Avoid Misinformation About Tax-Favored Health Accounts

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Do you have a health Flexible Spending Account, Health Savings Account or similar plan through your employer? The IRS is warning about misinformation that could lead to serious mistakes.

Nonmedical nutrition, wellness and exercise expenses that aren’t explicitly related to a medical diagnosis or treatment aren’t reimbursable under these plans. But that hasn’t stopped certain bad actors from offering to provide a “doctor’s note” (for a price) that they claim would authorize health reimbursement plans to accept ineligible expenses, such as for nonmedical food that doesn’t satisfy normal nutritional needs.

To review the IRS’s related FAQs: https://www.irs.gov/individuals/frequently-asked-questions-about-medical-expenses-related-to-nutrition-wellness-and-general-health

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A Strategy to Raise Your Medical Expense Deduction

With a little planning, you may be able to boost your itemized medical expense deduction when you file your 2024 tax return next year. Only eligible expenses exceeding 7.5% of your adjusted gross income are deductible. It’s not an easy hurdle to clear, short of a major medical disaster, which, of course, you want to avoid. But you can use a strategy called “bunching” medical expenses to exceed the 7.5% threshold.

Say, for example, that you’ve already scheduled surgery that will involve out-of-pocket expenses but you still fall short of the deductible threshold. Think about scheduling elective procedures, such as dental work or Lasik surgery, and making qualified purchases [Topic no. 502, Medical and dental expenses | Internal Revenue Service (irs.gov)] that will push you over the threshold for the year.

Remember, only the expenses over that amount and that aren’t covered by insurance or paid through a tax-advantaged account will be deductible. Contact the office for help running the numbers.

408-252-1800

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Deductions vs. Credits: What’s the Difference?

One of the most common misunderstandings about filing an income tax return is the difference between deductions and credits. Deductions reduce the amount of a taxpayer’s income before tax is calculated. For example, on your individual return, you can either take the standard deduction or itemize deductions, if it will reduce your taxable income more. Credits, on the other hand, reduce the actual tax due, dollar-for-dollar, generally making them more valuable than deductions.

For example, the tax savings from a $1,000 deduction would depend on your tax bracket; it would save you $150 if you’re in the 15% tax bracket but it would save you $350 if you’re in the 35% tax bracket. A $1,000 credit, on the other hand would save you $1,000 in taxes regardless of your tax bracket. (These examples assume no income-based phaseout or limit applies to the deduction or credit.)

Some credits, such as the Child Tax Credit, are partially or fully refundable. This means that if a taxpayer’s tax liability is less than the amount of the credit, the taxpayer can possibly receive the difference as a refund.

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How to Secure a Tax Benefit with the QBI Deduction

QBI may sound like the name of a TV quiz show. But it’s actually the acronym for “qualified business income,” which can trigger a tax deduction for some small business owners or self-employed individuals. The QBI deduction was authorized by the Tax Cuts and Jobs Act (TCJA), and it took effect in 2018.

How It Works

The deduction is still available to owners of pass-through entities – such as S corporations, partnerships and limited liability companies – as well as self-employed individuals. But it is scheduled to expire after 2025 unless Congress acts to extend it.

The maximum deduction is equal to 20% of QBI. Generally, QBI refers to your net profit, excluding capital gains and losses, dividends and interest income, employee compensation and guaranteed payments to partners. The deduction can be claimed whether or not you itemize.

Notably, the QBI deduction is subject to a phaseout based on your income. If your total taxable income is below the lowest threshold, you may be entitled to the full 20% deduction, although other limitations do apply:

  • For 2023, the thresholds are $182,100 for single filers and $364,200 for joint filers.
  • For 2024, the thresholds are $191,950 for single filers and $383,900 for joint filers.

But things get tricky if your income exceeds the applicable threshold. In that case, your ability to claim the QBI deduction depends on the nature of your business.

Specifically, the rules are different for regular business owners of pass-through entities, sole proprietors and those who are in “specified service trades or businesses” (SSTBs). This covers most businesspeople who provide personal services to the public, such as physicians, attorneys, financial planners and accountants. (Engineers and architects are excluded.) Professionals in this group forfeit the QBI deduction entirely if income exceeds another set of limits:

  • For 2023, these upper limits are $232,100 for single filers and $464,200 for joint filers.
  • For 2024, these upper limits are $241,950 for single filers and $483,900 for joint filers.

If your income falls between the thresholds stated above, your QBI deduction may be reduced, regardless of whether you’re in an SSTB or not. For taxpayers who are in SSTBs, the deduction is phased out until it disappears at the upper income threshold. For other taxpayers, the deduction is limited to the lesser of 20% of QBI or the greater of 1) 50% of the wages paid to employees on W-2s, or 2) 25% of wages plus 2.5% of the unadjusted basis of the qualified property owned by the business.

Available for a Limited Time

The QBI deduction provides a valuable tax break for small business owners, so if it expires, their taxes are likely to go up. It’s unclear at this time what the chance is of the deduction being extended. Contact the office for guidance in determining the best strategy for your personal situation.

408-252-1800

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