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Take advantage of these tips before year's end. You'll be glad you did come April 17.
Are you starting to worry about the tax bill you'll face in a few months? Have you still not gotten around to fully funding that retirement plan? Are you unsure about whether it makes more tax sense to buy that piece of equipment before the end of the year or after Jan. 1?
Well, you still have time to implement tax-saving moves by year-end. We asked personal finance and tax consultants what strategies they recommend for their physician clients. Here's what they told us.
Limit damage from the AMT
One way to know if you'll be subject to the AMT is to ask your tax adviser to do a tax projection. If you are, consider this strategy from CPA Robert Baldassari of Matthews, Carter and Boyce, in Fairfax, VA: "Don't have any more state tax withheld from your salary for the rest of the year. In the same vein, if at all possible, don't pay your local real estate taxes or any personal property tax until January."
Why? You can't deduct state taxes when you're under the AMT. So rather than waste a deduction, it makes sense to postpone the payment to next year, when you may well be able to deduct it. When you stop state withholding, you can pay the remainder of your state tax bill by making an estimated payment in January 2006, or paying the balance due when you file your state tax return.
Here's an example of how postponing state tax payments could benefit a doctor who's under the AMT this year: Say the doctor typically has $1,000 in state income tax withheld from each month's paycheck, or $12,000 for the year. If she changes her state withholding to zero for November and December, she'll have only $10,000 withheld. But since she's subject to the AMT, her federal tax will be exactly the same, even though she has $2,000 less in state tax withholding.
In 2006, when she pays the $2,000, her total state tax deduction will be $14,000. Assuming the doctor isn't subject to the AMT in 2006, that extra $2,000 deduction could save her $700 in federal income tax. (There's one caveat to this approach: If you reduce your state tax withholding too much, the state might assess a penalty for not having enough tax withheld. Ask your tax adviser to calculate whether any penalty would wipe out your federal tax savings. Your tax adviser would also weigh potential local penalties vs federal tax savings if you hold off on paying local real estate taxes and personal property tax until January.)
There are some other ways to limit the damage if you'll be subject to the AMT for 2005. Since you won't be able to deduct miscellaneous itemized deductions, try to postpone as many of these expenses as possible until 2006. And if you're refinancing your home or taking a home equity loan, be cautious. Although the AMT allows a deduction for interest on a mortgage used to buy, build, or improve your home, it doesn't allow an interest deduction if you borrow against your home for some other purpose.