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Category Archives: Tax Planning

7 Questions to Ask Your CPA Before Year-End

By Debra Taylor, CPA/PFS, Esq., CDFA

Given the complex tax situation many high-income earners face, start tax planning in the fall while there is still time to make adjustments. These seven questions can help you spot problem areas and better understand the services you may need.

Although tax season is still months away, tax management should begin in the fall – especially for high-income earners facing the 3.8% net investment income tax, AMT, and other taxes.

Physician Tax Deductions

Below are seven questions that can help you open a discussion with your CPA and your financial advisor about next year’s tax bill. Have the discussion early in the fall so you still have time to make adjustments if necessary.

1. Can I limit my exposure to the 3.8% Medicare surcharge tax?

The 3.8% Medicare surcharge applies to net investment income of singles with modified adjusted gross income (MAGI) over $200,000 and couples over $250,000. The threshold for separate filers is $125,000. MAGI is adjusted gross income (AGI) plus tax-free foreign earned income. The tax is due on the smaller of net investment income (interest, dividends, annuities, gains, passive income, and royalties) or the excess of MAGI over the thresholds.

If you think there may be some exposure, review with your advisors the tax efficiency of the portfolio holdings, perhaps moving less efficient investments into tax-deferred accounts, and capitalizing on tax loss harvesting.

Other ideas include using municipal bonds to help avoid the surtax, since interest is tax-free, and/or taking capital losses to offset any other gains you may have. You may also want to consider an installment sale to spread out a large gain if that keeps your AGI below the thresholds. If real estate is involved, a like-kind exchange will also defer the gain.

2. Can I maximize the tax break using a Flex Plan for child care costs?

You can still claim the dependent care credit to the extent that your expenses are greater than the amount you pay through your flexible spending account (FSA).

The maximum dependent care costs funded through an FSA are $5,000, but the credit applies to as much as $6,000 of eligible expenses for filers with two or more children under age 13. In that case, you should run the first $5,000 of dependent care cost through the FSA, and the next $1,000 would be eligible for the credit on Form 2441.

For most filers, taking the dependent care credit will save an extra $200 in taxes. Of course, no credit is allowed for any child care costs that are paid via the flex plan.

3. What if my school-age child went to summer camp?

Costs related to a child’s summer camp qualify for the dependent care credit. So if a you sent your child to any special day camps this summer (i.e., sports, computers, math, or theatre), don’t forget this break. Ditto for camps that help with reading and study skills.

However, the costs of summer school and tutoring programs aren’t eligible for the credit. They are treated as education, not care. The other rules for the credit aren’t affected: the child must be under 13 and expenses must be incurred so that the parents can work.

4. How should I handle an inherited IRA?

If you inherited an IRA last year, a tax planning deadline is looming. The IRA’s beneficiaries are set for September 30th of the year following the death of the IRA owner. Typically, the heirs are able to take distributions from inherited IRAs over their lifetimes, unless one or more of the beneficiaries of the account are not individuals.

With non-individual beneficiaries, the IRA has to be cleaned out within five years for all beneficiaries, which is generally a negative because it denies tax-deferred growth to the beneficiaries over their lives, which is a longer period of time. The issue occurs when the owner names a charity or college as one of the beneficiaries.

Redeeming a non-individual IRA interest by September 30th can pay dividends. If the charity, school, etc., is paid off by that time, the remaining individual beneficiaries can take distributions over their lives, enjoying more tax-free buildup inside the IRA.

5. How can I optimize the earnings of my children?

Optimize a child’s summer job by contributing to a Roth IRA. The child can contribute up to $5,500 as long as he has earned income of $5,500 or more. The parents can make the contribution for the child, although the parent’s pay-in counts towards the $14,000 annual gift tax exclusion.

What difference does this make? A parent’s generosity can provide a nice nest egg. A $5,500 contribution to a 16-year-old’s Roth that earns 7% each year will grow to $151,000 at age 65 and $212,000 at age 70. If the child works for a couple of summers and contributions are made annually, the future balance of the account will be much more significant. And remember, all qualified withdrawals are tax-free!

6. How can I use the 0% rate on long-term gains?

If your taxable income without long-term gains is in the 10% or 15% tax bracket, profits on the sales of assets owned over a year are tax-free until the gains push you into the 25% tax bracket which starts at $74,900 of taxable income for married couples and $37,450 for singles.

If part of the gain is taxed at 0% and the rest at 15%, claiming more itemizations or making a deductible IRA contribution gives you two tax breaks: 1) claiming the deduction saves on income tax and 2) it allows more capital gains to be taxed at the 0% rate.

However, taking more tax-free gains raises the adjusted gross income, which can cause more of your Social Security benefits to be taxable. In addition, your state income tax bill may jump, since many states tax gains as ordinary income.

7. How can I donate most efficiently?

One way to turbo-charge donations to charity is by giving away appreciated assets, such as stocks. The appreciation escapes the capital gains tax and you will get a deduction for the full value in most cases, as long as you’ve owned the asset for longer than a year.

However, deductions for donations are reduced when adjusted gross income is over $258,250 for singles, $284,050 for the household head, and $309,900 for married couples.

The right assets to donate

Do not donate any assets that have declined in value. If you do, the capital loss is wasted. From a tax point of view, you’re better off selling the asset and donating the proceeds. This also applies if you plan to make a gift to a person. If you give an asset that has diminished in value, you are then unable to sell the asset and deduct the loss.

Consider a charitable lead annuity trust

A charitable lead annuity trust is a trust that pays an annuity to a charity for a set term. Then, what’s left goes to the donor or other beneficiaries. Although interest rates may increase, the donor still gets a nice up-front write-off. That deduction can be used to offset income generated from a Roth IRA conversion, such as letting the donor experience a full lifetime of tax-free withdrawals from the Roth.

Substantiate non-cash donations

If you fail to substantiate property donations, you can lose the write-off. For example, a veterinarian donated over $100,000 of fossils to a charity, and although he did attach Form 8283 to his tax return and received letters from the charity acknowledging the gifts, the fossils were not appraised properly as they were not seen by a qualified expert, which is mandatory when claiming a deduction over $5,000 for non-cash donations.

The taxpayer also failed to obtain a contemporaneous written acknowledgement from the organization stating that he received nothing of value in return for his gift. As a result, the tax court upheld the IRS determination to disallow the deduction.

Understanding tax laws isn’t easy, especially since the laws change constantly and are often tricky. Attempting to take advantage of the benefits can be a confusing process. Though there are some great tips and explanations above, seek the assistance of a tax professional whenever you have any questions about your tax situation.

Have Questions?

Debra Taylor, CPA/PFS, Esq., CDFA, writes on tax and retirement planning for Horsesmouth, an independent organization providing unbiased insight into the critical issues facing financial advisors and their clients.

Debra Taylor is not affiliated with Larson Financial Group.

IMPORTANT NOTICE: This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Copyright © 2015 by Horsesmouth, LLC. All Rights Reserved

Tax Strategies for Doctors

Physician Tax Deductions

Tax planning is all about using proven and effective methods to pay as little in taxes as possible. A good tax strategy will reduce your tax burden in three primary ways:

  1. Reduce your taxable income
  2. Reduce your actual taxes owed
  3. Delay the due date on your taxes for many years to come

Reducing Taxable Income

Tax deductions are the means of reducing taxable income as much as possible. Most tax payers are familiar with the idea of deducting the interest they pay on their mortgage from their taxable income. The effect is that there is less income to be taxed. The same holds true for practice owners who are able to expense their business purchases prior to calculating their taxable yearly profit. The number of opportunities tax payers miss when it comes to tax deductions is hard to quantify. Physicians overpay their taxes consistently by not taking full advantage of the tax deductions available.

Personal Tax Deductions Include:

  • The value of items or funds given to charity (also considered a business deduction).
  • Any interest paid on a first mortgage for your home, and a second home for up to $1 million of loans.
  • Interest paid on second mortgages or home equity loans for your home, and a second home for up to $100,000 of loans.
  • Interest paid on student loans if your income is within allowable limits.
  • Funds contributed to a tax-deferred retirement plan (also considered a business deduction).
  • Professional fees that exceed 2% of your adjusted gross income, including legal, accounting, investment, and financial planning fees.
  • Investment losses.
  • Travel expenses in connection with a job search.
  • Expenses for using your automobile for charitable purposes.
  • Continuing education expenses.
  • Medical expenses, including health insurance premiums, which may or may not have income limits, depending on how the plan is structured.
  • Pre-school or childcare expenses paid for your children so that both spouses can work.

Note: The preceding list of available tax deductions is only a partial representation. It is not comprehensive and varies from person to person. Please consult a tax professional with knowledge about your specific needs.

Charitable Gifts

Even though numerous tax strategies exist, a favorite tax strategy is applicable to anyone that gives cash to charity each year, and also has a significant taxable investment account. In this case, a physician can gift investments to a charity instead of cash. They can repurchase similar investments with their cash, and will owe less tax when the investment is ultimately sold. This strategy creates a triple tax benefit:

  1. You receive a deduction for the full amount of the investments that you gift to the charity.
  2. The charity can sell the investments tax-free, even if there is a substantial gain.
  3. You pay less tax when you ultimately withdraw your cash that has been reinvested.

Tax Deductions for Doctors

In addition to tax deductions, available tax credits can actually reduce your tax bill, dollar for dollar.

Tax Deductions for Doctors

Items potentially eligible for tax credits include expenses for:

  • Higher education
  • International or domestic adoptions
  • Energy-efficient home improvements
  • Each child that you have
  • Childcare so that you and your spouse can work

Though tax credits are the most desirable tax benefit, they are often excluded for families with high incomes. Therefore, most of our clients find that they are limited only to tax deductions for planning purposes because their incomes are too high to be eligible for any credits.

Delaying the Due Date

When tax deductions or credits are not available, a third tax planning strategy is to delay the due date on taxes owed for as long as possible. One respected CPA told us that from day one, a CPA is taught how to keep delaying or deferring taxes. Though this is sometimes appropriate, in many instances it would likely be better to reduce the taxes owed rather than just delay them. Additionally, with high-income professionals, they may actually be delaying their taxes to an even-higher bracket later on.

The problem with delaying taxes is that it usually comes with a cost. Few people understand the negative ramifications of delaying taxes. Take for example the 401(k) that delays taxes until later. Not only do you eventually owe the taxes, but you also owe taxes on the growth in your account.

Due to the compound taxation often caused from tax-delay strategies, it is usually better to first seek out true tax-deduction strategies. The main exception to this rule comes with major real estate investment. If someone has a large gain on an investment property, under certain guidelines they can do what is known as a 1031 exchange, delaying the taxes owed on the sale of the property by purchasing another property. Many physicians use this technique on their investment property to delay their taxes as long as possible. Provided that they delay the taxes until death, the taxes may be forgiven without ever having been paid.

Physicians often pay unnecessary taxes to the IRS. A well balanced financial plan will help you implement strategies that reduce your tax burden. Larson Financial Group advisors are experts at creating balanced financial plans that can significantly reduce your tax burden.

Have Questions?

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

Understanding the Alternative Minimum Tax (AMT)

Each year, more and more physicians find themselves subject to the Alternative Minimum Tax (AMT). When asked, many don’t know how they got there or what, if anything, they can do about it.

The first year I owed AMT tax caught me by surprise. I’d run through tax projections with my accountant at quarterly intervals throughout the year. Why were our projections off by more than $10,000? Why are many physicians paying between $5,000 and $15,000 per year in taxes that they do not owe under our normal tax system? Enter the AMT.

This brief post will educate you on the AMT, some common triggering pitfalls for physicians, and finally, what might be done to minimize its impact on your taxes.

What is the AMT?

The alternative minimum tax was instituted back in 1969 when 155 American families earning more than $1 million dollars owed $0 in federal income tax. This was due to the way deductions were established at the time. Congress didn’t think these families were paying their fair share. Instead of changing the tax code for everyone, they decided to institute an entirely new tax structure to bring these families back into the tax-paying fold.

In its most basic form, the AMT is a totally separate way of calculating how much you owe in taxes. By examining line 45 of your personal tax return (2011 Form 1040), you’ll quickly see if you have been historically falling under this other tax structure. To simplify, think of AMT as a flat tax rate of approximately 28%. This is different than the effective and marginal tax rates you’ve already learned about. Under AMT, there are only two marginal brackets—a 26% bracket and a 28% bracket. The 28% bracket kicks in after $175,000 of income.

What causes you to be subject to AMT?

You’re subject to the AMT because you are eligible for deductions under our normal tax system that Congress has deemed inappropriate for the AMT system. Some deductions are safe under AMT, and don’t hurt you, while other deductions are not and can. Because of this, it’s not easy to look at someone’s income and know in advance if they will or will not be subject to AMT. A general rule of thumb is that you are more likely to be subject to AMT if your income is between $250,000 and $500,000 per year, but several families with incomes in excess of $1 million per year still owe AMT.

Following are two lists. First, the deductions normally considered safe under AMT. Second, a list of the deductions or other tax advantages that can often trigger AMT tax to be owed.

What physician tax deductions are typically safe under the AMT?

What deductions or tax-advantaged issues can commonly cause a physician to be subject to the AMT?

  • Property taxes
  • State and local taxes
  • Mortgage interest for certain home equity loans
  • Unreimbursed business expenses deducted on Schedule A
  • Professional fees deducted on Schedule A (including legal and investment advisory fees)
  • Realization of long-term capital gains
  • Interest from certain municipal bonds deemed “private activity bonds”
  • The exercise of incentive stock options (provided by an employer)
  • Use of the standard deduction

What are some ways to potentially reduce exposure to the AMT?

  1. Claim itemized deductions even if smaller than the standard deduction.
  2. Ask for a larger expense reimbursement account from your employer in exchange for a smaller salary.
  3. Increase contributions to retirement plans offered by your employer.
  4. Use a dependent care reimbursement arrangement through your employer to deduct your childcare expenses rather than claiming these deductions on your tax return.
  5. Consider timing state, local, and property tax payments to bundle them into an every-other-year payment structure.
  6. Reduce exposure to private activity municipal bonds.
  7. Have your investment advisor bill fees to your IRAs or 401(k) rather than your taxable (non-qualified) account. (if you fall under AMT, then you are not able to deduct investment advisory or other professional fees even if they exceed the 2% threshold)
  8. Consider converting traditional IRA funds to Roth IRA funds if you are comfortable with a 28% tax rate.

Each situation is unique. Even if you find you owe AMT, there may be ways to reduce or eliminate it. We advocate that physicians should have their accountant run a year-end tax projection each November. This way they can see if AMT is an issue and seek to reduce exposure if possible.

This information is provided for educational purposes only and should not be considered tax advice. Each individual’s tax situation is unique and you should consult your tax adviser prior to taking any action.

Have Questions?

Advisory services are offered through Larson Financial Group, LLC a Registered Investment Advisor.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

Get Into the Spirit of Giving (and Reap the Tax Benefits)

December is a popular time of year for reflection. Another year has run its course, and the holidays allow us to the opportunity to spend time with loved ones while remembering those who are less fortunate. It’s no surprise that donations to charitable organizations tend to spike at the end of the year.

Tax Deductions for Doctors

There’s still time, advocates of non-profit organizations say, to make a year-end donation that’s eligible for a tax deduction. In addition to being altruistic, seasonal generosity can be a favorable strategy when you’re preparing your tax return. Fortunately, once you’ve found a cause dear to your heart there are numerous resources online where you can do your due diligence in verifying the charity’s fiscal health and transparent governance.

Founded in 2002, charitynavigator.org helps donors evaluate where and how to spend their money. Charitable organizations are rated, allowing you to make sure your hard earned dollars are going to a good cause by avoiding charities that might misuse donations. Once a donation is made, there’s not much recourse for the donor if the organization turns out to be unethical or generally unwise with its decisions. Guidestar.org is another useful resource for researching and evaluating charities.

Methods of Donating

In addition to a standard cash donation, real estate and precious items such as jewelry, art and antiques can be deducted when donated to an eligible organization. However, steps must be taken to properly appraise and asses their fair market value. When estimating the value of donated property, it’s best to err on the conservative side since the IRS will penalize taxpayers for overstating the value of donated property. If you’re claiming a deduction of more than $5,000, the IRS mandates completing Form 8283, Section B.

Another donation strategy that we advocate is to donate investments to a charity instead of cash. If you donate stocks and/or bonds that have appreciated to a qualified charity, you can take a deduction on the appreciated value of those assets rather than their basis. Use the price on the date of the sale, averaging the high and low price to get the fair market value.

Charities are allowed to sell investments tax-free, even if there’s a substantial gain. Furthermore, you can repurchase the exact same investments with cash. Not only do you receive a deduction for the full amount of the investments that you gifted to the charity, but you also pay less taxes when you ultimately withdraw your cash that has been reinvested, so it’s pretty much a win-win.

Eligibility Requirements

Before donating, it’s imperative to make sure that an organization is a qualified charity under IRS rules. These include corporations, trusts, community organizations, funds or foundations organized and operated in the United States for religious, charitable, scientific, literary, or educational purposes. Other qualified charities include cemetery companies, veterans’ organizations, fraternal organizations and organizations designed to prevent cruelty toward children or animals.

Certain charities in Canada, Mexico and Israel may also qualify. You can search for qualified charities using the IRS’s online search tool. The IRS prohibits charitable contribution donations for money or property given to political candidates for public office and groups that lobby for legal changes. Labor unions, chambers of commerce, Homeowner’s associations and for-profit organizations are also not eligible.

Finally, remember to save all receipts and document when possible. No deduction is allowed for a separate contribution of $250 or more unless you have written confirmation from the charity. When donating paintings, antiques or objects of art worth $20,000 or more, a signed appraisal must be attached to your tax return, and the IRS may request an 8” X 10” color photo of the donated item. Just to be safe, you should keep records of your donations in the form of a cancelled check, credit card statement or a written acknowledgement from the charity. When in doubt, check with your financial advisor for rules specific to your situation.

Have Questions?

The above article is for general informational purposes only and should not be construed as tax advice. You should consult with a professional advisor familiar with your particular factual situation for advice concerning specific tax matters before making any decisions.

Understanding Tax-Loss Harvesting Strategies

Are there investments in your portfolio that have fallen in value since you purchased them? As each tax season approaches, it’s an opportune time to examine strategies that could help lower your tax burden. Tax-loss harvesting is one such method that many investors utilize to help reduce tax obligations.

Whether you want to hold the investment for the long term or realize any losses now, tax-loss harvesting may benefit your situation. Tax-loss harvesting is selling a security at a loss now to offset gains from other investments in the current tax year or possibly carry forward to future years. This strategy can help reduce an investor’s tax bill now and in the future.

Benefits of Tax-Loss Harvesting

Tax-loss harvesting is the practice of selling investments within a taxable account at a loss, thereby generating a capital loss that can be used against current capital gains and possibly against an investor’s future income. The ultimate objective is to limit the impact of capital gains taxes. Short-term capital gains, which are defined as gains on assets held less than one year, are normally taxed at a higher federal income tax rate than long-term capital gains.

Tax Deductions for Doctors

When properly applied, a loss in the long-term capital value of Stock A could be sold to offset the reportable long-term gain in value of Stock B, thus reducing the capital gains tax liability of Stock B. Furthermore, once an investor has offset all of their long-term capital gains, they can offset the loss against other short-term capital gains. Not only can this reduce tax burden for investors, but it can also help diversify a portfolio in ways that may not have been considered. By recognizing a tax loss, investors have various options such as allocating their tax savings in a similar but different investment.

In addition to offsetting taxable gains, the IRS allows investors to take up to $3,000 of losses per year if married filing jointly ($1,500 if single) to reduce their ordinary taxable income. It’s important to note that tax-loss harvesting only applies to investment losses held within taxable accounts. Investments held within tax-advantaged accounts such as 401(k)s and Roth IRAs do not receive the same benefits. However, high-income earners that have maxed out their tax-advantaged accounts should be aware of tax-loss harvesting opportunities when managing their portfolios.

Rules and Regulations

In order to take a physician tax deduction on the loss, an investor must sell the investment and not purchase the same or substantially similar investment for at least 30 days before or after the sale date. The purchase of that asset or a substantially similar asset in that 60-day window will cause the loss to be disallowed by the IRS under the wash-sale rule, but may be able to be carried over and added to the cost basis of the new purchase. However, an investor does not need to wait to reinvest the same dollar amount in an asset that is not substantially similar.

If an investment has fallen in value but the long-term outlook is promising, there’s the option of claiming the loss and re-investing in the same security after 30 days. One possible risk is if the security appreciates in value during the 30 day period that funds are not invested. This consideration, among others, should be weighed against the perceived gains from realizing the loss.

Harvesting a loss every time there is a fluctuation in the market can be a burdensome task from a tax-preparation standpoint. Therefore, the transaction costs of buying and selling should be compared to the amount saved in taxes when harvesting a loss. The general idea is to realize the loss if the tax benefits outweigh the administrative costs and investment risk.

Tax-loss harvesting is an active portfolio management strategy that may allow investors to improve their after-tax returns in some cases. It won’t restore actual investing losses, but it can save money by helping to reduce the tax burden. Markets can be volatile and unpredictable, but tax-loss harvesting may aid investors in making a tactical exit from an under-performing security. Prior to taking action, make sure to consult with your tax professional about your specific situation to make an informed decision.

Have Questions?

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Tax loss harvesting is a complicated issue and cannot be fully covered within the context of this article. This article should not be construed as tax advice. Please contact a qualified tax professional with knowledge about your specific needs.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.