Your Practice a Shelter From New Taxes

Lee R. Phillips, Counselor United States Supreme Court

A doctor's practice is his or her most important tax shelter and doctors should be thinking about ways to use it as such each and every day.

Many of the new tax laws that coming in 2013 are based on a trigger point of $200,000 for singles and $250,000 for married couples. I understand that most doctors aren’t going to be worried about $250,000 thresholds after Obamacare kicks in. One of the basic ways Obamacare plans to cut costs is by presuming that the doctor’s pay will be cut in half. The doctor is going to give up half of the income he or she was getting prior to 2013.

But, there are additional presumptions that need to be considered and actions that need to be taken to counter those presumptions. About half of the personal taxes that are going to help pay for Obamacare will kick in Jan. 1, 2013, and the rest will come in the next year. There are things you can do to cut your tax bill.

The average American family making $72,000 per year will pay an additional $4,000 in taxes next year. The tax burden placed on Americans in the next couple of years will be crushing. Start scrambling for the tax loopholes now and hope something happens to keep America from going over the “fiscal cliff” as Federal Reserve Chairman Ben Bernanke refers to what is coming.

Above the line and below the line

Understanding the basic concepts of taxes is critical. “Above the line” accounting and “below the line” accounting is one of the most important concepts, and yet most tax payers don’t understand it.

The “line” is the last line of page one of a 1040 IRS form. It is the adjusted gross income (AGI) line. The catch is anything that happens above the line goes to increase or decrease adjusted gross income. Anything below the line has no effect on adjusted gross income.

Most of the things people think of as tax planning tools are below the line. For example, the home mortgage deductions and charitable contributions are all below the line.

Adjusted gross income controls the tax bracket, exemptions, alternative minimum tax, credits and dozens of other issues associated with the IRS. It is the important number that has to be “controlled.”

As just one example of what is coming, last year you could be pretty sure you weren’t going to be affected by the alternative minimum tax if you made under $170,000 AGI. Now you will be hit with alternative minimum tax issues when you get to $45,000 AGI.

That’s a huge tax burden that has been placed on middle-class America. Would you believe the alternative minimum tax was implemented to make sure the rich would “pay their fair share”? Over the years, the alternative minimum tax exemption threshold has been lowered and lowered. Once the tax is there, it’s easy to lower the exemption threshold.

Could there be a parallel with the $250,000 AGI trigger points that are starting in 2013 and what has happened to the alternative minimum tax AGI limits? All they have to do is lower the AGI limits in future years.

There isn’t much you can do personally to lower your AGI. About the only thing that an individual can do to lower his or her AGI is to make less money and contribute to a standard IRA. Making less money is not a good idea. The object is to make more and keep more. There are things you can do to keep more of what you make.

Your most important tax shelter

A doctor’s practice is his or her most important tax shelter. Everything that takes place in the practice happens above the line. Using a practice as a tax shelter is something you have to think about and work on each day. It is a new way of life and business management you need to learn, but it can make your practice yield more money without you having to work any harder or see another patient. It’s not hard, but you’ve got to do it. Your “advisors” aren’t going to do it for you.

The doctors that leave their tax planning set up to their advisors get exactly what they asked for — a set up. Learn about techniques you can use to lower your AGI and start using your practice for more than seeing patients.

Lee R. Phillips is a United States Supreme Court Counselor who for the past 30 years has helped high income individuals control their taxes and protect their assets. Call (800) 806-1998 or visit LegaLees.com. For a free copy of Lee’s set of practical tax ideas, go here.