How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10151
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
1929974
Type Your Finance Question Here...
Lane is online now
A new question is answered every 9 seconds

How can I deduct health care premiums I paid and the medical

Customer Question

Hello,
How can I deduct health care premiums I paid and the medical costs I incurred in 2015 from the taxes. I own small business and I am a full time employee of it. Havent accounted the premium/med expenses in the W2.
Submitted: 9 months ago.
Category: Finance
Expert:  Lane replied 9 months ago.

If you are an S-Corp, shareholder/employee, the rules are that you MUST include in wages the amounts of those premiums ... HOWEVER, there's a special personal deduction you take on the first page of your Form 1040 as self-employed health insurance.

...

Depending on whether you purchase the policy or the S-Corp does you account for this as either S corporation paying the premiums for you to get the deduction, or you paying and the S-Corp reimbursing you. (Either way it's included in wages) So, if your purchase your policy yourself, you must have your S corporation reimburse you for the cost. If you choose the reimbursement option, be sure to submit your receipts to the corporation along with an expense report.

...

So, depending on whether you INCREASE the wages to cover it OR document that the wages that were paid WAS partially for paying for the health insurance determines whether there's net tax benefit or not. Technically, IRS will say you must GROSS UP the wages, but there is also no definition in the tax code as to what's a reasonable salary, so this is an area where you can be conservative (ADD the premium amount to the taxable wages) or aggressive (say that the wages you see there on that W-2 were partially for paying for health insurance).

...

One thing that IS cut and dry about this rule, is that there's no social security on that portion of wages that is there to pay health insurance on the premiums IF... (1) you’re the only employee of your S corporation, or (2) your corporation has other non-owner employees and provides them with health insurance.

...

And another, is that the deduction – which you’ll find on Form 1040, Line 29 – reduces adjusted gross income by the amount of premiums ... so doesn't affect AMT, as taking this as a medical cost on itemized deductions AND isn't limited to 10% of AGI

...

So, given that you HAVE'T grossed up the wages, to take advantage of this you'll either have to take the aggressive route (where IRS might look at previous year's income and say you didn't ADD this to wages, you "carved it out" of wages), or change that W-2, or a little of both.

...

Hope this provides enough information for you to make an informed decision.

Expert:  Lane replied 9 months ago.

SO, in conclusion, you can either (1) add the premiums and your out of pocket medical expenses and hope that gets you above the 10% of AGI threshold so that you can deduct SOME of that as a medical expense on the schedule A ... OR ... (2) Take the above the line deduction, (2a) taking the position that the premium amount was included or (2b) grossing UP the premium amount into wages.

...

By the way... one of the other things IRS could do upon an audit of this is look to see whether the amount of wages equaling premiums had SS& Medicare withheld against it.

...

And in the event you may have been told that an HSA would work here, a greater than 2% shareholder cannot make pre-tax contributions to an HSA via a salary reduction. Any contributions made on their behalf by the corporation are taxable and they may be deducted on their personal income tax (using that same logic).

...

Expert:  Lane replied 9 months ago.

I hope this helps to clarify your options.

...

If this HAS helped, I'd really appreciate a positive rating (using the rating request, faces, or stars on your screen).

...

I hope you’ll rate me based on thoroughness and accuracy, rather than any good news / bad news content. That’s the only way I’ll be credited for the work here. But please let me know if you still have questions.

Related Finance Questions