While you are taking care of your patients, who is taking care of your income tax concerns? A few tax planning strategies can legally reduce your tax liability and protect your assets.

 

Tax planning requires a commitment by the taxpayer in developing strategies: income tax reduction and asset protection. This will positively affect their tax liability in current and future tax years. These tax strategies can be short-term, long-term, business, and personal. Long-term tax planning strategies become more complex and will necessitate more time to consider, research, and implement. Tax planning must be individualized based on the uniqueness of each taxpayer and will require a comprehensive financial review to ensure that proper tax strategies will be implemented.

 

A few examples of long-term tax strategies would include Charitable Remainder Trusts, Family Limited Partnerships, Cash Value Life Insurance, and Section 1031 Like-Kind Exchanges.

 

Charitable Remainder Trusts – Charitable Remainder Trusts are irrevocable trusts where property or money can be donated to a qualified charity. The tax benefits allow the grantor to receive a current year income tax deduction for the fair market value of the charity's interest in the trust, the avoidance of capital gains on the appreciated value of the property donation, and could exclude the property from estate taxation. Additionally, the grantor will retain the right to continue using the property and/or receive payment of income from the asset. The qualified charity will receive its interest in the trust upon the death of the grantor.

 

Family Limited Partnerships – Family Limited Partnerships are partnerships where ownership of personal assets is contributed to the partnership in exchange for general and limited partnership interests. The donor will retain control and management of the assets and will have the ability to gift portions of the limited partnership interests to his or her children. The tax benefit will allow the partnership to allocate income and expense proportionately to the partnership interests. The allocated income will shift the tax liability from the original owners who pay taxes in a higher tax bracket to their children who will pay taxes in a lower tax bracket. Since the partnership will have ownership of the property not the partner, the family limited partnership entity will protect the partnership assets from creditors and from lawsuits against the partners. The Internal Revenue Service may examine the value of gifted limited partnership interests in a family limited partnership. It is important that the family limited partnership be properly structured to pass Internal Revenue Service examination.

 

Cash Value Life Insurance – Cash Value Life Insurance policies are a purchased life insurance policy which will accumulate cash value through interest income and other earnings and will pay a specified death benefit. The tax benefits allowed include tax free accumulation of interest income and other earnings, tax free death benefits to the beneficiaries, and the possible avoidance of estate taxes. A cash value life insurance policy should earn a higher or at least an equal return on investment after taxes than could be earned on an alternative investment.

 

Section 1031 Like-Kind Exchange - A Section 1031 Like-Kind Exchange transaction is where like-kind assets are exchanged in a tax free transaction. The tax benefit allowed will defer any appreciated value in the asset and not subjecting the increase in value to any capital gains tax. To illustrate, you have unimproved land which was purchased for $200,000 and now is worth $250,000. You have need of an office building. A seller has an office building worth $250,000 and is willing to trade for unimproved land. A sale would be negotiated under Section 1031. You would defer the taxes on the appreciated value of $50,000 and would incur no current income tax liability on this exchange transaction. On the future sale of the Section 1031 property you would incur an income tax liability based on any appreciated value.

 

As you may know, the above considerations are only a few of the many tax strategies which you may avail yourself. You are engaged at work and enjoy an active life, but taking time for tax planning and for developing strategies to protect your assets will be worth it. If you spend the time, you will be working more for your benefit and less for the U.S. Government's benefit.