Tax Guide to Deducting Long-Term Care Insurance Premiums
(Tax Strategies to Optimize Deductions and Reduce Liabilities)
Long-term care costs can be substantial, and neither Medicare nor Medicaid provide comprehensive coverage for most people. Long-term care insurance can help protect your finances, and there may be ways to deduct the premiums, depending on your business structure.
Here are four key points to consider:
C corporations can provide long-term care insurance as a fully deductible, tax-free benefit to owners.
Sole proprietors or single-member LLCs with a spouse as the only employee may be able to deduct 100 percent of the premiums through a Section 105-HRA plan.
S corporation owners, partners, and other sole proprietors may be able to deduct premiums subject to age-based limits.
If you don’t qualify for business-related deductions, you might deduct premiums as itemized deductions subject to age-based limits and the 7.5 percent floor.
Smart Solutions That Decrease Social Security and Medicare Taxes
For 2024, the Social Security tax ceiling increased to $168,600, resulting in a maximum Social Security tax of $20,906 for high-earners. This ceiling is projected to rise annually, reaching $242,700 or more by 2033. Additionally, a 2.9 percent Medicare tax applies to all wages and self-employment income, with an extra 0.9 percent for high-income earners.
If you’re self-employed, these taxes can be particularly burdensome. Here are three strategies that can potentially reduce your tax liability:
Operate as an S corporation – The corporation can pay you a reasonable salary while distributing remaining profits, exempt from self-employment taxes.
Leverage community property rules – Married filers in community property states can use IRS rules to create or eliminate a spouse partnership to reduce self-employment taxes.
Avoid the husband-wife partnership classification – With careful structuring, you can prevent this classification and reduce self-employment taxes.
Each of these strategies has specific requirements and trade-offs.
What Happens When You Die and Your S Corporation Owns a Rental?
If your S corporation owns a rental property, a common concern is whether the property receives a step-up in basis upon your passing. While the rental itself doesn’t get a step-up in basis, your heirs will achieve the same outcome:
Heirs inherit the S corporation stock at its stepped-up fair market value.
S corporation sells the rental, recognizing a gain.
Gain increases heirs’ basis in the S corporation stock.
Upon liquidation, heirs recognize a capital loss, offsetting the earlier gain.
The result? Potentially no federal income tax liability upon sale of the property, mimicking the traditional step-up in basis treatment.
Reduce Taxes by Using the Best Cryptocurrency Accounting Method
Crypto investors can optimize their taxable gains by choosing the right accounting method. Suppose you bought one Bitcoin for $15,000 (held for 14 months) and another six months later for $40,000, then sold one for $60,000. Your taxable gain could be $45,000 or $20,000 depending on your accounting method.
FIFO (First In, First Out) – Default IRS method; results in $45,000 taxable gain.
HIFO (Highest In, First Out) – Sells highest-cost crypto first; results in $20,000 taxable gain.
LIFO (Last In, First Out) – An alternative method with different tax implications.
To use specific identification methods, you must keep detailed records, including acquisition and sale dates, basis, and fair market values. Many investors use crypto tax software to automate these calculations and ensure compliance.
Avoid the Hidden Dangers of the Accumulated Earnings Penalty Tax
If you operate a C corporation, beware of the Accumulated Earnings Tax (AET). The IRS can impose this 20 percent penalty tax if your corporation retains excessive earnings instead of paying dividends.
To avoid the AET:
Elect S corporation status.
Retain no more than $250,000 ($150,000 for personal service corporations).
Document business reasons for retaining earnings (e.g., expansion, debt repayment, stock redemptions).
Proper documentation, including corporate minutes, business plans, and budgets, is critical in demonstrating the need for retained earnings beyond the threshold.
By implementing these tax strategies, business owners can optimize deductions, reduce tax liabilities, and protect their assets for long-term financial stability. For personalized guidance, consult a tax professional who can tailor these strategies to your specific situation.