These guidelines are must reading if you complete your own return. If you pay someone else to do it, they&ll serve as a thorough check on the work.
These guidelines are must reading if you complete your own return. If you pay someone else to do it, they'll serve as a thorough check on the work.
Like many busy physicians, you probably consider doing your taxes as appealing as cleaning gutters and haggling with insurance companies. To make your job easier this year, we asked seven of the country's leading certified public accountants to give us their best tips for completing Form 1040 and its schedules. The goal: to help you boost your deductions and shrink your family's federal tax liability. Here's what they said.
If you and your spouse earned roughly the same amount in 2001, consider whether checking Form 1040, Line 3, and filing separate returns could lower your taxes overall. "It can if one spouse has large medical expenses or a lot of miscellaneous itemized deductions," says Robert G. Baldassari of Matthews, Carter, and Boyce in McLean, VA. "A smart accountant or good off-the-shelf tax software can quickly determine whether filing a joint return or separate ones is the better way to go."
One caveat: Filing separately won't be advantageous if you live in one of nine states with community property rulesArizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In those states, when spouses file separately, they're required to split total income and itemized deductions down the middle.
Didn't get a tax rebate check this year? As long as you don't still owe federal tax for 2000, you can take a credit for the missing rebate on Line 47 of Form 1040. "It's possible that your check got lost in the mail or was sent to a wrong address," says Sidney Blum of Successful Financial Solutions in Northbrook, IL. If you do owe federal tax for 2000 or prior years, however, don't claim the credit; the IRS will use the amount of your check to reduce your debt.
Okay, we admit that the following tip isn't going to lower your taxes. But it could help your child save money.
"Often, because of income limitations, physicians receive no tax benefit from claiming college-age dependents," says Mary McGrath of Cozad Asset Management in Champaign, IL. "But the students may be paying college expenses using funds set aside in their own names. In this situation, they should file their own returns, and the physicians shouldn't claim the kids on Line 6c of Form 1040." The beauty of this strategy, McGrath says, is that your child can claim an exemption for himself or herself to shelter the liquidated investment income.
Only full-time students who receive less than half of their total annual support from their parents can benefit. However, your child's work income, scholarship money, or both may reduce the percentage of your total contribution to below 50 percent.
If you deduct too muchhefty amounts of property taxes or medical expenses, for exampleyou may be subject to the alternative minimum tax. The AMT is the IRS' way of ensuring that you pay your fair share of taxes.
But last year's AMT pain could become this year's tax break. "Many doctors don't know that if they paid the alternative minimum tax in 2000, they may qualify for a 'refund' of that tax on their 2001 return, as a credit claimed on Form 1040, Line 50," says Bob Baldassari. The catch: You can take the credit only if your regular tax liability for 2001 is more than the AMT you might owe. You can compute the latter using Form 6251.
"Most people who paid AMT will qualify for the credit," Baldassari adds. "Although it can't be used to offset future AMTonly to reduce regular taxthe amount can be carried over indefinitely." To determine the credit amount, you'll need to complete Form 8801.
Maybe you refinanced your home more than once, to take advantage of some great low rates. Do you know that in the year of a second refinancing, you can immediately deduct any points you haven't yet deducted on the initial refinancing? This can boost your writeoff from a few hundred dollars to several thousand. "Many taxpayers mistakenly think they have to continue to amortize the old points," says Sid Blum.
Points on a refinancing aren't reported to you along with home mortgage interest on Form 1098, so you'll need to deduct the allowable, amortized amount on Schedule A, Line 12.
A large inheritance is nice, but not if a huge tax bill comes attached. Unfortunately, that's what you can expect if you receive "income in respect of a decedent." That's tax-speak for what happened to a physician we'll call Dr. Jones.
Before Jones' aunt died, she sold her florist business for $250,000. The proceeds were included in the aunt's estate, even though she hadn't yet received them. Half of the money was left to Dr. Jones. He has to pay income tax on his $125,000 inheritance, but on Line 27 of Schedule A he's entitled to claim a deduction for the federal estate tax paid. (He gets no deduction for state death taxes, however.)
"The IRS considers this a miscellaneous itemized deduction, but it's separated out on Line 27 because it's not subject to the 2 percent rule for miscellaneous expenses," says Ronald Helle of Honkamp Krueger & Co. in Dubuque, IA. "So even if you don't meet the 2 percent threshold, you can reduce your tax bill."
If you buy a bond between dates when it pays interest, the accrued income is included in the price you pay, even though the seller reports and pays tax on that income. You receive Form 1099-INT, which shows this accrued interest, but it's up to you to subtract the amount from the total interest received. On Line 1 of Schedule B, report the total interest. On a separate line underneath it, list the accrued interest and flag it as such.
While reporting accrued interest reduces the amount of taxable interest, it increases by the same amount the profit subject to capital gains taxes when the bond is sold. "Since capital gains are taxed at a lower rate than regular interest, the result is an overall tax savings," Helle says.
Did you make a donation that may not fit the IRS' definition of a charitable contribution? Even though you can't deduct it on Schedule A, you may still be able to write it off.
"Some hospitals strongly recommend that physicians who have privileges there 'donate' a certain amount of money," Bob Baldassari says. "I know of one that expects $5,000 from each doctor every year," he continues. "My partners and I researched the issue and concluded that the money given to the hospital wouldn't meet the IRS definition of 'charitable' and should have been deducted as a Schedule C business expense."
If you have similar expenditures, run them past a tax expert before doing your return, Baldassari says. "I don't recommend that physicians make that call themselves." Chances are a preparer would suggest you classify this cost as "advertising" and write it off on Line 8 of Schedule C, or lump it into "other expenses" and deduct it on Line 27 of Schedule C.
If you picked up any of your staff's work-related parking or public transportation fees in 2001, you're entitled to a deduction on Schedule C, Line 14.
Last year, a Boston family physician offered each of her four employees up to $180 a month to cover their parking fees, which was the maximum the IRS allowed. She also provided $60 a month for transit passes$5 less than the 2001 limit for public transportation. Because her employees didn't exceed these monthly limits, they didn't have to pay income, Social Security, and Medicare taxes on these fringe benefits. (For 2002, the allowance for commuting expenses rises to $100 a month; the limit for parking fees remains unchanged but may be adjusted for inflation.)
Another tip: "Be sure to deduct business costs that were charged to a major credit card before the end of December," advises Sherman Doll of Thomas, Doll & Co. in Walnut Creek, CA. "The expenses are deductible in the year they were incurred, not when they're paid."
If you're too busy to complete your tax return, let a professional handle it. Not only will you offload that big headache, but if you're a sole proprietor, you can deduct the portion of tax preparation costs associated with Schedule C and any related forms. Claim the deduction on Schedule C, Line 17.
You can also deduct any fees you pay throughout the year for tax advice related to your practice or to rental property you own. To protect yourself if you're audited, ask your preparer for a breakdown of these fees.
If the stock market's abysmal performance in 2001 meant that you and your spouse suffered net investment losses of more than $3,000the most you can deduct from your ordinary incomeyou can carry over the excess to your 2002 return. This year's deduction is also subject to the $3,000 cap, which is a combined limit of short- and long-term capital losses. You report these on Line 6 and Line 14 of Schedule D, respectively.
Let's look at an example: Internist Pam Foster and her husband realized $4,000 in net losses in 2000. They deducted $3,000 on their 2000 return and carried over $1,000 to 2001. Their losses in 2001 totaled just $2,500, but they'll include $500 of their leftover loss so they can deduct $3,000 this year. They'll carry over the remaining unused $500 loss to 2002. Filing separately won't allow the Fosters to write off any more: The IRS limits couples who do that to $1,500 per return.
To maximize your deductions, Ron Helle recommends that you get into the habit of selling investment dogs to "harvest" your losses, even if you can't currently deduct them. If you're not ready to permanently part with the investments, you can buy them back after 30 days, without tax consequences. (The IRS will bar the loss deduction if you repurchase the investment within 30 days of the sale date or if you bought "substantially identical" stocks or securities 30 days before the sale date.) Or you can immediately reinvest the proceeds in a similar stock or fund.
How would you like to cut the tax on your future long-term capital gains from 20 to 18 percent? You can if you "sell" some winning assetsstocks, bonds, mutual funds, etc.and report the gains on Line 8 of Schedule D. However, you don't actually part with your investments. For now, the transaction just takes place on paper.
Here's how it works: You identify one or more investments that you own and plan to hold until at least Jan. 1, 2006. On this year's return, you report the date you bought the assets and list Jan. 2, 2001, as the "sell" date, followed by the closing market price. You then record your original cost and your gain, just as you would with any investment you sell at a profit. (When you actually do sell the investments, you'll first list Jan. 2, 2001, as the date you "repurchased" them, and then report the real sale date.)
Naturally, you don't want to pay taxes before collecting the gain. So first make sure you sold enough losing investments last year to offset the resulting tax liability.
Locking in an 18 percent rate now can save you some bucks if the investments grow in value over the subsequent five years. For instance, you'd save $500 in taxes on $25,000 in long-term capital gains. "However, once made, the election to use this strategy is irrevocable," warns Ronald J. Knueven of Clayton L. Scroggins Associates in Cincinnati. "So make sure you apply it to something you think is more likely to appreciate than dropblue-chip stocks or real estate, for example."
On Line 12 of Form 4562, the IRS will allow you to deduct up to $24,000 for business equipment, computers, and furniture purchased and placed in service before the end of 2001. Didn't use a particular item entirely for business? That's okay; as long as you did so at least 50 percent of the time, you can deduct a portion of its cost.
First-year expensing, as it's called, can apply to more than one item. If you can't deduct the full cost of each, you can depreciate the balance over subsequent years. How many years depends on what you're depreciating. Even leased items qualify for first-year expensing, so you may be able to deduct their entire retail price rather than just the lease payments.
But Uncle Sam's generosity has limits: If your annual purchases exceed $200,000, your deduction is reduced dollar for dollar, and it phases out completely once the total cost reaches $224,000.
Figuring out how to depreciate your medical assets can get tricky, as the complexity of Form 4562, Part II, suggests. But this year you may find the task a bit easierand get a bigger deduction than you normally wouldbecause the mid-quarter rule doesn't need to apply.
The mid-quarter rule typically slashes your first-year depreciation deduction if more than 40 percent of the assets you purchased during the year were first used (in IRS lingo, put into service) in the final three months. Why is Uncle Sam cutting you a break this year? "The IRS and the Bush administration are apparently concerned that the Sept. 11 terrorist attacks may unduly penalize businesses that may have pushed off some big purchases until after Sept. 30," says Sherman Doll. So for 2001, rather than having to figure out when you placed each new asset into service, you can simply take a half-year of depreciation for all of them. To make this election, write "Pursuant to Notice 2001-71" across the top of Form 4562.
"There are also New York State time and payment extensions available to those whose businesses were affected by the attacks," adds John V. O'Connor Jr. of Albany, NY. If you live in New York, check with your tax preparer to see if any of these extensions might apply.
Robert G. Baldassari, CPA, Matthews, Carter and Boyce, McLean, VA
Sidney Blum, CPA, Successful Financial Solutions, Northbrook, IL
Sherman Doll, CPA, Thomas, Doll & Co., Walnut Creek, CA
Ronald Helle, CPA, Honkamp Kreuger & Co., Dubuque, IA
Ronald J. Knueven, CPA, Clayton L. Scroggins Associates, Cincinnati
Mary McGrath, CPA, Cozad Asset Management, Champaign, IL
John V. O'Connor Jr., CPA, O'Connor & O'Connor, CPAs, Albany, NY
Dennis Murray. Your 2001 taxes: Tips from the experts to minimize your bill.