Dealing with medical expenses

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Escalating medical costs leave even insured families left to cover increasing out-of-pocket costs. While there are a number of strategies for small businesses and self-employed individuals to deduct the cost of health insurance coverage, the tax code also provides some relief allowing taxpayers to deduct medical costs.

Author: NCH Editorial Team

Feb 16, 2005

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Anyone who has prepared their own tax return is probably familiar with the rule that out-of-pocket deductions are generally only deductible if they exceed 7.5% of the adjusted gross income (AGI). But for taxpayers who are subject to the Alternative Minimum Tax, medical expenses are only deductibe in excess of 10% of their AGI. This means that many higher income taxpayers are unable to take any medical expense deduction. One terrific, if under-utilized fringe benefit that the tax code allows is for the use of a Medical Reimbursement Plan by small business corporations. If a corporation sets up an uninsured medical reimbursement plan to pay for non covered medical costs, the direct payment of medical expenses is not taxable to the employees for coverage for employees, spouses, and dependents. The only exceptions to this rule are for owners of more than 2% of S corporation stock, and payment of expenses for domestic partners. For the company providing the medical reimbursement, the payment of medical expenses are dedeductible from the first dollar. I had a client several years ago who set up a Nevada corporation with my company so he could set up a Medical Reimbursement Plan to be able to deduct reimbursement expenses for his son's cancer treatment. Even though he was a high income taxpayer, his uninsured expenses ran more than $25,000 per year. His Nevada company provided a vehicle for him to not lose that deduction.

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