HSA is different. This money will roll over year to year into perpetuity and continue to grow for future health expenses.
Now here's a neat trick, say you want to start an HSA but you don't have the cash. You can make a once in a lifetime contribution from an IRA to get you started. Now, you are limited to your annual contribution amount but you can get started now and start enjoying the benefits immediately.
You can have an HSA at any age but once you turn 65 and start Medicare you can't add any new money. So it's important you start now and start building up your reserves.
As previously mentioned, to have an HSA you must have a high deductible health policy. What if you don't have health insurance? There is another option for business owners called a "Health Reimbursement Arrangement" or HRA.
As always there are rules to the game. For an HRA you need to be a business owner but you are not required to have insurance. Now, this is a completely different structure but it can prove very beneficial. You need to have an advisor that is familiar with setting this up correctly. Once it's in place you are good to go and all of your medical expenses can be written off through your business.
Typically for an HRA, you will need a C-Corp (not my favorite structure) but there is a way around this. Again you need a knowledgeable advisor to guide you through the process.
It's been said, "it's not what you earn but what you keep!" We work so hard to make money then turn around and let it disappear without a thought of is there a better way. Take the time to learn the strategies available to you and learn to use them to your advantage. A little planning, a little effort could save you a small fortune!
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at www.csubsbdc.com.