As temperatures begin to fall, some of you will view this as the beginning of flu season. For us, it signals the beginning of year-end tax planning season. Just like failing to get your flu shot, neglecting to plan for your taxes now can have severe consequences later. The remainder of this article will discuss several tax saving tips for physicians.
Health Savings Accounts (H.S.A.)
An H.S.A. is a separate bank account that is used to pay for out-of-pocket medical expenses. It must be coupled with a high-deductible health plan (HDHP). When you contribute into the account, the contributions are pre-tax or tax-deductible up to certain limits. Funds can grow tax-free in the account and the disbursements are tax-free when used for medical expenses. For certain taxpayers, utilizing an H.S.A. can save around $3,500 per year in taxes.
Qualified Retirement Plans/401(k) Contributions
If you are employed and are not contributing the maximum annual amount to your particular employer’s retirement plan, we strongly encourage you to make that one of your primary goals. Not only does this go a long way towards meeting your retirement goals, but it can save you thousands in taxes every year as well.
If you own your business and the business does not have a plan in place, again, we strongly encourage you to get one in place and start utilizing it as soon as possible. There are numerous employer based qualified retirement plans to choose from. Each have different limits, criteria, deadlines, and other aspects, but all have the common goal of sheltering income from current year taxes.
Small Employer Health Insurance Premium Credit
If you are a small business owner and your company has a health insurance plan to pay for your staff’s health insurance premiums, you need to be aware of this potential tax credit. For 2013, certain small businesses are eligible for a tax credit of up to 35 percent of the cost of health insurance premiums paid by the employer. For example, if your private practice with four full-time staff members paid $300 per month per employee for health insurance premiums, you could be entitled to a tax credit of over $5,000. This has been around since 2010, so check your prior year tax returns for this credit. You can amend prior year tax returns.
Dependent Care Assistance Programs
Many taxpayers are aware of the child and dependent care expense credit available and claimed by filing Form 2441. For higher income taxpayers, this credit’s benefit is limited to $600 for one child or $1,200 for two or more children. However, many taxpayers are unaware of the option to pay for these costs using pre-tax dollars if your employer offers this option. You can exclude up to the first $5,000 of wages by allocating them to this plan. The plan then pays your child/dependent’s care provider directly. For a taxpayer in an upper tax bracket with one child, the additional tax savings by using this plan instead of the tax credit is often over $1,000.
Section 179 and Bonus Depreciation
As of the date of this article, Section 179 expense limits are set to scale back to a maximum of $25,000 and bonus depreciation is set to disappear after 2013. For 2013, up to $500,000 of eligible property can be expensed in the year placed in service. Also, bonus depreciation of 50 percent of the eligible property’s cost allows for quicker expensing. For example, placing a new $800,000 MRI magnet in service in December 2013 can result in an overall maximum expense deduction of $680,000 calculated as follows: $500,000 (Section 179 limit) + $150,000 (50 percent bonus depreciation on remaining $300,000 basis) + $30,000 (“normal” depreciation on remaining $150,000 basis. For 2014, the maximum first year expense deduction will be $160,000.
Self Employment Planning
Operating your business as a Schedule C for tax purposes allows you to take advantage of several tax breaks. Some of the more commonly utilized strategies and deductions used include the self-employed health insurance deduction, the home office deduction, employing family members, medical reimbursement plans, paying rent to related parties, and retirement plans. Each of these options has specific rules and requirements that must be followed. When structured properly, they can each save you substantial tax dollars.
Capital Gains/Losses Planning
The tax rate on long term capital gains can be zero percent, 15 percent, or 20 percent, depending on your taxable income. Because of this, proper tax planning becomes more valuable. In certain situations, harvesting losses by selling a security that has decreased in value, then purchasing the same security at least 31 days later can be beneficial.
These are just a few of the numerous ways to shelter some of your income from current year taxes. Most of these apply to all physicians in any situation. Some of these are more beneficial for employed physicians. Others only work for physicians in private practice. It is extremely important that you are aware of these and other tax saving measures as they can keep thousands more in your pocket each and every year.
L. Porter Roberts, Jr., CPA and Matthew S. Smith, CPA, CFE are with the Medical Services Group of Barr, Anderson & Roberts, PSC in Lexington, KY. If you would like more information, they can be reached via email at firstname.lastname@example.org and email@example.com and via telephone at (859) 268-1040.