Prepare Your Taxes for 2003 and Beyond

Ed Rabinowitz

Physician's Money Digest, February15 2004, Volume 11, Issue 3

It has been said that the only thingscertain in life are death and taxes.Rather than take issue with thatstatement, it suffices to say that atleast part of it is true.

Income tax reporting comes everyyear on Apr 15, and filing an extensiononly affords you a temporary delay.The day of reckoning will eventuallyoccur, so it's wise to accept that andprepare yourself accordingly. Unfortunately,that doesn't always happen.

“A lot of our physician-clients don'teven open the envelopes containing1099s that they get from various banksand brokerage houses,†explains CarolKatz, CPA, deputy tax director at LeonardJ. Miller & Associates. “They just putthem in a pile and give them to us.†Thatcan lead to missed opportunities.

Being well prepared, therefore, isthe first important step toward havingan efficient and accurate tax return.

Organize Finances

Computerized accounting programslike QuickBooks (www.quickbooks.intuit.com) and Quicken (www.quicken.com) can offer major assistance attax time. Other programs, like Turbo-Tax (www.turbotax.com), are used inthe actual preparation of a tax return.Tony Curatola, PhD, professor of accountingat Drexel University's LeBowCollege of Business, explains that physiciansshould not be preparing their owntax returns.

“Unless they want me to treat myselfwhen I'm ill, they shouldn't prepare theirown return,†Dr. Curatola says.

But Dr. Curatola says Quicken canhelp. He explains that he can call up allof his American Express or Visa chargesand have them categorized or he can seea list of all the contributions he made theprevious year. He is then able to set up areport with specific categories or headingsand reduce the time he has to preparefor his own tax return.

Having all that information organizedand readily available offers physiciansmany advantages. Stuart Kertzner,managing partner at Gettry, Marcus,Stern & Lehrer, CPA, PC, points out thatthe neater the package an accountantreceives from their client, the lower thecost of the preparation because there'sless organizational time involved.

“Accountants, in general, work ontime,†Kertzner says. “If a physician isbetter prepared, it cuts down on theprocessing time, so the fee should bemore reasonable.â€

Dr. Curatola echoes those thoughts.“Most people today have portfolios. Ifit used to take me 2 days to list all of aclient's stock transactions during thecourse of a year but I can now do it in30 seconds, that means I can do anotherclient's return,†Dr. Curatola says.“It doesn't matter to me who I bill.â€

There are other benefits of beingmore organized, and Kertzner points outthat the better organized a client is, theless likely that a legitimate deduction willbe omitted. Accountants, he explains, arenot mind readers. “We can only preparea return based on the information wehave,†Kertzner says. “If clients fail tocommunicate or provide us with theproper information, deductions they'reentitled to might get overlooked.â€

To help facilitate that organizedmindset, most tax preparers providetheir clients with tax organizers, whichare blank forms indicating the informationneeded to complete the currentyear's tax return. The organizer alsocontains information from the previousyear, complete with itemized deductions,so physicians can see the amountsthey paid in real estate taxes or interest.

“A tax organizer is a great tool,â€Kertzner says. “Physicians should checkto make sure they've included everythingthat they did the prior year. And ifreal estate taxes appear to be muchlower this year than last, it's time torevisit figures and make sure nothinghas been missed.â€

Unfortunately, too many people arewhat Kertzner refers to as “shopping-bagclients,†throwing everything into abag or envelope and sending it along totheir preparer. “We look at the year-to-yearcomparison ourselves, but thatjust delays the process,†Kertznerexplains. “And in the heat of taxseason, all accountants are verybusy. So the more organized theinformation, the more efficiently areturn can be prepared.â€

Maximize Deductions

What many taxpayers do not realizeis that there is a wide range ofdeductions that they can take fromtheir gross income, regardless ofwhether they itemize on their incometax return or not. These include IRAcontributions; student loan interest payments;moving expenses; medical savingsaccount contributions; one half of self-employmenttax; health insurance premiumsfor the self-employed; Keogh,simplified employee pension (SEP) andsavings incentive match plans for employeescontributions to self-employedretirement plans; forfeited interest onearly withdrawals from CDs; and alimonypayments made.

There are also a number of itemizeddeductions you may be able to take.These include medical and dentalexpenses, mortgage interest, charitabledonations, and investment interestexpenses. In the case of charitabledonations, however, you must have areceipt from the charity for any donationof $250 or more.

What you should also do, if youhaven't already, is maximize contributionsto your 2003 pension plan. Forexample, if your practice has a qualifiedplan, such as a SEP plan or a 401(k),and the maximum dollar amount ofcontributions has not yet been made,you have until your tax return is filed inApril—or in August or September if youfile an extension—to contribute. Andfor those aged 50 and over, currentcatch-up provisions can make thosenumbers meaningful. For example,401(k) limits for 2003 are $11,000. Butthe catch-up provision tacks on an additional$2000. The key element here isthat the qualified plan had to be establishedby Dec 31, 2003.

In most cases, physicians are notgoing to be able to make IRA contributionsunless they are nondeductible. Andwith a Roth IRA, physicians will generallybe excluded due to how much theyearn. So maximizing contributions toqualified retirement plans is important.

There are, however, some otherschools of thought to consider when itcomes to maximizing pension plan contributions.One of the reasons for makingtax-deferred contributions, Dr.Curatola says, is that we believe ourtaxes are going to be lower, not higher,when we retire. And theoretically, thatshould be the case.

“But think about it,†Dr. Curatolasays. “Years ago, tax brackets were ashigh as 50%. What are they today?They're lower, so people who put awaymoney years ago did not truly benefit.It's impossible to know what's going tohappen in the future.â€

That's a lot to consider, but it highlightsthe importance of meeting withyour accountant or tax preparer at timesother than when Apr 15 looms near.“The head of our firm likes to say that aCPA is like a doctor,†Katz explains. “Adoctor assesses your physical and emotionalhealth. We assess your financialhealth. That's why constant communicationcan be very helpful.â€

Work with a Professional

Trust is a critical part of any relationship.Patients want trust with their physicians,so why shouldn't a physician expectthe same with their tax preparer?And that level of trust works both ways.

“The accountant is going to be signingthe return,†explains Richard Silpe,with the law firm Cozen O'Connor. “Hehas to be comfortable that the informationhe's receiving is true and accurate.And in selecting an accountant, a physicianwants to know who they're workingwith, as opposed to hiring a firm andhaving the return passed down to a first-yearaccountant.â€

How do you find a good accountant?Dr. Curatola insists there's no better waythan by word of mouth. “You shouldn'tjust look accountants up in a telephonedirectory,†he explains. “Would peoplepick a doctor that way?â€

Kertzner echoes those thoughts,pointing out that many of his firm'sreferrals come from one physician talkingto another. But word-of-mouth recommendationsare not limited to physicianinteraction. Hopefully, Kertznersays, physicians are working with agood attorney, and recommendationscome that way as well. An insurance orpension professional could also providea valued recommendation.

One school of thought in selectingan accountant is to make certain theyhave experience preparing tax returnsfor physicians. But Dr. Curatola pointsout that physicians, just like everybodyelse, are unique in many ways.

“Although two people might bephysicians and have the same type ofinsurance patterns, one might be onstaff at a hospital while the other mighthave their own practice and just be affiliatedwith a hospital,â Dr. Curatolasays. “Someone who might only beworking with one or two physiciansmight look at things differently andwith a fresh perspective.â€

The most important element, Katzsays, is to feel comfortable and build along-term relationship with the accountantyou select. And just as a doctorwould ask many questions of a patientto learn their health history, it's importantthat an accountant ask enoughquestions to learn about you.

“It's not just about the tax return; it'sthe whole person,†Katz says. “Does thedoctor have some type of buy-and-sellagreement in place? Are there estate-planningaspects tied in with their practice?Maybe the physician is consideringexpanding their practice or buying thebuilding where the practice is located.Many physicians have partnerships insurgery centers, and there are all kinds ofissues with how it's owned and what canbe written off. A good CPA planning firmwill go beyond the 1040 and look at thewhole picture.â€

Plan Strategies Now

Building a good long-term relationshipwith an accountant or other taxpreparer doesn't happen overnight, andit also doesn't grow out of limited, oncea-year contact as Apr 15 approaches.Communication and regular meetingsthroughout the year are important ingredients.That's because the planning process,according to Kertzner, is crucial.That's where money is going to be saved.

“It's a policy at our firm to do ayear-end projection for every physicianpractice,†Kertzner says. “We like to get9-month numbers, bringing them up asclose to year-end as possible.†Doingso, he says, helps answer a lot of questionsearly on. “Should the doctor prepaythe fourth quarter estimate? Is thedoctor in the alternative minimum tax(AMT)? Should real estate taxes be paidin December? Doctors don't want surprisesat the end of the year.â€

Those projections are important.Kertzner explains that the old accountingtheory was to accelerate deductions andprepay everything. But under new taxlaws, many physicians could fall underthe AMT. “Without doing a good projection,if a physician just prepaid everything,they could lose those deductionsbecause they fall under the AMT. That'swhy a planning strategy is so important.â€

At the same time you sit down withyour accountant to prepare your 2003tax return, talk about developing a planfor 2004 and beyond. As Dr. Curatolapoints out, there are tax law provisionsthat are valid for both 2003 and 2004,but they will change in 2005. A reallygood tax preparer, he says, forms ateam with their client. They're not justdoing the tax return.

“They may want to bring an attorneyin, look at your estate, and decide howthings should be handled in the future,â€Dr. Curatola explains. “It's a team approach,one that has the accountant, theattorney, and the financial advisor onboard. And the tax preparer should bethe one spearheading it.â€

“Physicians get gypped just as everybodyelse,†Katz says. “They could havea broker who is churning their account.We've seen that. Those are the kinds ofthings we pick up on when we examineall the information, when the physiciancomes to us in June when we have moretime and we can ask deeper questions.â€

Consider starting plans now foryour 2004 taxes, and maximize year-endplanning. If you do, you won't findyourself scrambling in December andsweating things out in March.

“You'll know that you don't have tocome up with a bundle of money inApril because you planned ahead,â€Kertzner says. “That should make it apainless Apr 15.â€