Long term saving can bring lots of short-term benefits on your 2005 tax return.
This is the fifth in a six-part series. In each article, you'll find advice from an experienced CPA on how to work the tax code to your advantage to trim your bill come April 17.
Good job on deferring as much of your salary as possible into your 401(k) or SIMPLE plan! But hold on-there are more ways to mine the tax code for additional deductions, and it's not too late to reap the savings on your 2005 return.
Did you have income other than from your practice? You may be able to contribute to a Simplified Employee Pension (SEP). Did you establish a new retirement plan for your practice in 2005? There's a tax credit available. And don't forget to take a deduction for the fees you pay for the administration of your plan.
If you own your practice and have a retirement plan where the business makes contributions on behalf of employees-like a profit-sharing, money purchase, or defined-benefit plan-it's not too late to maximize your contribution. The deadline for making employer contributions to plans established by corporations is March 15 and the deadline for plans established by individuals and partnerships is April 17. You can add any extensions you may have applied for to those dates.
It's not even too late to set up a Simplified Employee Pension for 2005 if your practice doesn't have a plan. A SEP is also a great way to put aside additional funds if you have outside income, like from a drug company or for testifying in court. Assuming this income was paid to you personally and not to your practice, you can set up a SEP based on this compensation.
You have until the practice's tax filing due date to establish and fund the plan. If your practice is incorporated, you can make the maximum contribution of 25 percent of your compensation, up to $42,000. (If your plan covers employees, you must contribute 25 percent of their salaries for them, as well.)
If you're self-employed in a sole proprietorship or partnership, then the maximum contribution to a SEP is limited to 20 percent of your net earnings. Keep in mind that in figuring your 20 percent contribution, you must first subtract half your self-employment tax from net income. (Self-employed physicians who are contributing the maximum 20 percent for themselves would have to contribute 25 percent for all covered employees.)
Another option if your practice doesn't have a retirement plan: contributing to a traditional IRA. Your contribution is fully deductible if neither you nor your spouse is an active participant in a retirement plan. The maximum contribution for 2005 is $4,000 unless you're 50 or over. Then it's $4,500. You have until April 17 to make a 2005 contribution.
If you're covered by a retirement plan at work, your ability to make a deductible contribution to a traditional IRA phases out as your income increases. For married couples filing jointly for 2005, a full deduction is available if your modified adjusted gross income is $70,000 or less. The amount that's deductible decreases as your income goes up, and there's no deduction at $80,000 and higher. For a single filer, the limits are between $50,000 and $60,000.
However, if you're an active participant but your spouse isn't, and your joint modified adjusted gross income is $150,000 or less, your spouse's contribution is fully deductible. (Again, the deduction dwindles as your income rises and disappears at $160,000.)