A checklist of actions for medical practices and individual physicians to make based on current tax rules.
Year-end tax planning is challenging again this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. Regardless of what Congress does before the end of this year or early the next, there are solid tax savings to be realized by physicians taking advantage of tax breaks that are in effect for 2011.
I have compiled a checklist of actions for medical practices and individual physicians based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.
Medical practices should consider making expenditures that qualify for the business property expensing options (Section 179 expensing). Among the assets that qualify are tangible medical equipment, computers and off-the-shelf computer software, as well as some leased equipment depending on the terms of the lease.
For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2 million. Also, a limited amount of expensing may be claimed for qualified real property. This opens up significant year-end planning opportunities.
In addition, consider making expenditures that qualify for 100% bonus first-year depreciation if bought and placed in service this year. This 100% first-year write-off generally won't be available next year unless Congress acts to extend it. Thus, medical practices planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
Traditional income tax planning calls for deferring income to 2012 and accelerating expenses into 2011. This strategy makes sense this year since the 2010 Tax Relief Act extended lower rates through 2012 and in most cases you will be subject to the same (or lower) tax rates this year as in 2012.
Physicians should also consider using a credit card to prepay expenses that can generate deductions for this year.
If you have a retirement plan for your practice consider adding a profit sharing option to your plan which could allow an additional deduction on your 2011 tax return for a contribution that doesn’t have to be paid until the due date of the practice’s tax return in 2012, including extensions.
If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
You can realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding and then buy back the same securities at least 31 days later.
If you believe a Roth IRA is better than a traditional IRA and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
If you expect to owe state and local income taxes when you file your return next year, consider increasing withholding of state taxes on your last payroll (or pay estimated tax payments) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
When estimating the effect of any year-end planning moves on the AMT for 2011, keep in mind that many tax breaks allowed for purposes of calculating regular taxes (i.e. real estate taxes, state income taxes, miscellaneous itemized deductions and personal exemption deductions) are disallowed for AMT purposes.
You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
You may qualify for a tax credit if you install energy saving improvements, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner, in your home before 2012.
Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Consequently, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. In addition, since contributions to many state 529 college tuition plans qualify for state income tax deductions you might think about making a 529 plan contribution before the end of 2011.
If you are age 70-and-a-half or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
These are just some of the year-end steps that can be taken to save taxes. It’s possible that tax legislation could still be signed into law before January 1, 2012 extending expiring tax breaks or making other changes for 2012 that would affect your 2011 year-end planning. Therefore, it is critical to review your tax situation with your tax advisor now and make any changes that are still possible before the end of 2011
William A. Rooney, CPA , MA is a Senior Principal — Tax Services at GHP Horwath, P.C. in Denver, CO. GHP Horwath, P.C is a leading provider of accounting, tax and consulting services to the medical community. For more information about GHP Horwath, P.C, or the topic discussed in this article, Bill can be contacted at WRooney@ghphorwath.com, or by phone at 303-831-5054.
GHP Horwath, P.C is also a proud member of the National CPA Health Care Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the health care industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at firstname.lastname@example.org.
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