There's still time to save tens of thousands of dollars in federal and state taxes this year. Here are five ways doctors and physician business owners can significantly trim their taxes for 2010 and beyond.
By now, most of our clients have a fairly good idea on what their taxable income will be for 2010. If you are too, you may be wondering, “Is there anything I can do now to save taxes before April 15th?”
This short article will lay out a few ideas -- each of which could save you tens of thousands of dollars on your 2010 income-tax bill -- depending on your individual circumstances. Here are our Top 5 recommendations.
1. Maximize the Tax Benefits of Your Qualified Retirement Plan. Nearly 95% of the physicians and business owners who have contacted us over the years have some type of qualified retirement plan (QRP) in place, including 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, or even SEP or SIMPLE IRAs.
Unfortunately, most of these plans are not maximized for deductions for the business/practice owner(s). The Pension Protection Act of 2006 improved the QRP options for many business owners, including physicians. In other words, many owners may be using an “outdated” plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions significantly for 2010 and significantly reduce your taxes. If you haven’t had your plan evaluated by your tax advisor in recent years, you may be paying far more taxes than you should.
2. Implement a Non-Qualified or “Hybrid” Benefit Plan. The vast majority of physicians and business owners begin and end their retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe-benefit plans, non-qualified plans or “hybrid plans” in the last two years?
The truth for many doctors is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, we highly encourage you to do so. A number of these plans can help you to sharply reduce your taxable income — and they can be put into place in a few weeks, so it’s not too late for 2010.
3. Make Investments That Create Tax Benefits. There are a number of investments that, in and of themselves, create present tax benefits. These typically are asset classes in which the government encourages investment -- from oil and gas partnerships to conservation easements to certain types of racehorses. Tax deductions, tax credits and other potential benefits can be immediate and significant.
4. Use Charitable Giving. There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. Charitable Remainder Trusts, Charitable Lead Trusts, Private Foundations and other vehicles can be used, within the IRS rules, to benefit charitable causes, and reduce taxes immediately while retaining some benefits for families. If you have considered such any of these tools in the past, implementing them in a year of high income might be a good idea.
5. Do Not Pre-Pay 2011 Expenses in 2010. As the year winds down, we typically counsel clients to prepay for some of the following year’s expenses in the present year. As long as the economic benefit from the prepayment lasts 12 months or less, this can be done. However, unless your 2010 income will not put you into the top marginal income tax bracket, this strategy may not make sense for 2010. Since 2011 highest marginal tax rates are likely to be higher than 2010 rates, the time value of the earlier deduction may not be worth taking the deduction against a lower marginal rate.
David Mandell, JD, MBA, is an attorney, author of five books for doctors, and principal of the financial consulting firm O’Dell Jarvis Mandell LLC, where Carole Foos works as a CPA and tax consultant. SPECIAL OFFER: For a free (plus $5 shipping and handling) copy of “For Doctors Only: A Guide to Working Less and Building More,” please call (877) 656-4362.
Disclosure: This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment, legal or tax advice. There is no guarantee that the views and opinions expressed in this article will come to pass or be appropriate for your particular circumstances. U.S. tax and state corporate law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax, employee benefit and legal advice before implementing any strategy discussed herein. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.