Medical expenses of self-employed

If you're self-employed, an IRS ruling shows how you can get a full deduction for your family's medical expenses.

Medical expenses are an itemized deduction, but only to the extent that they exceed 7 1/2% of your adjusted gross income. Unless you've had unusual medical expenses during the year, this limitation will eliminate or sharply reduce the deduction that you can claim.

There is a provision in the tax code that allows you, as a self-employed individual, to deduct 60% of the amount paid for health insurance for you, your spouse, and your dependents. The deduction amount rises to 70% for 2002, and 100% for 2003 and later years. Still, at least until 2003, it covers only a portion of your medical costs.

But at least one self-employed person found a way, with IRS approval, to deduct all of his family's medical expenses. He did so by hiring his wife to work in the business as a bona fide employee. The business had an accident and health plan that covered all employees. Under the plan, the wife was reimbursed for her own medical expenses, and those of her husband (the business owner) and their dependents. IRS ruled that the business could deduct the medical expenses that it reimbursed, but the wife wouldn't be taxed on any of the reimbursements.

In the right situation, this strategy can be a real tax saver.


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