We&ve already had one tax cut. Here are several more ways to reduce what you owe.
We've already had one tax cut. Here are several more ways to reduce what you owe.
Don't settle for $600. If you're a joint tax filer, that's the advance refund for 2001 that you probably received as a result of President Bush's tax-relief law. However, if you want to save more in taxes in 2001, there are several steps you can take, even before year-end. These eleventh-hour moves would make sense for most doctors even if Congress hadn't overhauled the tax code. And some tactics represent sound advice to follow any time of the year.
The new law effectively trims tax brackets of 28 percent and higher by half a percentage point in 2001 and by another half point in 2002. That invites a traditional tax gambitpay some of next year's deductible expenses this year, and defer some of this year's income into next. You'll report less income in 2001, when the tax rate is more onerous, and more income in 2002, when the Feds' share is less.
"Accelerating expenses and deferring income is always a good idea," says Ronald J. Knueven, a CPA with Clayton L. Scroggins Associates, a practice management firm in Cincinnati. "But the tax cut next year makes it even more attractive."
Look for deductions among your business and itemized expenses.
Business expenses, Schedule C: Paying 2002 expenses in 2001 brings a tax advantage only if you do your accounting on a cash basis, the method most practices elect. Start with routine expenses that will crop up next January and beyondsuch as rent, office supplies, and malpractice insurance premiums. If your office needs maintenance and incidental repairs, get and pay for them before year-end, and take them as deductions.
You'll score your biggest tax savings, however, if you make a large capital outlay for equipment that you were intending to buy sooner or later anywaynew office furnishings, for example. A tax rule known as "first-year expensing" lets you write off up to $24,000 of that cost for 2001, with the balance depreciated as usual.
Itemized deductions, Schedule A: You can deduct medical expenses that exceed 7.5 percent of your adjusted gross income. If you're close to that threshold, or past it, now's a good time to get medical or dental care that you've been putting off.
Write a check in December to pay estimated state and local income taxes due in 2002 for the 2001 tax year.
Make your January mortgage payment before Dec. 31. You may have read that you can't claim a deduction for interest paid before it's due. That's true, but most mortgages are structured so that the payment owed in one month actually covers the preceding month. You'll be entitled to the deduction.
Prepay miscellaneous expenses such as fees for tax advice and subscriptions to investment newsletters and computerized financial data services. You can deduct whatever exceeds 2 percent of your adjusted gross income.
Delay year-end billings to insurers so income normally collected in December arrives in January. Your timing here depends on insurers' payment habits. "Most practices that submit paper claims won't see any money for four weeks," says consultant David C. Scroggins of Clayton L. Scroggins Associates. "For them to postpone income, they'll need to submit their bills from late November in early December. If they're filing electronic claims, which get paid faster, they should delay those late November billings until Dec. 20 or so."
Diverting cash flow to 2002 might be impractical for group practices, notes Scroggins. "Every doctor's financial situation is different, and some may not want to defer income," he says.
Moreover, he adds, if you're playing around with cash flow, be sure you'll have enough money rolling in during December and early January to handle payroll, rent, and other regular expenses.
Here's what not to do: Hold on to a check you receive in December 2001 and deposit it in January 2002. "If you have the check in hand, the IRS considers that you've received the money," explains Nashville CPA Lori Dodson. "It doesn't matter when you take it to the bank."
If you're cashing in stock to pay for a winter vacation or college tuition, choose the stock with the least appreciationand the lighter tax. If you've held stock in two companies for more than a year, select the one with the smaller gain.
Appreciation is also a tax consideration when you sell a portion of your shares in a particular company. Say you bought 100 shares of ABC in 1998 at 25 a share, and 100 more shares a year later at 35. Now the stock's at 50. If you're selling some shares, unload the ones you bought at 35; your taxable profit will be lower. Be sure to instruct your broker in writing about which shares to sell, and get written confirmation. Without that authorization, the IRS will assume you sold the oldest shares first.
Of course, if you're pondering what stock to sell, taxation shouldn't be your only consideration. You don't want to unload a stock with big potential for future gain.
Maybe you've sold appreciated stock this year. You can lower or cancel out your taxable gain by selling other shares at a loss. If your losses exceed gains, you can deduct up to $3,000 of losses from other income in 2001 and carry the remainder forward.
However, when matching losses to gains, you're required to apply "apples to apples" if the opportunity presents itself. That is, if you have long-term losses, you must first count them against any long-term gains. If there's a loss left over, then you may apply it to short-term gains. If you have no long-term gains to begin with, you're free to match long-term losses to short-term gains right off the bat. Those short-term gains are the ones you especially want to erase, because they're taxed as regular income. Long-term gains, on the other hand, are taxed at a lower rate, typically 20 percent.
Planning on selling shares in a mutual fund that will yield a long-term capital gain? Sell them before the annual year-end distribution many funds make. True, those shares will have a higher value before the distribution, resulting in a heftier capital gains tax. But if you take the distribution, part of it may be taxed as ordinary income, and therefore at a steeper rate than long-term gains.
To find out when the year-end distribution occurs, call the fund's customer service department.
Stashing away pre-tax money for retirement can lower your current income and therefore your tax bill. So pile on the dollars. How much you can give depends, of course, on what kind of retirement plan you have. Incidentally, limits will rise next year, so make sure you acquaint yourself with the fine print. (See "Grab new pension plan breaks")
Even if tax consequences have no bearing on your plans to share your wealth, you still ought to work the angles.
Where possible, donate stock instead of cash. Say you bought stock for $1,000 in 1999 and sold it for $10,000 in 2001a long-term capital gain. If you give the cash to a charity, you'll get a $10,000 deduction, but the 20 percent capital gains tax on the $9,000 appreciation will pinch you for $1,800. If you donate the stock, instead, you'll avoid the capital gains tax and still keep the $10,000 deduction. You'll further minimize your tax bill if you bestow the stock before a dividend distribution, which is taxable.
If you do donate stock, be sure your broker transfers the title by year-end. It has to be a done deal, unlike a check you mail with a postmark of Dec. 31. If you make a charitable contribution by check, you can deduct it as long as the postmark shows it was mailed before Jan. 1.
The IRS cuts you more slack, time-wise, on donations to charities via credit card. Charge your gift this December, pay off the bill in January 2002, and you can still claim the deduction for 2001.
Don't get so carried away with chopping your 2001 taxes that you're bitten by the alternative minimum tax. The AMT is a parallel tax code designed to snare people who otherwise avoid their fair share of taxes through deductions and credits. So if you deduct too much in 2001by prepaying 2002 expenses like estimated state taxes, or using a home equity loan to pay off your boatyou could find yourself liable for the AMT. In the process, you'll lose many of the tax breaks you engineered.
"Before you try to lower your taxes by accelerating expenses and the like, project your taxes under the regular tax code and then under the AMT," advises CPA Joel Rosenberg in Bardonia, NY. "If your proposed tax strategies leave you vulnerable to the AMT, don't use them."
Year-end maneuvering can backfire in other ways, adds Rosenberg. Lower your bottom line too much in 2001 through accelerated expenses and deferred income, and you might limit how much you can contribute to a retirement plan. Again, run the numbers before you act.
As 2001 winds down, you'll need time with your accountant to figure out how to cut your taxes without cutting your throat. Bush's refund check will buy you a few extra hours of advice.
Robert Lowes. Act fast to cut 2001 taxes. Medical Economics 2001;21:32.