Even if your parent files their own personal income tax return and doesn’t meet the criteria for you to claim them as a dependent on your own tax return, you might still have the opportunity to deduct their medical expenses when you file your taxes. If you are responsible for providing more than half of your parent’s financial support, you can potentially claim the medical expenses you’ve paid on their behalf throughout the year as a tax deduction. The key to this deduction is the total medical expenses, including those incurred by your parent and your family, that exceed 7.5% of your adjusted gross income (AGI) as stated on your tax return.
In many cases, the medical expenses for your parent are related to care received at a healthcare facility designed to cater to elderly individuals. When your parent is at such a healthcare facility and receives qualifying medical treatment, these expenses can typically be fully deducted on your taxes. This deduction may also extend to lodging and meal expenses. Meal and housing costs for a patient at a medical facility are generally considered fully deductible as medical expenses if the primary purpose of their stay is medical care rather than personal senior housing.
Typically, if your parent is no longer able to care for themselves independently or is suffering from a chronic illness, the costs associated with meals and housing are considered ancillary to their medical expenses and can be claimed as deductions on your taxes, provided you paid for these expenses and meet the support criteria mentioned above. According to the IRS, a chronically ill individual is someone who has been certified (at least annually) by a licensed healthcare practitioner as either unable to perform at least two activities of daily living without substantial assistance for at least 90 days or requiring substantial supervision due to severe cognitive impairment to protect their health and safety.
While healthcare facilities can often offer guidance on what costs qualify for a medical deduction, it’s advisable to have a follow-up discussion with your tax preparer to ensure a clear understanding of which expenses will be eligible for deduction on your tax return.
For 2023, the allowed max salary deferral for a 403b or 401k plan is $22,500 (or $30,000 if age 50 by the end of the year). If you have already funded an amount to an employer sponsored retirement plan via salary deferral, then you will be limited in your allowed salary deferral at a second place of employment in a year, whether you work a second job or change jobs throughout the year.
If you do overfund your allowed salary deferral to a 403b and/or 401k plan in a calendar year, then the excess (plus earnings on the amount overfunded through the date of correction) needs to be refunded by April 15th of the following calendar year. The overfunded amount plus earnings will be taxable in the calendar year overfunded but will not be subject to the 10% penalty when distributed from the plan back to you. The excess deferral and associated earnings distributed back to you are reported on a Form 1099-R.
Another consideration when you switch employers pertains to the retirement funds at your prior employer. You generally have the option of keeping those retirement funds invested in your former employer’s retirement plan.
Another option that may help simplify your tracking and management of your retirement funds over time, would be to instruct your prior employer’s retirement plan administrator to distribute the funds from that plan as a direct rollover into either your current employer sponsored retirement plan or into an Individual Retirement Account (IRA). Consolidating retirement accounts if you periodically switch employers will help you track to better track your retirement assets.
Heading into the last quarter of 2023, October is the perfect time of year to review your year-to-date paystubs in order to maximize pre-tax benefits and other withholding items. Examining your year-to-date paystub early in the final quarter of the year gives you a chance to make any needed adjustments before the opportunity passes by if you wait until the end of December.
Here are a few good questions to ask to see if you should make changes:
Are you on target to fund the maximum allowed 401k or 403b salary deferral amount?
For 2023 the maximum salary deferral is $22,500. Plus, if you are age 50 or older you are eligible to fund an additional “catch-up” amount of $7,500 making your total allowed contribution for 2023 $30,000. Turning age 50 at any time within the year allows you to fund the “catch up” provision as early as January 1 of the current year. You don’t need to wait until the actual day of turning 50 to begin funding the additional $7,500.
Did you switch jobs or work multiple jobs during the year and fund a 403b or 401k at each place of employment within this calendar year?
The 401k/403b max salary deferral is the total allowed salary deferral for employees from all places of employment during the calendar year. You are not allowed to fund the $22,500 ($30,000 including catch-up) maximum salary deferral limit at each separate place of employment.
Does your employer offer a pre-tax childcare and/or health Flexible Spending Account (FSA)?
Don’t forget, FSAs offered by your employer are “use it or lose it”. If you are funding an FSA for childcare or health care expenses, check your remaining balance available to be sure that the funds are fully used by year-end. Unless your employer has a rollover or a grace period feature, your unused funds at year end are forfeited back to the employer and not eligible to be carried over into the following year. However, if your employer has implemented the rollover option for your health FSA, then you can carryover up to $610 of unused funds from 2023 to 2024. Or, if your employer has implemented the grace period option (applicable to both dependent care and health FSAs), then the December 31 cutoff date is allowed to be extended until March 15 of the following year to use up remaining unused funds still available at the end of the year. For a health FSA, the max contribution limit for 2023 is $3,050 per individual. For a dependent care FSA, the max contribution limit for 2023 is $5,000 per household ($2,500 if married filing separately).
Are you taking advantage of a Health Savings Account (HSA), if offered by your employer?
If your health insurance plan is a “high deductible health plan” you are allowed to fund an HSA. Funding is made with pre-tax dollars. For 2023, the max contribution limits are $3,850 for self-only coverage and $7,750 for family coverage. If you are age 55 or older at the end of the year, then you can also fund an additional $1,000 into your plan. Plus, if your spouse is age 55 or older, he/she can establish a separate HSA and fund an additional $1,000 catch-up contribution into that account making your total family HSA contributions for 2023 $9,750. The major difference between the health FSA and an HSA is that the health FSA is “use it or lose it” at year-end while the HSA works more like an IRA where the unused funds remain in the HSA continuing to grow tax-free and available to be used for qualified medical expenses in future years.
Did you receive a large bonus or have some other significant compensation payout during the year?
The “federal supplemental withholding tax rate” is 22% on special compensation payments to employees. Typically for bonuses and other special compensation payments paid to you by your employer, federal taxes withheld from the payment are 22% of those taxable wages. If you are in a higher federal tax bracket than 22% (which is often the case), then federal taxes withheld will be too low and you may find yourself owing taxes next April. And if you are in a 35% or 37% federal tax bracket and the payout is significant, then your federal tax balance owed the following April tax filing date could be significant as well. A good idea would be to track down any paystubs reflecting special compensation amounts to see how federal taxes were withheld.
Effective January 1, 2024, the Corporate Transparency Act (CTA) establishes a new filing requirement for small business. Qualifying businesses must file a Beneficial Owner Information (BOI) report with Financial Crimes Enforcement network (FinCEN), a bureau under the Department of Treasury.
According to the bureau’s website, the expectation is that nearly all small businesses will meet the criteria and must file (Beneficial Ownership Information Reporting Rule Fact Sheet | FinCEN.gov).
The CTA details 23 exemptions from filing a BOI report. Notably exempt are “large operating companies” defined as any entity that “(a) employs more than 20 full-time employees in the U.S., (b) has filed a federal tax return or, if applicable, consolidated federal tax return recording more than $5 million in gross receipts or sales in the previous year and (c) has an operating presence at a physical office in the U.S” (FinCEN’s Proposed Rule: The Who, What and When of Beneficial Ownership Reporting under the CTA |… (williamsmullen.com))
Information on the reporting company itself that must be disclosed in the BOI report filing:
- Full name of the reporting company
- Any trade name or ‘doing business as’ name of the reporting company
- Business street address of the reporting company
- State or Tribal jurisdiction of formation of the reporting company
- IRS TIN of the reporting company
And for each beneficial owner identified, the reporting company must provide:
FinCEN defines “beneficial owner” as “any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company”.
Entities registered before January 1, 2024 have one year to file initial reports. Entities registered after 1/1/24 will have 30 days from notice of registration to file. Penalties for reporting violations are severe, reaching up to $10,000 in fines and up to 2 years imprisonment for criminal violations.
Interest rates generally move in the same direction as inflation. And with inflation creeping up over the past year or so, interest rates being offered by banks have jumped up too.
If you have excess money sitting in your practice bank accounts, please take a few minutes to set up a companion savings account and transfer any money not needed for working capital into that account. You should be able to earn 4% or more on those funds previously earning no interest. That equates to $4k of interest on every $100k transferred into an interest-bearing account.
For working capital, we generally recommend that our clients keep just one to two months of expenses on hand. Expenses include your “non-doctor” overhead costs, the salaries and benefits paid to your associates, the salaries and benefits paid to you and your family members, loan payments, and money needed to invest back into the practice within the next year or so to purchase equipment or improve the facility.
Another option is to take distributions from your practice and personally invest those funds into a savings account. Personal savings accounts generally pay a higher interest rate than what banks offer for accounts owned by businesses. Please be aware that there might be a tax pitfall when taking distributions from newer practices. As long as you have owned the practice for a while and the bulk of the practice loans have been paid off, you should be able to take distributions from the practice and personally invest those funds into a high-yield savings account, certificate of deposits, or money market accounts without triggering a tax on “distributions in excess of basis”.
Your 2022 tax return needs to be filed by Monday, October 16. With the partnership and S-Corp extension filing date of 9/15 behind us, taxpayers that were waiting on late K-1’s should have received them by now.
And, if you filed an extension back in April to give yourself more time to fund your retirement plan for you and your staff if you operate your practice as an unincorporated business, the deadline to top off your retirement plan for 2022 is also 10/16/23.