Tool Reimbursement Or Allowance
If you reimburse or provide an allowance to your employees to offset the cost of tools that they need for their job or you pay for their tools, the amount of the payment is a taxable benefit and should be included in the employees’ income.
When employed tradespersons file their income tax and benefit return, they may be able to deduct part of the cost of eligible tools they bought to earn employment income as a tradesperson.
Employers have to fill out and sign Form T2200, Declaration of Conditions of Employment, to certify that the employee must acquire these tools as a condition of, and for use in, their employment.
For more information, see Guide T4044, Employment Expenses.
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What Are Your Responsibilities
If you provide benefits to your employees, you always have to go through the same steps. If a step does not apply to you, skip it and go on to the next step:
- determine if the benefit is taxable
- calculate the value of the benefit
- calculate payroll deductions
In this guide, “employee” includes an individual who holds an office, unless otherwise noted.
Determine if the benefit is taxable
Your first step is to determine whether the benefit you provide to your employee is taxable and has to be included in their employment income when the benefit is received or enjoyed.
Whether or not a benefit is taxable depends on whether an employee or officer receives an economic advantage that can be measured in money, and whether that individual is the primary beneficiary of the benefit.
For more information on the term primary beneficiary, see paragraphs 2.14 and 2.23 to 2.25 of Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment. For some common examples of taxable benefits, see Chapters 2 to 4 of this guide.
The benefit may be paid in cash , or provided in a manner other than cash, such as a parking space or a gift certificate. For more information and examples, go to Pensionable and Insurable Earnings.
The manner in which you pay or provide the benefit to your employee will affect the payroll deductions you have to withhold. For more information, see Calculate payroll deductions.
Calculate the value of the benefit
You do not have to include the GST/HST for:
Can I Deduct Health Insurance Premiums Self Employed
Most self-employed taxpayers can deduct health insurance premiums, including age-based premiums for long-term care coverage. If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents.
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How To Apply The Percentage Threshold
This 7.5% rule is typically disadvantageous mathematically, unless you have significant other medical expenses in addition to your insurance premiums. You can include these in the deduction to help you get over the 7.5% threshold.
As an example, you could not deduct your premiums in 2020 if your AGI was $60,000 and you paid $4,500 in health insurance premiums over the course of the tax year because 7.5% of your AGI works out to $4,500. You didnt pay anything in excess of that figure.
But youve spent a cumulative total of $7,500 if you additionally paid $3,000 in additional uninsured medical expenses. This is $3,000 more than your 7.5% threshold so you can claim the entire $3,000 as an itemized tax deduction.
What Is Excess Advance Premium Tax Credit
The size of the advance premium tax credit is based on the household income estimate you provided when you applied for health insurance at Healthcare.gov or your state marketplace. So, you may find that you received excess advance payments.
You need to reconcile that amount with your actual income for the year and file Form 8962 with the IRS when you file your income tax return. If your actual income is higher than your estimate, you received a larger advance premium tax credit than was needed.
You usually need to repay the extra tax credit when you file your tax return. However, the federal government suspended the requirement to repay excess payments for 2020.
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Quebec Parental Insurance Plan
This plan replaces and enhances the measures provided to new parents under the Employment Insurance program administered by Employment and Social Development Canada .
The Canada Revenue Agency administers the requirements relating to Employment Insurance premiums. The Quebec Parental Insurance Plan references in this guide are only for clarifying EI requirements. All QPIP requirements should be confirmed with Revenu Québec, which administers the provincial plan.
Employers will use the EI rate corresponding to the province of employment. A reduced EI rate applies when the province of employment is Quebec and the regular EI rate applies when the province of employment is other than Quebec.
For more information on province of employment, refer to the section “Which provincial or territorial tax table should you use?”
Employers who have employees working in Quebec will use an EI deduction table specific to employees in Quebec. The deductions, remittances, reporting and the applicable new non-refundable tax credit will be based on the reduced EI rate. Employers should also track the QPIP information for T4 reporting.
The EI maximum insurable earnings will remain the same for all provinces and territories and will continue to be set by the federal government.
Group Term Life Insurance Policies Employer
This section applies to current, former, and retired employees.
Premiums you pay for employees’ group life insurance that is not group term insurance or optional dependant life insurance are also a taxable benefit.
A group term life insurance policy is one for which the only amounts payable by the insurer are policy dividends, experience rating refunds, and amounts payable on the death or disability of an employee, former employee, retired employee, or their covered dependants.
Term insurance is any life insurance under a group term life insurance policy other than insurance for which a lump-sum premium has become payable or has been paid. Life insurance for current employees would usually be term insurance, although it is sometimes provided for retired employees.
A lump-sum premium is a premium for insurance on an individual’s life where all or part of the premium is for insurance for a period that extends more than 13 months after the payment of the premium .
Calculating the benefit
If the premiums are paid regularly and the premium rate for each individual does not depend on age or gender, the benefit is:
- the premiums payable for term insurance on the individual’s life
- the total of all sales taxes and excise taxes, excluding GST/HST that apply to the individual’s insurance coverage
- any provincial insurance levies or sales tax that employers have to pay on some insurance premiums
Reporting the benefit
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What Can I Not Deduct From My Taxes
Any medical expenses that you are reimbursed for, like copays, would not be allowed to be deducted. As mentioned above, premium tax credits also fall under this category, as these credits allow you to reduce the health insurance costs that you would pay.
In addition, cosmetic expenses or procedures that are not related to your health would not count toward tax deductions. This can include hair transplants or other cosmetic surgeries that are not for the purpose of improving some underlying medical condition. Finally, you would not be able to deduct expenses for non-prescription drugs or general health purchases like toothpaste, vitamins or diet foods.
Loyalty And Other Points Programs
Your employees may collect loyalty points, such as frequent flyer points or air miles, on their personal credit cards when travelling on business trips, even though you reimburse them for the amounts they spend. Usually, these points can be exchanged or cashed in for rewards .
Your employees do not have to include in their income the value of the rewards they received or enjoyed from the points they collect on these business trips, unless any of the following apply:
- the points are converted to cash
- the plan or arrangement between you and the employee seems to be a form of remuneration
- the plan or arrangement is a form of tax avoidance
If any of the conditions above are met, the employee has to declare the fair market value of any personal rewards they received on an income tax and benefit return.
If you control the points you have to report on their T4 slip the FMV of any personal rewards they received from redeeming the points.
For examples of situations where loyalty and other points programs are considered taxable benefits, go to Loyalty and other points programs.
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Does Taxable Income Include Pretax Health Insurance
Pretax medical insurance is exempt from federal income taxes.
Health insurance isn’t cheap, even if you’re paying for coverage under an employer plan. However, using pretax dollars to pay for the plan helps you when it comes time to pay your taxes, because the money taken out of your paycheck to cover your premiums isn’t counted as taxable income for certain types of taxes.
Premiums As Part Of Overall Medical Expenses
Even if you are not self-employed, the Internal Revenue Service allows you to count medical and dental insurance premiums as part of the 7.5% of your adjusted gross income that has to be spent on health care before any out-of-pocket medical expenses can be deducted.
The deductibility threshold for medical expenses was briefly set at 10%, rather than 7.5%, from 2013 through 2016. But Congress reduced the threshold back to 7.5% as of 2017, and the Consolidated Appropriations Act, 2021, sets that as the permanent threshold.
A long list of health-related expenses can be included in your total medical expenses, including prescription medications and optional surgical procedures, like laser eye surgery to correct vision. The IRS has a list on its website.
Keep track of the out-of-pocket expenses you incur during the yearincluding health insurance premiums if you’re buying your own plan but are not self-employed . If your total costs exceed 7.5% of your AGI, you’ll be able to deduct the costs above that threshold, assuming you opt to itemize your deductionsmore on that in a moment.
So for example, if your AGI is $50,000 in 2021 and you spend $8,000 on medical costs, including health insurance premiums that you pay yourself and aren’t otherwise eligible to deduct, you’d be able to deduct $4,250 worth of medical expenses on your tax return .
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Do You Give Your Employee A Benefit An Allowance Or An Expense Reimbursement
Your employee has received a benefit if you pay for or give something that is personal in nature:
- directly to your employee
- to a person who does not deal at arms length with the employee
A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employees personal expense.
An allowance or an advance is any periodic or lump sum amount that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having them support the expenses. An allowance or advance is:
- usually an arbitrary amount that is predetermined without using the actual cost
- usually for a specific purpose
- used as the employee chooses, since the employee does not provide receipts
An allowance can be calculated based on distance, time or something else, such as a motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.
A reimbursement is an amount you pay to your employee to repay expenses they incurred while carrying out the duties of employment. The employee has to keep proper records to support the expenses and give them to you.
Is Health Insurance Tax Deductible For 2020 And 2021 Tax Year
Yes, if you reach the two above requirements, you could include out-of-pocket medical expenses that involved a doctor or health care professional.
Common items you can deduct from taxes include:
- Medical appointments
- Guide dog or service animal
- Wigs for patients who lost their hair due to illness
You can also deduct transportation expenses for going to the doctor — parking, tolls, mileage, cab or bus fares — and even airfare and certain lodging costs for out-of-town treatments.
But remember, you can only write off out-of-pocket expenses — copays, deductibles, etc. You cant write off the portion of the bills that your health plan or employer paid if you have an employer-sponsored plan.
Alan Steeples, certified public accountant and tax services manager at InConcert Financial Group, said the key to whether something is eligible for tax deduction is if a medical professional prescribed or recommended it. That can even include whirlpools for severe arthritis and air purification systems for patients with asthma. On the flip side, over-the-counter medication and vitamins aren’t usually eligible for deductions.
Rule of thumb: If its not prescribed or recommended by a physician, you cant write it off, Steeples said.
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You Can Deduct Your Premiums Even If Youre Not Self
But the self-employed health insurance deduction isnt the only way to deduct your Medicare premiums. You may be able to include them as an itemized deduction on your Schedule A instead. But you cant do both, as double-dipping is never allowed when it comes to taxes.
Taxpayers should look at them with and without, says Steber. Try it both ways and see which is a better bottom-line tax deduction.
If youre a small business making money, the deduction out front reduces your income. Thats usually the better tax benefit. But if your company is marginal and your Medicare premiums push you into a loss, then you can be limited , but you can itemize.
So you dont have to be self-employed to itemize your deductions, including medical expenses and your Medicare premiums count as medical expenses if youre itemizing. But if youre using the itemized deduction approach, you can only deduct medical expenses that exceed a certain amount, as explained below.
And its also important to understand that the Tax Cuts and Jobs Act, enacted in late 2018, increased the standard deduction significantly . This means that most people are unlikely to come out ahead with itemized deductions, and few tax filers choose to itemize their deductions. But it itemizing deductions is the more beneficial approach for you, know that you may be able to include some of your medical expenses among the deductions that you take.
Standard Deduction Vs Itemized
Tax deductions are claimed and filed through your yearly tax return that is sent to the IRS for review. The IRS offers two options for declaring deductions, which include either taking the standard deduction or itemizing your medical expenses. Both will ultimately reduce your adjusted gross income and therefore mitigate the amount of taxes that you would pay. AGI is the amount you earn in a given year minus any payments for alimony, student-loan interest and other costs. Recently, the Tax Cuts and Jobs Act has increased the standard deduction amounts along with suspending some of the itemized deductions available to you. For 2020, the standard deduction amounts are:
As shown above, depending on your situation, the standard deduction is a flat-dollar reduction of your AGI. When you take this deduction, you are essentially opting out of itemizing deductions. The biggest benefit to the standard deduction is that it makes the tax-prep process much simpler. For example, if you are single, have an AGI of $70,000 and decide to take the standard deduction, then your taxable income would be $57,600.
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What If You Need To Increase Your Magi To Qualify For Subsidies
On the other end of the spectrum, people living in states that have not expanded Medicaid may need to increase their MAGI in order to qualify for a subsidy, since Medicaid is available in those states on a very limited basis, and premium subsidies in the exchanges are not available to households with incomes below 100% of federal poverty level .
Navigators in those states recommend that residents keep track of every penny they earn, even from infrequent jobs. Some residents have been able to cobble together enough income from a variety of sources to get above 100% of poverty, even though the income from their primary job was too low to qualify for subsidies. Things like babysitting, selling extra garden produce, handyman work, and utilizing craft fairs to market a hobby like knitting or woodworking can sometimes make the difference.
But new rules finalized in 2018 require applicants to provide proof of their income if they attest to an income over the poverty level and existing federal data shows that the applicant has income below the poverty level. So people who are scrambling to attain an income of at least the poverty level need to keep careful records of their income sources so that they can provide proof of income if the exchange requests it.