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The author is a former senior editor of <i>Medical Economics</i>.
You can still reap big savings if you act before time runs out. This guide highlights 17 money-saving opportunities.
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You can still reap big savings if you act before time runs out. This guide highlights 17 money-saving opportunities.
Here's a batch of recipes for holiday delicacies that won't put any weight on you but should fatten your wallet. Yes, we're talking about ways to prepare some tasty tax savings in the next couple of months. First, we present a menu of year-end moves that figure to pay off for most doctors. Then we top it off with suggestions appropriate to your particular personal and professional circumstances.
Step up your 401(k) contributions. This could be the most rewarding year-end move you can make. Not only do you get an immediate benefit from lower taxable income in 2000, but you increase potential tax-deferred earnings for many years to come. This year's limit for elective deferrals to a 401(k) plan or a 403(b) if you work for a tax-exempt organizationis $10,500, up from $10,000 in 1999. Opportunities for much larger tax savings via expanded pension contributions may be available if you're self-employed or a corporate shareholder (see "Pile on retirement plan contributions.") Also consider a spousal IRA if you're eligible (see "Open an IRA for your spouse.")
Sort out "miscellaneous expenses." Before you can claim an itemized deduction here, you have to subtract 2 percent of your adjusted gross income from the total amount of miscellaneous expenses. Don't let this roadblock discourage you. Even if a thorough check fails to turn up enough eligible outlays, you may be able to increase your total by paying some 2001 personal expenses in 2000for instance, fees for tax advice or subscriptions to investment newsletters and computerized financial data services.
You can deduct the cost of administering an IRA or Keogh plan if you arrange to be billed directly, instead of having the fee paid out of contributions or plan funds. In the case of taxable investments, you can write off the amount a bank or other agent charges for serving as custodian, collecting interest or dividends, and maintaining records. You can also claim investment expenses allocated to you as a partner or shareholder in an S corporation. Legal expenses are deductible if they involve income or taxes.
Beat the clock with donations. Checks to charities can be deducted for 2000 even if you wait until Dec. 31 to mail them. But don't delay gifts of stock or other property to the last minute. To count for 2000, transfer of title to the assets must be completed by year-end. If you're giving appreciated stock and want to claim its full market value, be certain you've held it long termthat means more than 12 months for any gift you make now. Not only will you get the deduction, you'll owe no tax on the capital gain.
Be sure to get a receipt from a charitable organization for any single donation of $250 or more. If it's not a cash gift, the receipt must describe the donation, though not value it. If you give more than $75 and receive a tangible benefit in return (other than a token item), the charity must tell you in writing what it's worth, because you'll have to reduce your deduction by that amount.
Make the best use of casualty losses. To be deductible, the loss must be due to a sudden or unexpected event, like an earthquakenot a gradual or progressive process, like a termite infestation. If you suffered damage from one of this year's bumper crop of natural disasters, verify your losses by having a licensed appraiser estimate your property's worth before and after the event. You can claim a casualty deduction for personal property only if each unreimbursed loss exceeds $100, and the total of all your losses (less that first $100 per loss) is more than 10 percent of your AGI for the year. But you may be able to increase your write-off by basing it on your 1999 AGI, if that was smaller than this year's. This option is applicable to disasters in areas declared by the President to be eligible for federal assistance. To choose the 1999 AGI basis, you must file an amended return for that year by April 16, 2001.
Leverage your personal deductions. In addition to paying miscellaneous expenses in advance, you may want to consider prepaying some of next year's other deductible expenses. For example, the IRS will let you deduct installment payments on state and local income or property taxes made this year, even if they're not due until 2001, provided the local taxing authorities accept them.
Pulling some of next year's itemized deductions on to your 2000 return may not only cut this year's taxes but also enable you to take the standard deduction for 2001and that, surprisingly, can boost your savings. Suppose your 2000 itemized deductions amount to $8,000, and you anticipate about the same figure next yeara two-year total of $16,000. If you can raise your 2000 deductions to $11,000 by "borrowing" $3,000 from 2001, that will leave you $5,000 in potential itemized deductions for 2001. Instead of itemizing next year, you can take the standard deduction (at least $7,350 on a joint return). Then your total for the two years will be $18,350 or more.
Protect your right to a home-sale tax break. If your home is now on the market, make sure you (and your spouse, if you're married) have used it as your main residence for at least two of the five years prior to the sale. If you haven't lived there that long, you may want to postpone the closing date of the sale to get the full exclusion on your profit$500,000 for married couples, $250,000 for singles.
Open an IRA for your spouse. Retirement plan participants with AGI of $61,000 or more are barred from making deductible contributions to an IRA. But a married couple where one spouse doesn't work can put away $2,000 if their joint AGI doesn't top $150,000. The deductible amount phases out for AGI between $150,000 and $160,000.
You can instead contribute to a spousal Roth IRA under the same AGI rulesand to one for yourself even if you have a retirement plan. While Roth contributions aren't deductible, you won't owe tax on the money you earn, as long as you don't withdraw any earnings until after you're 59 1/2 (or after five years, if that's later). Contributions to a Roth or traditional IRA will count for the 2000 tax year if made by April 16, 2001.
Make sure of dependency claims. They're worth $2,800 apiece this year, but the rules governing exemptions for dependents other than your children under age 19 can be tricky. If you're contributing to the support of anyone else, you may have to take steps before year-end to preserve your right to an exemption, so consult your tax adviser. It's particularly important to verify dependency exemptions if you're divorced or legally separated, or if the persons you're supporting receive government assistance or scholarship aid.
In general, you get an exemption if you contribute more than half of the dependent's total support. Don't count any money the dependent salts away in the bank or uses to pay life insurance premiums or income taxes. Also leave out medical costs paid by Medicare or private insurance. Health expenses you pay for the dependent, including expenses for a stay in a care facility, count on your side of the support ledger. If it's a close question whether your support comes to more than 50 percent, making an additional contribution before year-end may safeguard your claim.
You may be able to claim a tax credit, as well as exemptions, for your dependent children. If your AGI doesn't top $110,000 and you file jointly, each child under 17 at year-end will trim your tax bill by $500. For every $1,000 (or fraction) of AGI above that, you lose $50 of the total creditnot $50 per child. Consequently, a married couple with, say, three eligible children and an AGI of $126,000 in 2000 would lose $800 (16 times $50), leaving them with a net credit of $700.
For more tax-saving ideas involving education tax credits, education IRAs, and custodial accounts, see "Let your kids save you money, for a change."
Take advantage of first-year expensing. It's not too late to increase your practice deductions for 2000 by buying equipment, provided you start using it before year-end. True, you could lose some tax benefit if you pile more than 40 percent of your total 2000 equipment purchases into the final quarter. But whatever the percentage, you can still deduct up to $20,000 of the equipment's cost as a first-year expense and depreciate the rest. That write-off is reduced, however, for every $1,000 you purchase over $200,000.
Watch out, though, if the transaction involves a trade-in of equipment you already own. In that case, only the amount you pay in cash or finance with a note is eligible for first-year expensing. However, the new equipment's cost basis for depreciation purposes does include the book value of the trade-in.
If you buy several items, you can split the allowance any way you like. You subtract it from the items' cost, and then take a depreciation deduction on any balance. If two items are depreciable at different ratesfor example, computers over five years and office furniture over sevenit usually pays to apply the allowance first to the item with the slower ratein this case, the furniture.
You don't have to use up any of your first-year allowance to write off expenses for supplies with a life of one year or less. Their cost is fully deductible in the year you buy them. So have your staff inventory your medical and office supplies to see what you might need next year, then order and pay for them before the end of 2000.
Beef up your car write-offs. If you use your car for both professional and personal reasons, you may need to act now to preserve or raise your deduction, assuming you base it on actual costs, rather than take the standard IRS allowance (32.5 cents per business mile in 2000). If your business use doesn't come to more than 50 percent for the year, you'll have to depreciate the car by the straight-line rather than the accelerated method. Worse, you'll owe ordinary income tax on the difference between straight-line and any accelerated write-offs claimed in prior years. Furthermore, even if your business use tops 50 percent in future years, you'll have to continue using straight-line depreciation.
Say you bought a $20,000 car in 1998 and used it 55 percent professionally in 1998 and 1999, taking $4,488 in accelerated depreciation for those years. With straight-line, your write-offs would have been only $3,300. If your practice use falls below 50 percent this year, you'll owe tax on the $1,188 difference.
You may be able to prevent that by using your family car for most of your nonbusiness travel the rest of the year. Even if your practice car is already used at least 50 percent for business, boosting the percentage of professional use will increase your deduction for operating expenses.
If you use the actual-cost method, be prepared to support your claim with receipts verifying what you spent for fuel, repairs, insurance, tolls, etc. You can count parking fees at business destinations, but not at your officethat's a nondeductible commuting expense.
Pile on retirement plan contributions. Don't overlook tax-saving opportunities offered by the pension rules. If you have only a profit-sharing plan, consider starting a second plan to increase your deductible set-aside. The top income base for 2000 contributions is $170,000, up from $160,000 last year. Even so, the maximum contribution to a profit-sharing plan usually works out to be less than the $30,000 ceiling for defined-contribution plans. Adding a money-purchase plan would enable you to stash away the difference. You have until next April 16 (or until your tax return's extended due date) to make the contribution for 2000, but you must set up the new plan by the end of this year.
Doctors with defined-benefit plans may also be able to contribute more this year, because of an increase in the annual pension payout they're allowed to fund for. It's now $135,000, up from $130,000. Subject to that limit, you can set aside as much as necessary to provide for a pension equal to 100 percent of average salary, based on the three highest consecutive years. The $30,000 annual contribution ceiling doesn't apply to this type of plan. If you want to set up a defined-benefit plan and get a tax benefit for 2000, you'll have to meet the year-end adoption deadline. The paperwork is awesome, so you'll need to move fast.
Nail down your T&E deductions. The IRS expects you to have evidence of payment for all items costing $75 or more. Without such evidence, it will be hard for your accountant to prepare your return accurately and to defend the figures at an audit. The tax law specifically prohibits T&E deductions based on estimates or your unsupported word. Also, the expense must be "helpful" to and "appropriate" for your business. Your diary or written notes should substantiate this. You don't have to prove an actual business benefit, however.
If you're missing any receipts, begin tracking them down now. Canceled checks won't do in some cases. For instance, you'll need itemized bills for hotel stays, because not all the charges maybe deductible. If your spouse came along, you can't claim her expenses unless she's your employee and had a valid business reason for being present. But you can deduct the hotel's single room rate, not merely half the double rate. Another example: If you stayed over Saturday to get a cheaper airfare, you may need to verify that you saved money. So procure the relevant information, if you don't have it already.
Pay health insurance premiums. If you're self-employed or in an S corporation, you can write off 60 percent of the total health insurance premiums you pay this year for yourself, your spouse, and dependents. The total can also include the following amounts of long-term-care premiums: $220 if age 40 or less; $410 if 41-50; $820 if 51-60; $2,200 if 61-70; $2,750 if 71 or older. However, you can't count insurance premiums for any month during which you were eligible to participate in a health plan subsidized by your or your spouse's employer.
Juggle stock market gains and losses. The best use for capital losses is to offset regular income or short-term gains, which are taxable in your top bracket. Suppose you've taken some gains but don't want to part with the securities you'd have to sell to establish a loss. Consider selling those securities, and then rebuying them. But you must wait more than 30 days. Otherwise, the IRS would call it a "wash sale" and disallow the loss. The 30-day waiting period applies even if you double upthat is, purchase an equal amount of identical stock before you sell the original shares. You won't violate the wash-sale rule, though, if you replace a holding with a similar but not identical onesubstitute General Motors for Ford, say.
If you already have a net capital loss, you can offset up to $3,000 of regular income this year. However, you'd have to carry forward the rest to future years, and then you might be forced to use the remainder of the loss to offset more lightly taxed long-term gains. To soak up the entire loss, consider selling a stock on which you have a short-term gain. If you still like the stock, you can rebuy it immediately; the wash-sale rule applies only to losses. (If you're a parent, see "Let your kids save you money, for a change" for another way to cut taxes on investment income.)
You may want to tailor the size of a gain or loss for maximum tax benefit by selling only part of a holding. If you acquired shares at different times and prices, be sure to let your broker know which ones to sell when you authorize the transaction. Otherwise, the IRS requires you to assume you sold the oldest shares first in figuring the result. Do the math before the trade; the IRS won't let you tag the shares retroactively. For this reason, put your instructions to your broker in writing and keep a copy for your records.
Hold down interest income. If you have a Treasury bill issued for a term of a year or less that matures in 2001, avoid selling it before the end of this year. If you sell this year, you'll owe tax on the discount you got when you bought the security. If you hold off on selling, that discount won't be reportable as income until next year, when the T-bill matures, or you sell it. Likewise, avoid selling a bond before year-end if the interest is taxable and the next coupon date falls early in 2001. Reason: When you sell a bond, the money you receive ordinarily includes a prorated share of the interest accrued since the last coupon date. The interest counts as income for the year in which you sell the bond, even if the next coupon date is after Dec. 31.
That's no problem when selling tax-exempt bonds, but you may still owe tax on certain municipals for another reason. If you bought a bond trading at a market discount (below its original price), part of that discount is taxable as interest income. This rule applies to all discounted bonds, including municipals, purchased after April 30, 1993.
Consider an installment sale. If you sell property at a profit and take payment over more than one year, your gains will generally be taxed only as you receive the money. Spreading out the gain will lower your AGI, and that might help save some of your itemized deductions and personal exemptions that are phased out when AGI reaches a certain level. Also, you stand to benefit if the capital gains tax rate is reduced in the future.
Conversely, even if you agree to let your buyer pay in installments, you can still choose to report your total gain in the year of sale. You might want to do that if you have enough capital losses this year to offset the gain. But be sure those losses will be deductible. Once you elect to report the gain in full, the IRS won't let you change your mind merely because you want to avoid tax.
Take one last look at your investment portfolio.You can register a gain or loss for this year by selling as late as Friday, Dec. 29, even though you don't receive the proceeds until 2001.
Lawrence Farber. Cut this year's taxes--it's not too late. Medical Economics 2000;21:144.