Beware of the curative Expenses Trap!

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A great way to deduct your curative expenses through your enterprise has been colse to since 1954, but hasn't garnered much publicity until about the last ten years or so.

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A curative charge refund Plan (Merp), also known as a condition refund list (Hra) can save a self-employed person some thousands of tax dollars each year, but if it's not documented properly can consequent in reclassification of the deducted expenses as wages (subject to 15.3% Fica taxes as well as earnings taxes), penalties, and interest.

In most cases, the average taxpayer cannot take benefit of the legal deduction for qualified curative expenses. First, you have to be able to "itemize" your deductions on agenda A of your 1040. This means that for 2008, things like your state earnings taxes, asset taxes on your house, value-based taxes on vehicles, and mortgage interest, and some other items, need to total up to more than 50 if you're particular or ,900 if you're married. Once you've considered that you're close to clearing that hurdle, you need to total up your qualified curative expenses. But you're not closed yet: now the government wants you to sacrifice those curative expenses by 7.5% of your adjusted gross earnings (Agi). This means you'll take the total of all your wages, enterprise income, interest and dividends, capital gains, withdrawal income, communal safety income, alimony, jury duty pay, etc., subtract out a few adjustment items such as alimony you paid, Ira contributions, trainee loan interest, self-employed condition insurance, etc. And subtract 7.5% of That total from your qualified curative expenses. So, for example, if your total Agi is ,000, then the first ,750 of curative expenses don't even count as a deduction!

Now, let's take a look at what happens if you have a qualified enterprise and set up a condition refund Account. First, the ,750 you couldn't deduct before becomes a enterprise deduction. You don't have to adjust it by any percentages of Agi or any other number. This becomes a tax-free fringe benefit through your business. Second, as a deductible enterprise expense, if you are a sole proprietor or farmer or other "flow-through" business, you have probably saved colse to 50 in earnings taxes (assuming a 28% tax bracket.) Then, if you are a sole proprietor, farmer, or partner in a normal partnership, you've just saved 15.3% self employment tax, or 7. If you're total curative expenses (including curative mileage for trips to the doctor, dentist, and pharmacy) are more than ,750, your tax savings growth accordingly.

These plans are a great tool, but you have to have a legitimate enterprise And the plan Must be properly documented. This is one of the areas that Irs reviews for abuse and incorrect procedures. If you do not consequent the documentation requirements, that ,750 in legal enterprise expenses just turned into dutible wages, and added over ,600 to your tax bill, plus interest and penalties. This is an costly mistake for overlooking three uncomplicated documents: a plan adoption agreement, a plan summary, and an employer-employee agreement together with job descriptions and compensation plan.

If you are self-employed or own your own enterprise and are not taking benefit of an Hsa, you are leaving money on the table that could help you personally and supply an incentive plan to attract and support ability employees.

Although these plans are relatively easy to set up and maintain, we suggest using a pro who is very familiar with the plans to make sure your documents are in order and required disclosures are made, as well as accurate handling of your payroll.

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