Contrary to traditional tax planning, maximizing taxable income in the current year may be optimal for many physicians since tax rates are set to increase at the beginning of 2013.
There are solid tax savings to be realized by physicians taking advantage of tax breaks that are still in effect for 2012.
Contrary to traditional tax planning — which normally attempts to minimize taxable income in the current year and deferring said income to a future year — this year maximizing taxable income in the current year may be the optimal tax planning strategy for many physicians since tax rates are set to increase. By paying tax at a lower rate in 2012 versus recognizing taxable income in a future period (at a higher tax rate) a net tax savings results.
I have compiled actions for medical practices and individual physicians based on current tax rules that may help save tax dollars if you act before year’s end. Tax planning this year will need to be an evolving process as more information is available based on congressional action and as the end of the year approaches. Not all actions below will apply in your particular situation, but you will likely benefit from many of them.
Medical practices and practice owners
Medical practices should consider making expenditures that qualify for the business property expensing options (Section 179 expensing). Among the assets that qualify are tangible medical equipment, computers and off-the-shelf computer software, as well as some leased equipment depending on the terms of the lease.
NOTE: A maximum of $139,000 of the cost of qualifying property placed in service can be expensed in 2012. If Congress doesn’t act, the expensing limit will decrease to $25,000 and the investment ceiling limit will be $200,000 in 2013. Also, a limited amount of expensing may be claimed for qualified real property. This opens up significant year-end planning opportunities.
In addition, consider making expenditures that qualify for 50% bonus first-year depreciation if bought and placed in service this year. This 50% first-year write-off generally won't be available next year unless Congress acts to extend it. Thus, medical practices planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
If you are considering the purchase of a business vehicle, heavy SUVs (built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight) have favorable depreciation and expensing rules. These rules may allow you to write off most of the cost of the heavy SUV this year. These favorable write-offs may not be available in 2013.
Physicians should also consider using a credit card to prepay expenses that can generate deductions for this year.
Lastly, if you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2012. Contributions to an HSA are deductible (within IRS limits). Like IRA contributions, HSA contributions can be made by April 15, 2013, and still be deductible on 2012 tax returns.
You can realize losses on stock while substantially preserving your investment position. You can sell the original holding and then buy back the same securities at least 31 days later.
NOTE: The current maximum long-term capital gain rate of 15% may be higher starting in 2013. Starting in 2013, married taxpayers with adjusted gross income exceeding $250,000 and single taxpayers with adjusted gross income exceeding $200,000 will also be subject to the additional 3.8% Unearned Income Medicare Contribution Tax on capital gains, interest income and dividend income. This additional tax alone makes year-end planning regarding potential stock and other investment sales crucial in 2012.
If you believe a Roth IRA is better than a traditional IRA and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. However, keep in mind that such a conversion will increase your adjusted gross income for 2012.
If you expect to owe state and local income taxes when you file your return next year, consider increasing withholding of state taxes on your last payroll (or pay estimated tax payments) before year-end to pull the deduction of those taxes into 2012 if doing so won't create an alternative minimum tax (AMT) problem.
NOTE: When estimating the effect of any year-end planning moves on the AMT for 2012, keep in mind that many tax breaks allowed for purposes of calculating regular taxes (i.e. real estate taxes, state income taxes, miscellaneous itemized deductions and personal exemption deductions) are disallowed for AMT purposes.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2012 ($14,000 in 2013) to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
These are just some of the year-end steps that can be taken to save taxes. It’s possible that tax legislation could still be signed into law before Jan. 1, 2013 extending expiring tax breaks or making other changes for 2013 that would affect your 2012 year-end planning. Therefore, it is critical to review your tax situation with your tax advisor now and make any changes that are still possible before the end of 2012.
William A. Rooney, CPA , MA, is a Senior Principal — Tax Services at GHP Horwath, P.C. in Denver, Colo. GHP Horwath, P.C is a leading provider of accounting, tax and consulting services to the medical community. For more information about GHP Horwath, P.C, or the topic discussed in this article, Bill can be contacted at WRooney@ghphorwath.com, or by phone at (303) 831-5054.
GHP Horwath, P.C is also a proud member of the National CPA Health Care Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the health care industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at firstname.lastname@example.org.