Friday, April 04, 2008

About Your Taxes . . .

In case you haven't noticed, April 15th is coming up. What did you do last year to cut your tax bill?

Make charitable donations? Suffer a casualty loss? Contribute to a retirement plan?

How about your health insurance and medical bills?

Under current tax law, most people cannot deduct their health insurance premiums and, in most cases, are not allowed a write down for out of pocket medical expenses. But with careful planning you can improve cash flow AND cut your tax bill.

Here is a real life example.

Joe & Mary are looking for health insurance. Joe is 52 and takes medication for HTN (hypertension) and high cholesterol. Mary is 50 and takes HRT (hormone replacement therapy) medication as well as HTN meds.

They are looking for a plan with copays for doctor & Rx and are willing to consider a plan with a $2,500 deductible.

The best plan that fits their criteria is $480 per month before underwriting loads. After adjustments the final premium is $570.

The plan has unlimited doc visits at $35 each, annual wellness exams for $60 and Rx copays. Based on the meds they currently take and figuring 2 doc visits (each) per year (plus the annual wellness benefit) their annual outlay for everything will run $8900.

That's a lot of money.

Even more when you figure they will pay all of that with AFTER TAX dollars.

In a 25% marginal tax bracket ($63,700 taxable income, married filing jointly) they will have to earn $11,867, pay $2,967 in taxes, to have $8,900 left over to pay premiums and out of pocket expenses.

Bill and Sue have an identical situation. They are the same age, have the same ailments, and in the same tax bracket. But Bill and Sue had an advisor (that would be me) that made suggestions on plan design including establishing an HSA to cover out of pocket expenses on a tax favored basis. It was also suggested that they ask their doctor about the possibility of switching their high priced brand name medications for just as effective generic drugs.

The results are remarkable.

Their premium drops from $570 per month to $300 and NO underwriting loads. It is suggested that they deposit the premium savings into their HSA.

This alone will save them $810 in taxes.

Add in the savings on medications by switching to generics and lower priced brand name meds their monthly outlay drops from $742 (premiums + out of pocket) to $586.

The annual cash flow savings is $1,872.

If they have a "normal" year, they will use $600 from their HSA to cover doctor visits and meds. Their HSA deposit totaled $3,240 and will have $2,640 left over that is THEIR money.

Add in the $1,872 in cash flow savings and the difference in the two plans is $4,512.

Did I mention this approach saves $810 in taxes?
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