By DALIA CANTOR, CPA
No one likes April 15th surprises that involve writing large sums of your hard-earned dollars to Uncle Sam, hence it is important to stay proactive and implement effective tax strategies throughout the year.
I suggest my clients review current year tax situation at least twice during the year and at times more frequently, if the circumstances call for it:
- Review your tax projections sometime in July when you have 6 months of practice results ready and at that time usually have a fairly good idea where the year is going;
- Revisit your tax plan and estimates in November or early December to make sure you are on track and if things changed you still have enough time to make tax advantageous decisions before the year is over;
- Be aware of life events that may affect your tax situation such as marriage, divorce, changes in dependents, sale or purchase of assets, retirement, etc. Should you have one or more of these changes occur, it is always wise to review your tax plan and make changes accordingly;
- Keep in touch with your trusted tax adviser to stay current with tax law changes and how they may affect your individual tax situation. This is especially important this year as we have tax reform on its way that will most likely impact many of us.
So, your practice is thriving - you made all the right changes to increase collections by tightening your billing and receivables process, you achieved efficiencies in controlling your overhead and your profitability is rising....along with the taxes that you will end up paying on those profits. I often hear physicians say - I am better off making less so I don't have to give it all to the government. It is not true if you take the right steps to take advantage of the many opportunities to implement right tax strategies on the practice and personal level that will minimize your tax burden yet allow you to keep the excess profits.
Some of the tax savings tools seem obvious yet are still being overlooked by many physicians and their tax advisers. Just to name a few:
- Pretax contributions to retirement plans such as a 401(k), 403(b), 457 plan or, in certain cases, tax-deductible contributions to Traditional IRAs. Many physicians will not be able to deduct their IRA contributions and should consider a "backdoor Roth IRA contribution" strategy;
- Defined benefit retirement plans (also known as "pension plans" or cash balance plans) allow self-employed physicians and doctors who are shareholders in their medical practices to deduct contributions to these plans and defer income tax to a later date. In addition to contributions to 401(k) plans, younger physicians might contribute an additional $30,000 to a defined benefit plan while doctors approaching retirement might contribute up to $180,000 per year, deferring somewhere between $12,000 and $72,000 in federal income taxes (assuming the 39.6% tax bracket). This tax strategy requires careful business planning an often involves the services of a pension actuary or "third party administrator" and other professionals such as an attorney, and a registered investment advisor;
- Purchasing needed medical equipment before the year is over to take advantage of accelerated or bonus depreciation. Even if you finance the equipment purchase you can still take full advantage of the write off;
- Tax-loss harvesting which is selling a losing investment in a taxable account to intentionally realize the loss. The first $3,000 of losses can be used to offset ordinary income, saving the average physician $1,000 to $1,500. The remaining capital loss can be carried forward for up to 20 years and used to offset future capital gains;
- Student loan interest is not deductible for most physicians due to high income limitations and phase outs. However, physicians can use a home equity line of credit (HELOC) or a cash-out refinance to get cash to pay down student loans, thereby converting the interest into a tax deduction;
- Loss from a rental property is also often disallowed for physicians due to high income limitations, however, mortgage interest and property taxes on a rental home can be deducted as itemized deduction for a second home.
Some of you are ready to scale back as you near your retirement age and therefore need to reevaluate your tax strategies to take into account reduced production and properly align your salaries and income tax withholding. Most of us are so focused on putting money away for our retirement when we are actively working, yet many fail to properly execute the exit. You know how to climb up the hill but do you know how to go down?
There is no cookie cutter when it comes to individual tax planning - every client and their situation is unique. Now is a great time to get together with your CPA to review your tax planning strategies and get creative.