Year-end tax planning for 2014 is particularly challenging because Congress has yet acted on a host of tax breaks that expired at the end of 2013. It is uncertain at this time whether the extender provisions will be extended by Congress on a permanent or temporary basis (and whether any such extension would be made retroactive). These extender provisions may be dealt with as part of a broader tax reform effort, be examined on an individual basis as opposed to as part of the traditionally passed ”extenders package,” or simply allowed to remain expired. These tax breaks include the following:
- An option to deduct state and local sales and use taxes instead of state and local income taxes
- An above-the-line-deduction for qualified higher education expenses
- The use of tax-free IRA distributions for charitable purposes by those age 70-1/2 or older
- The exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence
Our doctor clients that are retired may find numbers one and three above to have some impact on their planning, but for most other doctors these individual provisions will have no impact on their personal returns.
- 50% bonus first year depreciation for most new machinery, equipment and software – Expired
- $500,000 annual expensing limitation – Reduced back to $25,000 limit
- Research tax credit – Expired
- 15-year write-off for qualified leasehold improvement property – Expired
Our healthcare business clients may find numbers 1, 2 and 4 to have an impact on their tax planning this year. In the past several years these tax provisions have been extended; however, this year an “extender package” may not be available.
Tax planning towards the end of this year will take on the same time-honored approach of deferring income and accelerating expenses to minimize your 2014 income taxes.
First of all, we will want to keep an eye on the suspended Business tax deductions noted above. If these regulations are reinstated for 2014, taking advantage of the accelerated depreciation or election to expense more than $25,000 of capital purchases will be worth considering.
Effective year-end tax planning should take account of each doctor’s particular situation and planning goals, with the aim of minimizing taxes to the greatest extent possible. Doctors are often taxed in higher tax brackets – the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds (which are lower than the thresholds at which the phase-out of itemized deductions and personal exemptions begins). So, while many doctors may come out ahead by following the traditional approach (deferring income and accelerating deductions), others, who might be in lower tax brackets or have special circumstances, may benefit from considering accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect.
The following are a few examples of year-end tax strategies and planning to consider:
- If you are operating your business as an S-Corporation, give consideration to maximizing the pass-through income and then distribute the money as a dividend. You should take caution to setting this dividend too high for various reasons, but moving in this direction makes sense today. Dividends received through your S-Corporation will be taxed as ordinary income, but you will save money on payroll taxes and surtaxes that may apply.
- Many doctors experienced losses in their investment portfolios several years ago when they sold out during a down-turn of the market and are carrying over their losses each year due to limits on deducting the overall loss. If your current portfolio has experienced gains, give consideration to selling your investment at a gain that can be off-set with prior year losses that are being carried forward from year to year. If you like the investment, you can always re-purchase, which will then establish a new basis for a sale down the road. Just keep in mind, that you can’t sell and investment at a loss and then repurchase the investment and still take the loss due to what is called “wash-sale” rules.
- Historically, you may have taken the approach of delaying your billing so that you can move income into the next year. While this might make some sense from the tax viewpoint, I’m not in favor of this from a business standpoint – especially, for my healthcare businesses. Working and maintaining your accounts receivable trumps taxes, in my opinion (see 5 Actions Steps for Optimizing Your Collections). Accelerating your expenses at year-end still makes for good tax planning. Take advantage of year-end sales from your clinical and office suppliers. Pay for these supplies and other invoices prior to December 31st. If you expect that your cash flow will improve in January (it often doesn’t, however), you can put the costs on a business credit card. For cash basis taxpayers, an expense charged on a credit card is considered as though you actually paid for the item when you charge it on the card. Keep in mind, that you need to have a business credit card – doctors that put the expense on their personal do not receive a business deduction until the business reimburses the cost to the doctor.
- Over the years of working with doctors, I have seen life-circumstances have impact on my clients and their business. Changes in a doctor’s tax status due, say, to divorce, marriage, or loss of head of household status should be considered. For example, if your 2014 tax filling will be as “Head of Household”, and then the following year will be “Single” it may be wise to accelerate your income into 2014 to take advantage of the “Head of Household” filing. Certain widows or widowers whose spouses died will need to look at the impact of filing a joint return versus filing as a single taxpayer in years following the loss of their spouse. And, reviewing your tax situation in the year you plan to be married is also something to be considered.
- Doctors who are trying to save money for their retirement should give consideration to funding an IRA in coordination with their typical qualified retirement plans that they have at the office. Utilizing this approach to savings allows for options of either deferring the earnings until retirement or potentially converting the IRA to a Roth IRA, which currently holds favorable tax status. For more information on this discussion, see Consider Converting Your Traditional IRA to a Roth IRA.
- Be on the look out for Alternative Minimum Tax (AMT). I find this affecting doctors more today than ever before. While you may not be able to keep it from impacting your tax return, you can try to minimize the effect. If you are subject to AMT, be sure to review the deductions that are causing it to occur in your situation. You may be able to time your expenses from year to year that will help minimize the impact of AMT.
- Finally, being charitable with your money can provide you with tax savings. There are many ways in which you can spread the love to your favorite charity – simply writing a check is one way, but beginning in 2014, again, your itemized deduction may be subjected to a partial phase-out based upon your income. You might consider supporting your charity through your business by advertising with them at a fund-raising function. This would move the deduction from your personal return to your business return, which will ultimately reduce your available income that you would receive from the business and taxed personally. This action would take planning, especially if you are in a group practice. Another option for being charitable is to gift appreciated assets. Recently, I had a doctor gift a rare Civil War document to a museum that he acquired. This will turn out to be a great deduction in his situation.
Attempting to limit your tax exposure takes planning. And, that planning doesn’t occur just when you file your taxes in early 2015 – it happens through-out the year. Doctors that invest their time with their tax advisors during the year will move in the right direction for saving taxes when they ultimately have their tax advisor file their return.
Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™, Enrolled Agent, and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client, contact Mike at www.vmde.com.