While planning to reduce your taxable income is important, it is equally imperative that you take advantage of the multitude of federal and state tax credits that are available.
Raise your hand if you feel you paid too much in income taxes last year. There are probably many hands raised because 2013 saw a multitude of tax changes take effect that increased taxes for many people. We saw clients pay as much as 14-18% more in tax compared to 2012—when their income stayed constant! As 2014 draws to a close, it is important to discuss and plan accordingly with your tax advisor any changes that will affect you. This is a challenging year-end planning season as Congress has yet to decide on several tax breaks that expired at the end of 2013. To help you be prepared for 2014, 2015, retirement, and beyond, here are some tips to achieve maximum tax savings:
At the start of 2013, the IRS enacted a new 3.8% Medicare surtax on net investment income. The tax is imposed on the lesser of 1) net investment income or 2) gross income in excess of $200,000 for single filers or $250,000 for joint filers. Included in net investment income is any portfolio income (interest, dividends and capital gains), rental and royalty income, and income from businesses and pass-through entities that are passive activities.
In years past, depreciation has been an effective tax planning tool for businesses due to the favorable accelerated depreciation rules. As of now however, bonus depreciation has expired for 2014, and the Section 179 deduction is reduced to $25,000 with a dollar-for-dollar phase-out if you purchase $200,000 or more of assets during the year. This is one item that Congress may retroactively change, however as of the date of this article they have not done so.
One of the primary causes of higher income taxes in 2013 for physicians was the increase to the top income tax rate for individuals to 39.6% as well as an increase to the top capital gains rate to 20%. The IRS has recently released the inflation adjustments to the 2014 tax brackets, as listed below. In 2014, single individuals making over $406,750 and married individuals making over $457,600 will be subject to the top tax rate of 39.6%, as well as the top capital gains rate of 20% plus the 3.8% net investment income tax discussed above, for a total capital gains rate of 23.8%.
Note: If you have a C Corporation, be mindful that professional service corporations like physicians, accountants and lawyers are taxed at a flat 35%.
While planning to reduce your taxable income is important, it is equally imperative that you take advantage of the multitude of federal and state tax credits that are available. Tax credits are more beneficial than tax deductions because credits reduce your tax liability dollar for dollar. You may be eligible for a tax credit if you hired employees this year, paid for your employee’s health insurance, recently hired veterans or if you purchased disabled accessible equipment, just to name a few. Tax credits are often overlooked since they may not be reoccurring events. State credits vary by state, so be sure to discuss with your tax advisor potential areas that might apply to you.
The most important action item for you as a taxpayer is to contact your tax advisor and assess your tax situation prior to year-end. While there may not be a magic bullet to reduce your tax, knowing your outlook sooner rather than later helps eliminate the sticker shock of April 15th. Planning annually will not only prepare you for the current year, but help you reach your long-term goals.
David Botzis, CPA, is a Partner in the Charleston, South Carolina office of Dixon Hughes Goodman LLP, and also serves as the partner in charge of the Physicians Practice Group. He works with medical providers and practices throughout the region, providing support in the areas of strategic planning, income tax planning, compensation plan design and valuation services, as well as developing and improving operational efficiencies within their organizations. David can be contacted at firstname.lastname@example.org.
Scott Russell, CPA, is a Manager in the Charleston, South Carolina office of Dixon Hughes Goodman LLP. He is a member of the local physician services group, and works closely with the tax team to ensure timely tax return preparation and review. Scott can be reached at email@example.com.
Sam Winkler, CPA, is a Senior Associate in the tax department in the Charleston, South Carolina office of Dixon Hughes Goodman LLP, and also a member of the local physician services group. Sam can be reached at firstname.lastname@example.org.
Dixon Hughes Goodman LLP is a proud member of the National CPA Healthcare Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at email@example.com.
About Dixon Hughes Goodman LLP: With more than 1,800 people in 12 states, Dixon Hughes Goodman ranks among the nation’s top 20 public accounting firms. Offering comprehensive assurance, tax and advisory services, the firm focuses on major industry lines and serves clients in all 50 states as well as internationally. Visit www.dhgllp.com for additional information.