Tax Planning Tips to Achieve Maximum Tax Savings

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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.

  • Tax Tip: Review how your income sources are classified with your tax advisor. Do you own multiple real estate rentals? Do you own real estate that you rent to your medical practice or business? Are you invested in multiple partnerships that are your trade or business? It may be possible to group multiple activities together and get them out of the passive classification.

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.

  • Tax Tip: If you own your own business, don’t neglect to take advantage of this, but be sure to monitor your purchases and ensure they have an economic and business purpose, because tax benefits may be limited.
  • Tax Tip: Depreciable real estate often constitutes a substantial percentage of a company’s assets. If you recently acquired a building or did major expansions/renovations and would like to increase your cash flow, consider having a cost segregation study performed. This is an engineering-based study that generates tax savings by identifying shorter-life assets within real estate, such as certain electrical and mechanical systems, decorative features, specialty fixtures, and equipment and land improvements. These assets are segregated and reclassified to qualify for 5-, 7-, or 15-year depreciable lives. Such costs are typically included in construction or acquisition calculations and depreciated over 39 years. Maximizing available depreciation deductions reduces current taxes and accelerates cash flow.

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%.

  • Tax Tip: If possible, it may make sense to defer income like year-end bonuses, consulting income, and self-employment income. Accelerate expenses like real estate taxes, property taxes, and interest payments. Consider using a credit card to pay business expenses before the end of the year.
  • Tax Tip: You may be able to shift income to children—especially if you own your own business. A child is required to file a tax return only if his earned income is greater than $6,200. If you own your own practice, you may be able to employ your child for a legitimate business expense. Please consult your tax advisor regarding the specifics of employing children in your business.
  • Tax Tip: Examine the entity structure of your business. Is your practice income reported on Schedule C? It may be advantageous to switch to a Subchapter S Corporation or even a C Corporation depending on your situation. Schedule C profit is subject to self-employment tax, whereas S corporation profit is not, as long as you take a reasonable salary from your S Corporation. The following example illustrates the potential for tax savings on a married Individual’s tax return from switching a Schedule C to a Subchapter S Corporation compared to a Subchapter C Corporation.

Note: If you have a C Corporation, be mindful that professional service corporations like physicians, accountants and lawyers are taxed at a flat 35%.

  • Tax Tip: Set up a Roth IRA. Roth IRA earnings and distributions are tax-free when you retire. Contribute after tax dollars to a Roth and you will never pay tax on that money again. If your income is less than $188,000 you can contribute up to $5,500 ($6,500 if you are older than 50) directly to a Roth. However, there is no income limitation to convert a Traditional IRA to a Roth. If you are over the $188,000 threshold you can contribute to a Traditional IRA and roll it into a Roth the next week. You will pay tax on any earnings during that time, but it should be minimal. Roth conversions may only be done once in a 12 month period. Consult your tax or financial advisor for the specifics on how this process works.
  • Tax Tip: Minimize the impact of Alternative Minimum Tax (AMT). AMT affects more taxpayers every year. You may be able to bunch certain deductions to minimize its impact on you, such as property taxes, real estate taxes, and investment advisor expenses. AMT is shown on line 45 of your personal tax return.
  • Tax Tip: Perform an overall financial checkup to assess your situation prior to year-end. You should think about retirement, insurance needs, investment and estate planning, check wills, and utilize Flexible Spending Account funds (you can only carry over $500 in an FSA). If you expect to have capital gains from stock sales or dividends, it may make sense to harvest stock losses to offset these gains.

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 david.botzis@dhgllp.com.

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 scott.russell@dhgllp.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 sam.winkler@dhgllp.com.

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 info@hcaa.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.