If you're wondering what you can do now to save taxes on April 15, here are a few ideas that can each save you tens of thousands of dollars on your 2012 income tax bill.
As we approach the fourth quarter of 2012, many of our oral surgeon clients have a fairly good idea of what their taxable income will be for the year. If you are like these clients, you may be wondering “Is there anything I can do NOW to save taxes on April 15?” The answer is very likely “yes.”
This short article will lay out a few ideas — each of them could save you tens of thousands of dollars on your 2012 income tax bill, depending on your facts and circumstances, as well as some capital gains and estate tax planning concepts as well.
This year, tax planning is especially important because of significant tax increases set to arrive on Jan. 1, 2013. Consider:
• Not only are the so-called Bush tax cuts set to expire, but a new 3.8% surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the federal tax rate on ordinary income to as high as an effective 44.6% for many oral and maxillofacial surgeons — with state taxes on top of this.
• Similarly, the tax rate on long-term capital gains could increase from 15% to 20% and the rate on qualified dividends from 15% to an effective 44.6%.
• Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35% to 55% and the exclusion amount will drop from $5.12 million to $1 million.
Techniques to reduce 2012 income taxes
1. Maximize the tax benefits of your qualified retirement plan (QRP)
Nearly 95% of oral surgeons have some type of QRP in place. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, or even SEP or SIMPLE IRAs.
However, most of these plans are NOT maximized for deductions for the business/practice owner(s). The Pension Protection Act of 2006 improved the QRP options for practice owners. In other words, many owners may be using an “outdated” plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions significantly for 2012 and reduce your taxes on April 15.
2. Implement a fringe benefit or “hybrid” plan
Unfortunately, the vast majority of oral and maxillofacial surgeons begins and ends retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe benefit plans, non-qualified plans or “hybrid plans” in the last two years? The unfortunate truth for many surgeons is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, we highly encourage you to do so. A number of these plans can help you reduce your taxable income in 2012 significantly … and they can be put into place in a few weeks, so it’s not too late for 2012.
3. Use charitable giving
There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. Charitable Remainder Trusts (CRTs), Charitable Lead Trusts (CLTs), Private Foundations — these all can be used, within the IRS rules, to benefit charitable causes, reduce taxes and retain some benefits for families. If you have considered any of these tools in the past, implementing them in a year of high income might be a good idea.
4. Pre-pay 2012 expenses in 2012
As the year winds down, we typically counsel clients to prepay for some of the following year’s expenses in the present year. As long as the economic benefit from the prepayment lasts 12 months or less, this can be done. Since 2013 highest marginal tax rates will be higher than those in 2012, this makes sense.
This article gives you a few ideas for potential tax savings for 2012 income and beyond. For larger practices with $3 to $5 million or more of revenue, there are additional techniques which could offer significantly greater deductions.
In the next article, we’ll cover techniques to reduce taxes on your investments, such as the Medicare tax, as well as some estate tax planning tips.
David Mandell, JD, MBA, is an attorney, author of five books for doctors, and principal of the financial consulting firm OJM Group. Carole Foos, CPA, works at OJM Group as a CPA and tax consultant. They can be reached at (877) 656-4362 for a free consultation to discuss your 2012 taxes and what you can do to reduce them. You can also call for a free (plus $10 S&H) copy of For Doctors Only: A Guide to Working Less and Building More.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.