Taxing Matters February 21, 2007

Wednesday, February 21, 2007

By Dave Cohen

Q. What are the tax-free benefits available to the self-employed, like the employer-sponsored tax benefits, that employees can take advantage of?

A. Employees may have tax-free medical plans and retirement benefits, and the self-employed also have similar options.

Self-employed persons (sole proprietors) may take a deduction for medical insurance payments for every month in the year that they, or their spouse, were not covered by a subsidized, employment-related medical plan.

They must associate the insurance with a particular business. The IRS clarified the fact that a sole-proprietor may include insurance that is titled in the name of the proprietor.

This deduction is an adjustment to total income, rather than a business expense, and is usable to the extent that there is a taxable profit from the business.

Also, any taxpayer with a High Deductible Health Plan may open and contribute to a Health Savings Account. Generally, an HDHP is an insurance plan that has a minimum deductible of $1,050 and a maximum deductible and out-of-pocket medical expense limit of $5,250 for self-only coverage (twice those amounts for family coverage).

The maximum deductible contribution is the HDHP deductible or $2,700 ($5,450 for family coverage). When an out-of-pocket medical expense is incurred, a tax-free withdrawal may be made to cover the paid expense.

A withdrawal without a corresponding medical expense is taxable and may be subject to a penalty tax.

The process of depositing to and withdrawing from the account effectively deducts out-of-pocket medical expenses from taxable income without the limits to deductibility encountered in itemizing deductions.

A self-employed person also may set up an Individual Retirement Arrangement (IRA) based on the taxable profit from his or her business called a Simplified Employee Pension (SEP) IRA.

The maximum contribution is based on a specified portion of the profit from the business, currently up to 25 percent of taxable profit; however, any employees who are required to have employment-related taxes withheld and receive a W-2 must also have access to the plan in the same way.

Since this is an employment-related plan, it may impact the ability to deduct a contribution to a traditional IRA also.
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Taxing Matters February 21, 2007 | Planet JH News Article: Business

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