For most fitness professionals, the idea of deducting all their medical expenses might sound too good to be true. However, it’s actually a real perk built into their day-to-day operations. As a fitness entrepreneur, you can deduct 100% of your medical insurance monthly premiums.
However, even though you are deducting your monthly premiums, you might be missing out on the deductions for the out-of-pocket costs such as doctor visits, prescriptions, contact lenses, etc.
So, are you getting a tax deduction for your medical expenses? Most Fitness Entrepreneurs are not. Let me explain why this is the case and teach you how to get the most of your medical tax deductions!
You will see the challenge most face when we review how the Medical Deduction works.
There are 2 components of your Medical Deduction:
1. Your monthly premium for Health, Vision & Dental
2. Your out-of-pocket expenses for doctors’ visits, treatments, prescriptions, contact lens, etc.
For us business owners, these are treated separately. Let’s dive into these two a little more deeply so you get a clearer picture.
Your Monthly Premium
As a Fitness Entrepreneur you are eligible to deduct 100% of the monthly premiums if you meet two qualifications. One being that you have a net profit in your business and the other being that you are NOT offered qualifying health insurance from another employer (or your spouse’s employer).
If you are self-employed with no other health insurance, you can deduct the monthly premiums. This is deductible regardless of if your entity structure is a Sole Proprietorship, LLC or S-Corporation.
Side Note: The procedure changes for an S-Corp, but the deduction IS allowed. If someone tells you that it is not allowed as the owner of an S-Corp, please seek another opinion from a different accountant.
Your Out-of-Pocket Expenses
The way to get this tax deduction requires some math. Let's break it down with a simple example.
Medical expenses are only deductible after you spend 7.5% of your income. If your fitness business made you $100,000 in profits (not revenue, profit) …you need to spend $7,500 ($100,000 * 7.5% = $7,500) in medical expenses BEFORE the deduction BEGINS! And this is just for OUT-OF-POCKET expenses!
We are not including any of the monthly premiums here. Those deductions are captured for you in component #1. So, in this hypothetical example, you need to spend $7,500 before any tax deduction kicks in. If you had $5,000 of medical expenses from doctors’ visits and prescriptions in 2022...Your medical tax deduction is $0.
If your medical expenses were $8,000...your medical tax deduction is $500 ($8,000 - $7,500). Without adding too much tax complexity, I will add 1 more variable here.
In the scenario above with the $8,000 expense turning into a $500 deduction:
• That $500 is what is referred to as an "Itemized Deduction".
And currently, in 2022, for over 80% of US taxpayers it's more favorable to take the "Standard Deduction". Thus, completely circumventing the little bit of medical that you might have tried to deduct.
As you can see, depending on your income, most Americans are leaving most of their out-of-pocket medical expenses on the table without a tax deduction.
2 Ways to Turn Expenses at Into a Deduction
• Do you have a lot of out-of-pocket expenses?
Upgrade your medical plan to reduce the out-of-pocket deductible. The premiums will still be deductible for you, so if you upgrade your plan to pay more per month and reduce your out-of-pocket expenses you will push more of those dollars into a tax deduction.
The downside is if you had one-time expenses like an injury, then next year you might be paying for an expensive health plan that you are not using. The goal is to pay less tax, not to waste money.
• Do you infrequently see the doctor and have low expenses?
Consider a Health Savings Account (HSA). These plans allow you to open a bank account that you can fund with pre-tax money each year. If you need to pay for a doctor visit, you can use the HSA account money (just like using a debit card) and fully deduct it.
For 2022, you can put up to $3,650 as an individual ($7,300 per family) into an HSA account.
In the example above, the $500 is now fully deductible because you can pay directly from the HSA bank account.
There are PROs & CONs to HSAs
o Typically lower monthly premiums
o Little known feature of HSA is that the money can be invested just like a retirement account such as an IRA.
o High deductibles before the insurance “kicks in”. Meaning that a doctor or hospital visit can be very expensive.
I would only recommend an HSA if you were healthy and can commit to contributing money into an HSA account. Otherwise, you have a very low-cost health insurance that if you get sick or injured could be thousands of dollars in doctor bills.
As a Fitness Entrepreneur, you are likely healthy and not incurring many medical expenses. The ones that you do incur it’s likely you are not maximizing your tax efficiency. In addition to picking the right plan, it is equally important to do your best to add up all available qualified medical expenses.
Disclaimer: This is meant to be educational. Tax deductions all have complex rules that require documentation and reporting to properly and legally take the deduction. This was not advice for your specific business. Please speak with a qualified tax professional before making any changes to your tax deduction strategy.