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A Mid-Year Tax Round-Up for Medical Professionals
By Andrew D. Schwartz CPA
The American Taxpayer Relief Act of 2012 rescued the vast majority of Americans from the tax edge of the “fiscal cliff” and the steep tax increases scheduled to kick in as the Bush tax cuts expired at the end of 2012.
This legislation, however, did not entirely spare high-income earners; like some doctors and other medical professionals.
Key Provisions of ATRA 2012
Here are the key provisions of the Act passed on January 1, 2013 and strategies you can implement to minimize your tax burden under these new rules:
Threshold for 39.6% Bracket:
The American Taxpayer Relief Act raised the top federal marginal income tax rates from the 35% max in place since the Bush 2003 tax cuts to 39.6% for taxable income exceeding the following thresholds:
###
| Filing Status | Tax Bracket Starts (at taxable income) |
| Married Filing Joint | $450k |
| Head of Household | $425k |
| Single | $400k |
| Married Filing Separate | $225k |
###
Increased Tax Rate on Long-Term Capital Gains and Corporate Dividends
The top tax bracket was not the only increase to federal income taxes. For long-term capital gains and qualified corporate dividends, the tax rate increases by one-third – from 15% to 20% – based on the same taxable income thresholds as apply the 39.6% bracket, effective 1/1/13.
Higher Medicare Taxes:
There are two new increases to the Medicare tax. One upped the Medicare tax that you’ll pay on your earned income from 1.45% to 2.25% for single individuals earning more than $200k or married couples whose combined earned income exceeds $250k.
Keep in mind that your employer will match Medicare taxes withheld from your pay at a rate of 1.45%, so the federal government now gets 3.8% on your earned income that exceeds the applicable threshold.
New 3.8% Medicare Tax On Unearned Income:
The new 3.8% Medicare tax on unearned income kicks in at the $200k of Adjusted Gross Income (AGI) for single individuals and $250k of AGI for married couples. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents. This is the first time that unearned income has ever been subject to Medicare taxes.
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Strategies to minimize your tax bill in light of these new rules:
Plan Your Revenue & Expenditures
Most healthcare professionals are on the “Cash Basis” of accounting, which means that:
- Income is reported when fees are collected
- Deductions are claimed when bills are paid
By planning your billing and your expenditures, especially as the year winds down, you might be able to flatten out profit fluctuations from year to year, which could help minimize the portion of your income that will be taxed at higher rates.
Invest in retirement
Always a good idea, socking away money in retirement accounts is even more valuable now when it means saving 39.6% in federal income taxes and allowing your investment to grow tax-deferred. You should also consider rebalancing your portfolio, putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.
Contribute to a 529 plan
With investment income taxes higher in 2013, take the opportunity to invest in a 529 plan to begin planning for your child’s college education. All earnings in a 529 plan are tax-free, provided that the funds are used to pay for college. And many states even allow you to deduct a 529 contribution on your state tax return. The annual maximum contribution into these tax-advantaged college savings plans is $14,000 per child per year for Gift Tax purposes (or $28,000 for spouses splitting gifts), however, you can frontload five year’s worth of contributions all in one year. Don’t forget to file a Gift Tax Return if you contribute more than $14k ($28k if married) into 529 accounts in one calendar year on behalf of a child.
Purchase needed equipment and machinery for your practice
With the fate of the $500K Section 179 deduction up in the air past 2013, it might be in your best interest to buy big-ticket equipment and machinery during the year to take advantage of the immediate deduction.
Employ your spouse and children
If there’s extra work to be done at your practice, putting your children and spouse on your payroll can be a great way to shift income to a lower tax bracket (in your child’s case) and enable your spouse to put away the maximum ($17,500 for 2013) pre-tax into a 401k retirement fund. Moreover, your child can fund a Roth IRA with the money they earn, up to a maximum of $5,500 in 2013.
Establish a Health Savings Account
If you have a qualified high-deductible health insurance plan, take advantage of the opportunity to pair it with a Health Savings Account (HSA). Contributions to an HSA are tax-deductible and grow tax-deferred. Plus, HSAs allow tax-free distributions to cover your family’s health care costs and any money remaining in the HSA is available penalty-free to supplement your retirement once you reach age 65. The maximum contribution into an HSA for 2013 is $6,450 for married couples and $3,250 for single individuals.
Conclusion
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Physician Advisors: www.CertifiedMedicalPlanner.org
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Filed under: Accounting, Financial Planning, Retirement and Benefits, Taxation | Tagged: 3.8% Medicare Tax, 401k retirement fund, 529 plan, AGI, American Taxpayer Relief Act of 2012, Andrew D. Schwartz CPA, Cash Basis" accounting, Corporate Dividends, gift tax, health savings account, IRA, Long-Term Capital Gains, Revenue & Expenditures, Section 179 deduction |
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How to get tax breaks for your medical practice
Federal, state and local governments may offer doctors incentives because medical practices are recognized as economic engines.
http://www.amednews.com/article/20130805/business/130809990/4/
But, physicians must also know how and where to find them.
Regina
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Some Tax Quotes
There are two systems of taxation in our country: one for the informed and one for the uninformed.
– Honorable Learned Hand, US Appeals Court Justice
Over and over again Courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. to demand more in the name of morals is mere cant.
– Honorable Learned Hand, US Appeals Court Justice
The hardest thing in the world to understand is income tax!
– Albert Einstein
Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”
– Author Unknown
Bill
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Why Future Tax Rates Will Be Even Higher
http://www.forbes.com/sites/mikepatton/2013/08/22/why-future-tax-rates-will-be-higher/?utm_source=money.msn.com&utm_medium=partner&utm_campaign=7+investment+mistakes&partner=msnedit
Mark
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How to get tax breaks for your medical practice
Federal, state and local governments offer doctors incentives because practices are recognized as economic engines.
http://www.amednews.com/article/20130805/business/130809990/4/
But, physicians must know how and where to find them.
Regina
LikeLike
Potential Tax Fraud Alert
I would like to make all ME-P readers aware of a scam that is currently taking place in Georgia; possibly elsewhere.
Individuals are calling taxpayers and claiming they are calling from the IRS or the GA Department of Revenue and saying that you owe taxes.
So, please remember, if you owe any amount in taxes you will receive a notice in writing by mail. You will never receive a phone call from either the IRS or the GA Department of Revenue.
Do not ever give out any personal information if you receive a call.
Robert Whirley CPA
[Whirley & Associates, LLC]
Alpharetta, GA
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More on Capital Gains Tax and Mutual Funds
Capital gains are the profits realized from the sale of capital assets such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor.
However, mutual fund investors could be charged capital gains on investments in the fund that are sold by the fund during the year.
There are two types of capital gains: long term and short term; each is subject to different tax rates.
Long-term gains are profits on assets held longer than 12 months before they are sold. The American Taxpayer Relief Act of 2012 instituted a 20% long-term capital gains tax rate for taxpayers in the 39.6% income tax bracket and extended both the 0% capital gains tax rate for individuals in the 10% and 15% tax brackets and the 15% capital gains tax rate for all other tax brackets.
Short-term gains (on assets held for 12 months or less) are taxed as ordinary income at the seller’s marginal income tax rate.
The taxable amount of each gain is determined by a “cost basis” — in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. In addition, any capital losses incurred in the current tax year or previous years can be used to offset taxes on current-year capital gains. Losses of up to $3,000 a year may be claimed as a tax deduction.
So, if you have been purchasing shares in a mutual fund over several years and want to sell some holdings, instruct your financial professional to sell shares that you purchased for the highest amount of money, because this will reduce your capital gains. Also, be sure to specify which shares you are selling so that you can take advantage of the lower rate on long-term gains. The IRS may assume that you are selling shares you have held for a shorter time and tax you using short-term rates.
Capital gains distributions for the prior year are reported to you by January 31, and any taxes that must be paid on gains are due on the date of your tax return.
As noted above, higher-income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers). This is an outcome of the Patient Protection and Affordable Care Act.
Bronson
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