I Got Excited

I love helping people arrange their affairs to save taxes.  Recently, I had the opportunity to review the tax returns for a self-employed individual (H) and his wife (W).  H was reporting net business income on his Schedule C of around $90,000 and had wage income of 37,000 and other income of around $46,000 to total income of $173,000.  W had no other separate income.

The return was reasonably prepared (I mean no obvious errors) with deductions for a Health Savings Account, self-employment tax, Sep IRA, self-employed health insurance and IRA for his wife that reduced their adjusted gross income to $138,000.  Their Itemized deductions totaled $23,000 and the total federal taxes, self-employment income taxes and California taxes were around $36,000.

I asked H some questions and found out that his wife was his full time office manager and he had no other employees.  Then I got excited.

I explained to H and W that the business of H could set up a medical reimbursement plan for all employees (only W) that would pay all the medical costs of the employee (W) and her spouse (H) as long as the total amount paid did not exceed the reasonable compensation for the services that W provided H’s business.   H estimated that the full time services of W were $30,000.

Then I explained that if properly supported and documented business meals with his wife when they discussed and made plans for the business occasionally, they could deduct the meals subject to a 50% limitation.

Finally, I discuss with H that he could set up a one person 401K so he could increase the amount he could contribute and deduct each year for retirement savings.

If these recommendations had been in place for H’s and W’s 2016 tax returns, all the medical expenses paid in 2016 of $23,000 could have fully deductible business expenses, reducing their regular taxes and self-employment tax.   If they could justify and document certain meals during the year, perhaps they could have deducted 50% of perhaps $1,000-$2,000 in meals together.  This would have reduced the net business income of H to around $66,000.

Because H was over 50, H could have set up a one person 401K thereby contributing 20% of the net business income of $69,000 or $13,800 plus an elective deferral of $24,000 or up to $37,800 for 2016 in addition to W’s IRA contribution of $6,500.  This would have increased the deductible retirement savings for 2016 by over $20,000.

The net effect of these changes, if they had been implemented in 2016, would have reduced their taxes over $14,000.  We can’t do anything about 2016 taxes now.  However, H and W enthusiastically implemented my suggestions for 2017.  Don’t you just love it?

If you’re wondering what hidden gems might be found in your tax returns, let us take a look! It’s never too late to file an amended return. Contact our office today.

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