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A Decade of Corporate Profit VERSUS Tax Receipts

CIRCA 2010 – 2019

***********

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On the Unintended Consequences of High Taxes on the Rich

On the two types of tax increases

[By Rick Kahler CFP®]

Two types of tax increases are being promoted by several presidential candidates and members of Congress. The less common idea, which I wrote about recently, is a wealth tax on net worth. The more common proposal is a significant increase in income taxes.

Presidential candidate Bernie Sanders favors a progressive income tax that tops out at 54.2% on incomes over $10 million. Not to be outdone, Congresswoman Alexandria Ocasio-Cortez supports increasing the income tax on the same group to 70%.

If you think these proposals are so radical that only the most liberal of voters would support them, a poll conducted by Hill-HarrisX in January 2019 found that 59% of all voters favored a 70% tax bracket. The survey asked 1001 registered voters if they favored a 70% top rate for “the 10 millionth dollar and beyond for individuals making $10 million a year or more in reportable income.” While predictably most Democrats polled—71%—favored the steep increase, 60% of Independents and 45% of Republicans also supported it.

When you consider how popular the notion of a 70% top income bracket is, it isn’t a stretch by any means to imagine these same voters in the 2020 election giving control of Congress and the Presidency to politicians favorable to hiking taxes. The chance of seeing such massive increases on the wealthy goes from a remote possibility to a real probability.

Promoters of the anticipated windfall revenues from such a tax want to redistribute the proceeds to fund things like free college education, affordable health care for all, high speed rail trains, and converting existing buildings to comply with “green” regulations.

While all these outcomes are well intended, perhaps even desirous, before we forge ahead it may be a good idea to consider unforeseen consequences. Let’s look at how past attempts to fund massive government benefits by raising taxes on the rich have worked.

France

In 2012 France raised the top tax bracket to 75% on individuals earning over $1 million. French economist Thomas Piketty, who really wanted to see the tax at 80%, was so exuberant about the move that he predicted many other countries would follow suit.

Government officials estimated that tax revenues would soar to 30 billion euros in 2013. They were roughly half right: revenues came in at 16 billion euros. One of the reasons the tax revenue windfall didn’t develop was a consequence that politicians had not considered. The wealthy packed their bags and moved, taking their investments and income with them.

By 2015, around 2.5 million French citizens lived in the U.K., Belgium, Singapore, and other countries that had much more competitive tax rates. The French economy ground to a halt, growth stagnated, and unemployment soared to 10%. In 2015 France repealed the ill-fated tax.

England

According to The Times of London in March 2019, one-third of British billionaires have left the country because of high taxes, most in the last ten years.

Maryland

The state of Maryland has had a similar experience due to high state and municipal taxes. In October 2013, the Maryland Public Policy Institute reported on throngs of wealthy retirees  “moving out of Maryland to save money on taxes and leave more to their children. This is costing the state millions in tax revenue.”

***

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Assessment

If the U.S. enacts a similar tax, it is foolish to assume the outcome will be any different. A plethora of other countries with great amenities and competitive tax rates will appeal to those affected by the tax. Tax policies that regard the wealthy primarily as sources of revenue rather than investors in their communities do little to keep those citizens anchored at home.

And so, your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Small Companies Get Tax Breaks, Too!

How can this possibly be fair?

By Rick Kahler MS CFP®

An April 29th headline in The New York Times got my attention: “Profitable Giants Like Amazon pay $0 in Corporate Taxes. Some Voters Are Sick of It.” My immediate reaction was outrage. Amazon had a 0% tax rate. My company’s overall tax rate was 24%, and its net profit was less than 0.000025% of Amazon’s. How can this possibly be fair?

The Times article, by Stephanie Saul and Patricia Cohen, gave few specifics but left the impression that Amazon simply gets out of paying taxes on its profits because of a legal, but unfair, manipulation of the tax code afforded only to wealthy corporations, leaving the heavy lifting to the rest of us poor saps.

I wanted to know how Amazon did it, so I did some research

First, let’s put the $11.1 billion profit into perspective. The past 18 months are the first time Amazon has shown any meaningful profit since 2011. Many of those years saw them losing billions of dollars.

The total value (market capitalization) that shareholders have invested in Amazon is $954 billion as of April 29, 2019. That means the 2018 profit of $11.1 billion represents an earnings yield of 1.16% return on investors’ money. The average earnings yield on a large US company is 4.5%, significantly higher than Amazon’s. While $11.1 billion sounds like a lot of money in dollar terms, when viewed in the amount of money it takes to generate those profits, Amazon’s financials are significantly subpar.

Amazon reduced their taxes to zero by primarily doing four things:

  1. They reinvested their profits in equipment and buildings, and were able to deduct a portion of these expenses. They will have to repay the taxes they deferred on these purchases when they sell the equipment or property. And the money spent was not available for distribution to their shareholders.
  2. They received a tax credit for spending on research and development. This credit is an incentive for any company to help offset the high risk of the up-front costs of developing new ideas, not all of which pay off.
  3. They paid some employees in the form of stock, rather than cash. While still a real cost to the company, this is used to minimize cash outflows, while giving employees an opportunity to reap the rewards of their hard work in future profits.
  4. In their start-up years, Amazon lost billions of dollars. Out of fairness, the tax code allows any business to carry losses over into future years to offset profits, when and if they ever materialize. This type of “write off” is real money that was lost.

The article cited a carpet layer who had a profit of $18,000 and paid more in taxes than Amazon. He was so upset at this injustice that he joined the Socialist Party.

The article failed to mention that many of the same write-offs used by Amazon were available to him, too. If his business was incorporated, the tax bill on his profits was probably 21%, or $3,780. If he had reinvested his profit in a new carpet cleaning machine, had losses from previous years to carry forward, spent money on developing a new type of carpet cleaner, or paid his employees in stock, he would have paid nothing in taxes.

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Assessment

Critics of big corporations might say such strategies would not be realistic for a one-person company. Yet I have seen many small business owners use them, particularly carrying forward losses that result from the essential start-up costs. The corporate tax code generally applies equally to all businesses and is meant to encourage small companies as well as large ones to take the risks necessary to create new jobs.

Conclusion

Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Consider Taxes Before Retiring Abroad

Physicians Considering Retirement in Another Country?

By Rick Kahler CFP®

One way for a retiring doctor to stretch a retirement nest egg is to relocate your retirement nest. Finding a place with a lower cost of living can include considering retirement in another country.

International Living

According to International Living, Panama is one of the best options for Americans looking for affordable living costs, good medical services, and an appealing climate. Costa Rica, Mexico, and Belize are also good possibilities.

Before you pack your sunhat and flip-flops and head for a low-cost retirement haven like Panama, however, take a look at all the factors affecting your retirement income and expenses. One of those is taxes.

Taxes

Moving out of the country does not mean your tax bill to the US government or your current state will decrease. Short of giving up your US passport, there is nothing you can do to escape paying US taxes on your income, even if you don’t live in the US. We are one of two countries worldwide—the other is Eritrea—that taxes our citizens based on both residence and citizenship.

You might assume, however, that moving out of the country would end your liability for state income taxes. That isn’t always the case. Some states still want to tax your income even though you don’t live there. According to Vincenzo Villamena in a December 2018 article for International Living magazine titled “How to Minimize Your State Tax Bill as an Expat,” it’s especially problematic if you end up returning to your old address in the state and start filing an income tax return. Eventually, he says, “the state will see the gap” and may require you to pay taxes on the missing years.

You have nothing to worry about if you live in one of the seven states with no income tax: South Dakota, Wyoming, Nevada, Washington, Texas, Florida, and Alaska. Tennessee and New Hampshire aren’t bad, either, as they don’t tax your earnings but they do tax your investment income. Most other states will let you off the hook if you submit evidence that your residence is in another country and you haven’t lived in the state for a while.

Then there are the states that won’t let go of their former residents easily. Those are California, Virginia, New Mexico, South Carolina, North Carolina, Massachusetts, and Maryland. Assuming that when you leave you will be coming back, they require that you continue to pay state tax on your income.

***

Solutions?

The solution to this issue takes a little financial planning and some extra time. The best way to escape paying taxes to a state you no longer live in is to move to a state with no income tax first before relocating abroad. You must prove to your old state that you have left and have no intention of ever coming back.

***

***

This means moving for real—cutting as many ties to your old state as possible and establishing as many as possible in your new state. You will want to sell your home, close bank accounts, cancel any mailing addresses, change healthcare providers and health insurance companies (including Medicare), be sure no dependents remain in the state, and register to vote and get a driver’s license in the new state. As a final good-bye you will want to notify the tax authorities that you are filing a final tax return for your last year that you lived in the state.

Assessment

In case you need a good state from which to launch your leap into expat status, consider South Dakota. Not only would my income tax-free home state let you go easily, it would welcome you back if you should decide to return to the US.

Your thoughts are appreciatedBook of Month

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Two Different Personal IRA Investing Strategies?

Based on Tax Considerations?

 

 

 

 

 

By Dr. David Edward Marcinko MBA

LINK: https://medicalexecutivepost.com/schedule-a-consultation/

One personal investing strategy is to place more conservative investments (those with lower expected returns) in a tax-deferred traditional IRA, 401-k, 403-b or similar, and more aggressive (higher-earning) assets in a taxable brokerage account or Roth IRA.

WHY? Each account is thus working hard but in very different ways.

HOW? The conservative funds in the traditional IRA or retirement accounts would fill any needs for safety as they grow more slowly – and the higher tax rate won’t take out as big of a bite.

Meanwhile, the more aggressive funds in a taxable brokerage accounts would grow more quickly, but be taxed at a lower rate.

Assessment: Any thoughts?

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MORE FOR DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

***

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

 

2019 Tax Deductions and Credits

Update on Tax Reform

***

***

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Hospital Spending VERSUS Federal Tax Rates

CIRCA 2010 – 2026

[By staff reporters]

 

***

Assessment

Your thoughts are appreciated.

RESOURCES:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

THANK YOU

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

ATTN: S-Corporation shareholders

Dear S-Corporation shareholder,

[By Cindy Freking, CPA]

The year is coming to an end and we would like to send you a few important reminders.

Be certain that you have taken an adequate salary from your S-Corporation. The practice of taking cash distributions from your S-Corporation without drawing a salary or without drawing an adequate salary is increasingly being challenged by the IRS. The IRS is winning.

If the company is paying your health insurance premiums, please be sure that those premiums will be included in your W-2. If they are not, you will lose the self-employed health insurance deduction that is available to you on your own personal income tax return.

Assessment

If you need help to determine your salary, the appropriateness of your salary and the health insurance premiums that should be included in your taxable wages, please contact your local CPA.

Have a wonderful holiday!

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

HOW SHOULD THE FEDERAL GOVERNMENT BE FINANCED?

The “BENEFIT” PRINCIPLE Versus “ABILITY-TO-PAY” PRINCIPLE OF TAXATION

[By staff reporters]

OK; the 2018 mid-term elections are over. So, where do you stand on federal taxation? Let’s review the very basics.

The Lindahl Tax

A “Lindahl Tax” is a form of taxation conceived by Erik Lindahl in which individuals pay for public goods according to their marginal benefits. In other words, they pay according to the amount of satisfaction or utility they derive from the consumption of an additional unit of the public good.

It can be seen as an individual’s share of the collective tax burden of an economy. The optimal level of a public good is that quantity at which the willingness to pay for one more unit of the good, taken in totality for all the individuals is equal to the marginal cost of supplying that good. Lindahl tax is the optimal quantity times the willingness to pay for one more unit of that good at this quantity.

***

Lindahl Benefit Principle. Those that benefit the most from a particular program should pay the most for that program (Lindahl Tax principle at work). Fuel Tax to finance road construction. Ability-to-Pay Principle. Those who have the greatest ability to pay should be required to pay the most. Horizontal equity. Vertical equity.

Ability-to-Pay Tax

An “Ability-to-Pay Tax” is exactly what it says with both horizontal and vertical components.

Ability-to-pay taxation is a progressive taxation principle that maintains that taxes should be levied according to a taxpayer’s ability to pay. Ability-to-pay taxation is a progressive taxation principle that maintains that taxes should be levied according to a taxpayer’s ability to pay.

***

***

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance & Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

***

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

How You Can Deduct Your Medical Expenses

Reduce Taxes, Bunch Deductions

By Rick Kahler MSFS CFP®

***

Want to save a bunch under the new federal income tax laws? Try bunching your deductions.

The new tax law doubles the standard deduction and eliminates most miscellaneous deductions. It takes a lot more of the limited allowable deductions left to reach the threshold for itemizing deductions instead of using the standard amount.

This means fewer Americans will be able to itemize. A Jan 18, 2018 post by Dena Bunis at AARP.com quotes Mark Mazur, director of the nonpartisan Tax Policy Center: “We’ve estimated that about 30 percent itemized in 2017, and we think that’s going to go down to about the 10 percent range going forward.”

By “bunching” donations and tax payments into alternating years, you may still be able to itemize your deductions every other year. The three main deductions you may be able to bunch are property and state income taxes (up to a cap of $10,000), charitable donations, and medical expenses.

Example:

Here’s how bunching works for a single person. Let’s assume you have $11,500 of deductions every year. This will not put you over the $12,000 threshold, so you will take the $12,000 standard deduction every year. However, if you can bunch all those deductions into alternate years, you could deduct $23,000 one year and take the standard deduction the next year. Depending on your top income tax bracket, bunching might save you a tidy $1,100 to $4,070 every other year. (If you are married, just double these numbers.)

One of the easiest expenses to bunch in South Dakota is property taxes. Most property owners pay the first half of the prior year’s taxes in April and the second half in October. However, county treasurers will allow you to pay your taxes in full on January 1 of each year. So, every other year you write a check to the county treasurer on December 31, bunching two years of property taxes into one year.

Charitable donations can also be easily bunched. You might simply double your donations one year and skip them the next (let smaller charities that rely on your contributions know you’re doing this). Or you could use a donor advised fund (DAF). These funds allow you to make sizeable charitable donations without even knowing which charities you want to support or when. The fund managers keep your money invested until you direct them when and to whom to disburse it. If you give $6,000 a year to your church, for example, you could bunch two or more years of giving into one year and then have the DAF release the funds annually.

Medical deductions in excess of a percentage of your income (7.5% in 2018; 10% in 2019 and after) can be deducted if you itemize. Bunching elective procedures and other expenses into one year may put you over the threshold every other year.

AARP says that you may be surprised at some of the medical costs that are deductible. Those that are eligible include:

·         Out-of-pocket payments for prescription drugs and fees to doctors, dentists, chiropractors, psychiatrists, psychologists, podiatrists, physical or occupational therapists

·         Health and long-term care insurance premiums

·         Payments to nursing homes and other long-term care facilities

·         Inpatient alcohol and drug treatment programs

·         Modifications made to your home for medical reasons

·         Transportation to and from medical appointments

·         Dentures, prescription eyeglasses, hearing aids, and DME such as wheelchairs

·         Smoking-cessation and weight-loss programs related to a specific disease.

Assessment

Obviously, the potential for tax savings from bunching deductions will vary considerably. You may want to investigate what impact it could have for you. At least on alternate years, the savings might make you a happier taxpayer.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

DOCTORS:

“Insurance Risk Management Strategies for Doctors” https://tinyurl.com/ydx9kd93

“Fiduciary Financial Planning for Physicians” https://tinyurl.com/y7f5pnox

“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

HOSPITALS:

“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

2018 – 2021 HSA Contribution Limits

Inflation Adjustments for the Tax Cuts and Jobs Act

By Dr. David Edward Marcinko MBA

http://www.CertifiedMedicalPlanner.org

On March 5, 2018, the IRS released Revenue Procedure 2018-18 (as part of Bulletin 2018-10). Due to changes made in the Tax Cuts and Jobs Act, certain adjustments needed to be made to inflation amounts.

The includes a reduction in the maximum family HSA contribution for those with family coverage under an HDHP from $6,900 to a new limit of $6,850 for calendar year 2018. The single contribution limit remains unchanged at $3,450 per year.

This reduction affects employees participating in an HSA Plan who have elected to contribute more than $6,850 for family coverage in 2018.

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

About the Laffer Curve

What it is – How it works
By staff reporters

DEFINITION:

In economics, the Laffer curve is a representation of the relationship between rates of taxation and the resulting levels of government revenue.

The Laffer curve claims to illustrate the concept of taxable income elasticity—i.e., taxable income will change in response to changes in the rate of taxation. http://www.HealthDictionarySeries.org

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HISTORY:

The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments.

The curve is used to illustrate Laffer’s main premise that the more an activity such as production is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated.

MORE: https://www.investopedia.com/terms/l/laffercurve.asp

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Contact: MarcinkoAdvisors@msn.com

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https://www.crcpress.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

On The Tax Cut and Jobs Act (TCJA)

The Tax Cut and Jobs Act (TCJA)

By Rick Kahler CFP®

The Tax Cut and Jobs Act (TCJA) has generated a lot of media hype, much of which is coming from the extreme wings of both political parties and much of which is simply not true.

Here is some perspective

When he signed the bill President Trump called it “the largest tax cuts in our history”. This is not so.

According to a November 2, 2017, article in Reuters, the largest personal tax cuts in U.S. history came from Presidents Warren Harding and Calvin Coolidge, both Republicans. In 1922, the top tax rate was 73 percent. By 1925, it was only 25 percent.

Under Presidents John Kennedy and Lyndon Johnson, both Democrats, the tax cuts of 1964 and 1965 cut the top rate from 91 percent to 70 percent. The 1986 Reagan cuts lowered the top rate from 70 percent to 28 percent.

In comparison, the Trump cuts reduced the top rate from 39.6% to 37%, a miniscule 6.6% drop.

The new tax rules do mean some significant changes 

The good news is that the standard deduction will nearly double and the maximum child tax credit will increase from $1000 to $2000. But almost nowhere do you read about the bad news: the current personal exemptions will go away.

For 2017, an individual can take the $6350 standard deduction plus the $4050 personal exemption for a total of $10,400 (plus $4050 for each dependent). For 2018, this is $12,000, only $1,600 more in deductions. This means a median tax savings of about $192 per person, and only if you don’t itemize.

The even worse news

Home office expenses, moving expenses to relocate for a new job, casualty and gambling losses, unreimbursed business expenses, tax preparation software, tax preparation fees, and investment advisory fees will no longer be deductible on Schedule A.

This tax act has been labeled as terrible for the middle class and wonderful for the uber-rich. I don’t see that either claim is true. It appears to me that the winners (not “big winners”) are the middle class. Yes, the uber-rich also get a small 6.6% reduction—hardly a big deal compared to the cuts of 23% to 73% under Kennedy, Reagan, Harding, and Coolidge.

Corporate taxes

The real impact of the TCJA is its reductions on corporate taxes, not personal taxes. Taxes on C-corporations are cut from 34% to 21% (a 38% reduction). What isn’t reported is that reducing America’s corporate income tax has had bipartisan support for several years. The current US rate of 34% is the highest in developed countries, when the average global corporate tax rate is 22.6%.

Those who attack “big corporations that will just pass tax savings on to investors” tend to forget that 43% of Americans invest in these same corporations, including those with 401(k), IRA, or 403(b) retirement plans.

You also probably haven’t read that the new law actually raises taxes on corporations with taxable incomes of under $50,000, from 15% to 21% (a 38% increase). These corporations are those most generally owned by the Main Street business person.

The TCJA helps tax payers that are sole proprietors, partners and shareholders of S-corporations, LLCs and partnerships, which pass profits or losses through to be taxed in the taxpayer’s personal tax brackets. The new law allows most of these pass-through entities to exclude 20% of their profit from taxes. However, if you are in the profession of law, accounting, medicine, or financial planning, or are a professional musician or athlete, the exclusion probably doesn’t apply.

Assessment-Irony

Finally, for the 51% of Americans who pay taxes, the TCJA adds an unbelievable amount of complexity to an already complex tax code.

Conclusion

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The Tax Cuts and Jobs Act of 2018

The Tax Cuts and Jobs Act

By Robert Whirley CPA

Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way.

Attached you will find summaries of the various provisions. We have tried to make sure these are final given the fact that the law changed three times in 24 hours.

Here’s a quick rundown of last-minute moves you should think about making

Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-through, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

• . . . If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.

• . . . Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.

• . . . If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.

• . . . If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.

• . . . The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction.

Here’s what you can do about this right now:

• Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.

• The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

• The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

IRS

Other year-end strategies

Here are some other last minute moves that can save tax dollars in view of the new tax law:

• The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.

• Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.

• For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.

• Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.

• The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.

• Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit.

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Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Assessment

Please keep in mind that I’ve described only some of the year-end moves that should be considered in light of the new tax law.

Robert Whirley & Associates, LLC + ProActive Advisory
11675 Rainwater Drive
Suite 430, Bldg 600
Alpharetta, GA 30009
http://www.WhirleyProactive.com
770.932.1919
770.932.1192 (fax)

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An End of Year Financial Check List

Important for your Financial Health

By Patrick Bourbon CFA

The last few weeks of the year are often a mad rush so we thought that it is a good time to share this checklist of important items to consider before the calendar year ends, all related to your investments and finances so that you can reach your goals and dreams faster.

1. Review your IRA – 401(k) / 403(b) retirement accounts – Are you on track for a comfortable retirement?
2. Start tax planning! It’s not too early to think about taxes – Asset location & Tax efficiency
3. Rebalance your portfolio
4. Harvest your capital losses
5. Check your emergency fund
6. Review your insurance policies
7. Contribute to your Health Spending Account
8. Take your Required Minimum Distribution
9. Contribute to your 529 Plan
10. Determine your net worth
11. Check your credit score
12. Check your beneficiaries
13. Update your estate plan
14. Maximize your business deductions
15. Spending and automated savings – You want to look ahead

Assessment

Short and sweet.

Conclusion

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A Social Security Taxation Synopsis

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By Vanguard Services

Infographic on Social Security Taxation

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social_security_infographic_112016

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Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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The New Social Security Wage Base for 2017

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Social Security wage base increases to $127,200 for 2017

[By Robert Whirley CPA & Associates, LLC + ProActive Advisory]

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2017 will increase to $127,200.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

For 2017, the FICA tax rate for employers is 7.65%—6.2% for OASDI and 1.45% for HI.

For 2017, an employee will pay:

  1. 6.2% Social Security tax on the first $127,200 of wages (maximum tax is $7,886.40 [6.2% of $127,200]), plus
  2. 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
  3. 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). (Code Sec. 3101(b)(2))

For 2017, the self-employment tax imposed on self-employed people is:

  • 12.4% OASDI on the first $127,200 of self-employment income, for a maximum tax of $15,772.80 (12.40% of $127,200); plus
  • 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a separate return), (Code Sec. 1401(a), Code Sec. 1401(b)), plus
  • 3.8% (2.90% regular Medicare tax + 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). (Code Sec. 1401(b)(2))
  • There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

IRS

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Key Hospital Employee Benefits

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For KEY Hospital Employees

By PERRY D’ALESSIO; CPA

[D’Alessio Tocci & Pell LLP]

Dr. David E. Marcinko; MBA CMP®

http://www.CertifiedMedicalPlanner.org

Effective January 1st 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) was increased from $205,000 to $210,000.

For a participant who separated from service before January 1st 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2013, by 1.0155.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:

  • The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased to $17,500.
  • The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.
  • The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.
  • The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $205,000 to $210,000.
  • The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from to $115,000.
  • The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over is increased from $5,000 to $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
  • The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.
  • The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $500 to $550.
  • The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from to $12,000.
  • The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased to $17,500.
  • The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000.  The compensation amount under Section 1.61‑21(f)(5)(iii) is increased from $205,000 to $210,000.
  • The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). These dollar amounts and the adjustments are as follows:
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $59,000 to $60,000.
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,6250 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $44,250 to $45,000.
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), from $29,500 to $30,000.
  • The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.
  • The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000.

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IRS

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Assessment

Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.

Source: http://www.irs.gov/newsroom/article/0,,id=187833,00.html

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

 Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Corporate Taxes

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Erik Hare

[By Erik Hare]

What is a fair corporate tax?

It’s a hot political topic, but one loaded with a tremendous amount of mis-information. On the left, it’s common to cite “loopholes” which allow corporations to “offsh…

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Corporate Taxes

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Don’t forget 1st. Quarter Estimated Tax

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Andrew Schwartz

By Andrew Schwartz CPA

Doctors –Don’t forget 1st Quarter Estimated Tax payments for 2016; due April 18th.

‘Estimated Tax’

Estimated taxes are usually paid on a quarterly basis. If the estimated taxes that are paid do not equal at least 90% of the taxpayer’s actual tax liability (or 100% or 110% of the taxpayer’s prior-year liability, depending on the level of adjusted gross income), then interest and penalties are assessed against the delinquent amount.

Don’t forget- 1st Quarter Estimated Tax

IRS

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Tax Changes for 2015-16

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By Robert Whirley CPA

[Whirley & Associates, LLC]

Alpharetta, GA

Doctors – Be Aware!

As tax filing season rapidly approaches I wanted to provide you with a few key items to note for 2015 and 2016.  If you are interested I can send you my full list of tax changes for 2015 and 2016 – I warn you, it’s 19 pages long – and this is only my short list.

Welcome to the New Year 2016! 

  • For 2015, the standard mileage rate for business travel is 57.5¢ (54¢ for 2016).
  • The simplified per diem rates for post-Sept. 30, 2015 travel are $275 for high-cost areas and $185 for all other localities (up from $259 and $172).
  • For 2015 and 2016, a HDHP for health savings account (HSA) purposes is a health plan with an annual deductible that is not less than $1,300 for individual coverage and $2,600 for family coverage. Maximum out-of-pocket expenses can’t exceed $6,450 for individual coverage for 2015 ($6,550 for 2016) and $12,900 for family coverage for 2015 ($13,100 for 2016). The maximum annual HSA deductible contribution is the sum of the monthly contribution limits, based on eligibility and health plan coverage on the first day of the month. The monthly limit is 1/12 of the indexed amount for self-only coverage ($3,350 for 2015 and 2016) and for family coverage ($6,650 for 2015 and $6,750 for 2016).
  • Enhanced expensing—in the form of increased limitations and treatment of certain real property as Code Sec. 179 property—was made permanent, as was the ability to revoke a Code Sec. 179 election without IRS’s consent.
  • The mileage rate for use of a car for qualified medical transportation is 23¢ per mile for expenses paid or incurred in 2015 (19¢ for 2016).
  • Bonus first-year depreciation was retroactively extended through 2019 with a number of modifications, including a gradual reduction over that time (50% for qualified property placed in service in 2015 through 2017, 40% for 2018, and 30% for 2019).
  • The de minimis safe harbor for taxpayers that don’t have an applicable financial statement was raised from $500 to $2,500. – For items expensed as miscellaneous supplies.
  • For contributions by individuals (including ranchers and farmers), the increased charitable deduction for qualified conservation easements was made permanent.
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements was made permanent.
  • Education Tax Breaks:
  • The American Opportunity tax credit (AOTC) was made permanent. It was also made subject to heightened verification processes and paid-preparer due diligence requirements in order to reduce the number of improper payments.
  • The up-to-$250 above-the-line deduction for teachers’ out-of-pocket classroom-related expenses was made permanent.

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The above-the-line deduction for qualified tuition and related expenses was retroactively extended through 2016.

  • Starting in 2015, the definition of “qualified higher education expenses” for Sec. 529 qualified tuition programs includes certain computer and technology-based costs.
  • For tax years beginning after June 29, 2015, taxpayers must receive a Form 1098-T from the educational institution containing all required information in order to claim the AOTC, the above-the-line deduction for higher education expenses, or the Lifetime Learning Credit.
  • For 2015 and 2016, the AOTC phases out at the same level of modified AGI—over $80,000 ($160,000 for a joint return).
  • For 2015 and 2016, the maximum AOTC/Hope Scholarship Credit is $2,500.
  • For 2015, the Lifetime Learning credit phases out for taxpayers with modified AGI in excess of $55,000 ($110,000 for a joint return). For 2016, the corresponding figures are $55,000 and $111,000.
  • For 2015, the higher education exclusion for savings bond income phases out ratably for taxpayers with modified AGI between $77,200 and $92,200 ($115,750 to $145,750 for joint filers). For 2016, the corresponding ranges are $77,550 to $92,550, and $116,300 to $146,300.
  • For 2015 and 2016, the deduction for interest paid on qualified higher education loans phases out ratably for taxpayers with modified AGI between $65,000 and $80,000 ($130,000 and $160,000 for joint filers).

Assessment

Just days into 2016 and you’re also facing pressures bearing down on your payroll operations. Are you ready to meet them? For example:

  • You’re not done with tax year 2015 … yet. There are FUTA credit reductions to determine and budget for, the impact of tax extenders legislation to consider (including retroactive reinstatement of parity between mass transit benefits and parking benefits), and more.
  • Major tax reform is probably off the table for now. But don’t let that fool you. New federal laws increase payroll tax penalties, change the due dates for your corporate returns and yank passports from individuals with tax debts. Of course, Payroll will bear the brunt of these new laws.
  • The IRS has issued a raft of payroll tax regulations, and proposed regulations from the Department of Labor will ratchet up the amount employees must earn to be exempt from overtime. Finally, the IRS and its sister agencies continue to issue guidance on compliance with the Affordable Care Act.
  • There’s a key FLSA case pending before the U.S. Supreme Court. Word on the street is that it may continue to permit class action lawsuits for unpaid overtime.

Conclusion

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Congress Passes Permanent Tax Provisions

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By Cindy Freking CPA

[Tax Manager ]

cfreking@whirleyproactive.com

Late on December 15th, a bipartisan agreement was reached on tax extenders—i.e., the 50 or so temporary tax provisions that are routinely extended by Congress on a one- or two-year basis—and numerous other tax provisions in the “Protecting Americans from Tax Hikes (PATH) Act of 2015” (the Act). This agreement makes permanent many of the individual and business extenders and contains provisions on Real Estate Investment Trusts (REITs), IRS administration and the Tax Courts and miscellaneous other provisions.

Below are some provisions that have been made permanent:

DEPRECIATION & EXPENSING PROVISIONS

  • The Act makes permanent the $500,000 expensing limitation and $2 million phase out amounts under Code Section 179
  • For property placed in service after Dec 31, 2015, the Act provides that air conditioning and heating units are now eligible for expensing
  • Assets for which the De Minimis election applies are not counted in determining the Code Section 179 expensing election or the ceiling
  • 15 Year Write off for Qualified Leasehold , Retail Improvements & Restaurant Property

INDIVIDUALS

  • American Opportunity Credit
  • Enhanced Earned Income Tax Credit
  • Above the line Educator Expenses
  • Exclusion for Employer Provided Mass Transit & Parking
  • State and Local Sales deduction
  • Liberalized rules for Qualified Conservation Contributions
  • Nontaxable IRA transfers to eligible charities

BUSINESSES

  • Research & Development credit & offset now available against taxes in addition to income taxes
  • Reduction in S-Corporation recognition period for Built in Gains Tax
  • Exclusion of 100% Gain on certain small business stock
  • Enhanced deduction for Food Inventory
  • Differential Wage Payment Credit (active duty employees)

Assessment

The above provides a brief overview of the Act. There are various provisions that have been extended through 2016 and 2019 and other miscellaneous provisions. If you need additional information or have questions, please contact your CPA.

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Three common misunderstandings and reality checks about the ACA’s Cadillac tax

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Dr. David Edward Marcinko, editor-in-chief, is a next-generation apostle of Nobel Laureate Kenneth Joseph Arrow, PhD, as a health-care economist, insurance advisor, financial advisor, risk manager, and board-certified surgeon from Temple University in Philadelphia. In the past, he edited eight practice-management books, three medical textbooks and manuals in four languages, five financial planning yearbooks, dozens of interactive CD-ROMs, and three comprehensive health-care administration dictionaries. Internationally recognized for his clinical work, he is a distinguished visiting professor of surgery and a recipient of an honorary Bachelor of Medicine–Bachelor of Surgery (MBBS) degree from Marien Hospital in Aachen, Germany. He provides litigation support and expert witness testimony in state and federal court, with medical publications archived in the Library of Congress and the Library of Medicine at the National Institutes of Health.

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About the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015”

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Changes and Updates in Tax Return Due Dates

By Bobby Whirley CPA, Alpharetta, GA

[Whirley & Associates, LLC + Proactive Advisory]

On July 31st, 2015, President Obama signed into law P.L. 114-41, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.”

Although this new law was primarily designed as a 3-month stopgap extension of the Highway Trust Fund and related measures, it includes a number of important tax provisions, including revised due dates for partnership and C corporation returns and revised extended due dates for some returns. This letter provides an overview of these provisions, which may have an impact on you, your family, or your business.

Revised Due Dates for Partnership and C Corporation Returns

Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by March 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership’s tax year. And, partnerships using a calendar year must file their returns by April 15th of the following year. Since the due date of the partnership return is the same date as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

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Under the new law, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after December 31st, 2015:

  • Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by March 15th of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same. By having most partnership returns due one month before individual returns are due, taxpayers and practitioners will generally not have to extend, or scurry around at the last minute to file, the returns of individuals who are partners in partnerships.
  • C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by April 15th of the following year. In other words, the filing deadline for C corporations will be deferred for one month.
  • Keep in mind that these important changes to the filing deadlines generally won’t go into effect until the 2016 returns have to be filed. Under a special rule for C corporations with fiscal years ending on June 30th, the change is deferred for ten years — it won’t apply until tax years beginning after December 31st, 2025.

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Veterans Day 2015

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Revised Extended Due Dates for Various Returns

  • Taxpayers who can’t file a tax form on time can ask the IRS for an extension to file the form. Effective for tax returns for tax years beginning after December 31st, 2015, the new law directs the IRS to modify its regulations to provide for a longer extension to file a number of forms, including the following:
  • Form 1065 (U.S. Return of Partnership Income) will have a maximum extension of six-months (currently, a 5-month extension applies). The extension will end on September 15th for calendar year taxpayers.
  • Form 1041 (U.S. Income Tax Return for Estates and Trusts) will have a maximum extension of five and a half months (currently, a 5-month extension applies). The extension will end on Sept. 30th for calendar year taxpayers.
  • The Form 5500 series (Annual Return/Report of Employee Benefit Plan) will have a maximum automatic extension of three and a half months (under currently law, a 2½ month period applies). The extension will end on November 15 for calendar year filers.

FinCEN Report Due Date Revised

  • Taxpayers with a financial interest in or signature authority over certain foreign financial accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Currently, this form must be filed by June 30 of the year immediately following the calendar year being reported, and no extensions are allowed.

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Assessment

Under the new law, for returns for tax years beginning after December 31, 2015, the due date of FinCEN Report 114 will be April 15 with a maximum extension for a 6-month period ending on October 15th. The IRS may also waive the penalty for failure to timely request an extension for filing the Report, for any taxpayer required to file FinCEN Form 114 for the first time.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 Front Matter with Foreword by Jason Dyken MD MBA

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Year End Tax Planning for Physicians

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And … Business Owners

By Robert Whirley CPA

[Alpharetta, GA 30009]

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make. 

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Year-End Tax Planning Moves for Individuals

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.
  • If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015 if you won’t be subject to the alternative minimum tax (AMT) in 2015.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.
  • Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70- 1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also 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.

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Year-End Tax-Planning Moves for Medical Practices, & Business Owners 

  • Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions in 2015.
  • Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.
  • A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for 2015. This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.
  • To reduce 2015 taxable income, if you are a debtor, consider deferring a debt-cancellation event until 2016.
  • To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year. These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don’t miss out on any resuscitated tax-saving opportunities.  

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Tax

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

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PERSONAL FINANCIAL ACCOUNTING AND INCOME TAXATION FOR DOCTORs

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A SPECIAL ME-P REPORT

[The Ethical Pursuit of Tax Reduction and Avoidance]

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[By Perry D’Alessio CPA]

The objective of tax planning is to arrive at the lowest overall tax cost on the activities performed.  In as much as physicians constitute 14% of the so-called and maligned “one-percenters” [$388,905 earned-not passive income/year]; this essay will address some methods and strategies to reduce federal and state income taxes. It is applicable to all physicians and medical professionals; as independent practitioners or employees.

So, how much in income taxes do the wealthy pay? The top 10 percent of taxpayers paid over 70 percent of the total amount collected in federal income taxes in 2010, the latest year figures are available, according to the Tax Foundation, a think tank that advocates for lower taxes. That’s up from 55 percent in 1986. The remaining 90 percent bore just under 30 percent of the tax burden. And, 47 percent of all Americans pay hardly anything at all.

Realize, that’s just federal income tax and doesn’t include payroll tax for Social Security and Medicare (which the vast majority of people pay), plus state taxes and all of the other taxes we face. When you add them all together; using figures from the Tax Policy Center and the Institute on Taxation and Economic Policy. Earners in the top 1 percent pay about 43 percent of their incomes in tax. People in the middle quintile pay 25 percent while the poorest fifth pays 13 percent.

Finally, before you assume these one- and 10-percenters are living on luxury yachts and in million-dollar mansions, consider how little money it takes to be a top wage earner.

According to 2011 IRS data, the top 1 percent have adjusted gross incomes of $388,905 per year or more. To be in the top 10 percent, you need an adjusted gross income of just $120,136 or more. These are good incomes to be sure, but definitely not enough to be out work, or the medical office, for more than a few weeks each year.

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

***

Now consider the following more specifically:

  • 42 percent of all federal tax revenue came from individual income taxes in 2010 and it has been the largest single source of revenue since 1950.
  • Individuals paid more than $2.2 trillion in 2010.
  • Bush-era tax cuts have finally expired, giving us the 20th century tax rates with the top income tax rate of 39.6%, we have not seen rates this high in almost 15 years.
  • 39.6% tax rate kicks in at $400,000 for individual taxpayers and $450,000 for married couples filing jointly.
  • Taxpayers who make over $200,000 ($250,000 for married taxpayers) will be subject to the Medicare surtax. If that’s you, Medicare surtax will be tacked on to your wages, compensation, or self-employment income over that amount. The amount of the surcharge is .9%. 
  • Net Investment Income Tax (NIIT) new as of 2013; if you have both net investment income and modified adjusted gross income (MAGI) of at least $200,000 for an individual taxpayer and $250,000 for taxpayers filing as married an additional 3.8 percent of the net investment income is an added tax. 

ASSESMENT

So, where do you fall on this schematic, doctor?

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ABOUT

Perry D’Alessio has twenty years’ experience in public accounting. He specializes in the taxation of closely held businesses and their owners, as well as high wealth individuals. He has a broad range of experience that includes individual, corporate, partnership, fiduciary, estate, and gift taxation. Business development has also been a focus. Particularly in the Healthcare and Fitness Industry, he worked with successful entities whose emphasis was on growth through development of strategic relationships and unit building.  Mr.  D’Alessio received his Bachelor of Business Administration degree in Accounting from Baruch College. He is a Certified Public Accountant in New York. He is a member of the American Institute of Certified Public Accountants (AICPA), the New York State Society of Certified Public Accountants (NYSSCPA). He served on several New York State Society tax committees including: PCAOB and HealthCare. Mr. D’Alessio presents at financial and medical associations throughout the region, and authored a book chapter in the “Financial Management Strategies for Hospitals and Healthcare Organizations” for the Institute of Medical Business Advisors, Inc.

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Understanding 1031 Exchanges

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The Ultimate Infographic Guide

By 1031 Gateway

In this infographic you will learn how to defer your capital gains taxes utilizing a 1031 exchange, what kinds of properties qualify for 1031, what the basic 1031 rules and time limits are, and how to benefit your heirs by stepping up your basis.

***

1031Exchange

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Taxing the Rich … and Doctors?

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The Effect of Taxing America’s Wealthy

By blog.turbotax.intuit.com.

The wealth difference between states demonstrates that certain states had much stronger increases in affluent taxpayers.

For example, Warren Buffett recently called to raise tax rates on taxpayers making more than $1 million and proposed an additional increase on taxpayers whose income exceeds $10 million.

So, where do the “super-rich live and what would it look like if they were given additional taxes?”

 ***

rich

[Click to Enlarge]

Assessment

But, what about the “rich” doctors? Are they even rich, merely affluent or new members of the holloi polloi working class? Do tell.

More:

Even More:

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Tax Day and “Tax Freedom Day” is April 15-18, 2015

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More Time … More Pain!

[By Staff Reporters]

You get three extra days to file your taxes this year. They’ll be due this Monday, April 18th.

But, it’s not because of a previously announced processing delay that will prevent people who itemize their taxes from filing before mid- to late February, the IRS said Tuesday.

Instead, the bonus days come thanks to Emancipation Day, a little-known Washington, D.C., holiday that celebrates the freeing of slaves in the district.

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money-pie

[Tax Money Pie]

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What it Is?

In the United States; according to Wikipedia, Tax Day is a colloquial term for the day on which individual income tax returns are due to the federal government.[1] The term may also refer to the same day for states, even where the tax return due date is a different day.

Since 1955, for those living in the United States, Tax Day has typically fallen on April 15.[1] For those filing a U.S. tax return but living outside the United States and Puerto Rico, Tax Day has typically fallen on June 15, due to the two-month automatic extension granted to filers by IRS Publication 54.[2]

Due to Emancipation Day in Washington, D.C. (which is observed on the weekday closest to April 16), when April 15 falls on a Friday, tax returns are due the following Monday; when April 15 falls on a Saturday or Sunday, tax returns are due the following Tuesday.

  • In 2014, Tax Day was Tuesday, April 15
  • In 2015, Tax Day was Wednesday, April 15
  • In 2016, Tax Day will be Monday, April 18
  • In 2017, Tax Day will be Tuesday, April 18

Assessment

Similarly, April 15th is the deadline for filing Income Tax Returns (ITR) in the Philippines.

“Tax Freedom” Day with Personal Calculator

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18 Financial Planning Tips For Physicians from a DR-CPA

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For Personal and Medical Practice Management Modernity

Dr. Gary Bode; CPA, MSA, CMP

By Dr. Gary L. Bode CPA MSA CMP [Hon] PA

http://garybodecpa.com/

http://www.CertifiedMedicalPlanner.org

1. Consider establishing an employee stock ownership plan (ESOP).

If you own a clinic or medical practice or business and need to diversify your investment portfolio, consider establishing an ESOP. ESOP’s are the most common form of employee ownership in the U.S. and are used by companies for several purposes, among them motivating and rewarding employees and being able to borrow money to acquire new assets in pretax dollars. In addition, a properly funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.

2. Make sure there is a succession plan in place.

Have you provided for a succession plan for both management and ownership of your medical practice, clinic or business in the event of your death or incapacity? Many business owners or physician-executives wait too long to recognize the benefits of making a succession plan. These benefits include ensuring an orderly transition at the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and a non-financial perspective (intra-family and intra-company squabbles).

3. Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership.

These entity forms should be considered for both tax and non-tax reasons.

4. Avoid nondeductible compensation.

Compensation can only be deducted if it is reasonable. Recent court-decisions have allowed physician executives or business owners to deduct compensation when (1) the corporation’s success was due to the shareholder-employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate prerequisites and fringe benefits.

5. Purchase corporate owned life insurance (COLI).

COLI can be a tax-effective tool for funding deferred executive compensation, funding clinic or company redemption of stock as part of a succession plan, and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.

6. Consider establishing a SIMPLE retirement plan.

If you have no more than 100 employees and no other qualified plan, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $12,500 per year if you’re under 50 years old and $15,500 a year if you’re over 50 in 2015. As an employer, you are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.

 ***free_54915

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7. Establish a Keogh retirement plan before December 31st.

If you are self-employed and want to deduct contributions to a new Keogh retirement plan for this tax year, you must establish the plan by December 31st. You don’t actually have to put the money into your Keogh(s) until the due date of your tax return. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions.

8. Section 179 expensing.

Businesses and medical practices may be able to expense up to $25,000 in 2015 for equipment purchases of qualifying property placed in service during the filing year, instead of depreciating the expenditures over a longer time period. The limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year 2015 exceeds $200,000.

9. Don’t forget deductions for health insurance premiums.

If you are self-employed (or are a partner or a 2-percent S corporation shareholder-employee) you may deduct 100 percent of your medical insurance premiums for yourself and your family as an adjustment to gross income. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.

10. Review whether compensation may be subject to self-employment taxes.

If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.

11. Don’t overlook minimum distributions at age 70½ and rack up a 50 percent penalty.

Minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after the year in which you reach age 70½. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50 percent of the amount of the shortfall is imposed.

12. Don’t double up your first minimum distributions and pay unnecessary income and excise taxes.

Minimum distributions are generally required at age seventy and one-half, but you are allowed to delay the first distribution until April 1 of the year following the year you reach age seventy and one-half. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 70½. This double-up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 70½.

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buckets cash

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13. Don’t forget filing requirements for household employees.

Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $1,900 a year in 2015 (same as 2014). Federal employment taxes for household employees are reported on your individual income tax return (Form 1040, Schedule H). To avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.

14. Consider funding a nondeductible regular or Roth IRA.

Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax-deferred income. Note, the income thresholds to qualify for making deductible IRA contributions, even if you or your spouse is an active participant in a employer plan, are increasing.

The $100,000 income test for converting a traditional IRA to a ROTH IRA was permanently eliminated in 2010, allowing anyone to complete the conversion.

You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10 percent additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

Caution: You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. However, the amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10 percent additional tax on early distributions.

15. Calculate your tax liability as if filing jointly and separately.

In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Filing separately may also lower the phase out of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.

16. Avoid the hobby loss rules.

If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.

17. Review your will and plan ahead for post-mortem tax strategies.

A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent’s final individual income tax return. Also, review your will as the estate tax laws are influx and your will may have been written with differing limits in effect. In 2015, estates of $5,430,000 (up from $5,340,000 in 2014) are exempt from the estate tax with a 40 percent maximum tax rate (made permanent starting in tax year 2013).

18. Check to see if you qualify for the Child Tax Credit.

A $1,000 tax credit is available for each dependent child (including stepchildren and eligible foster children) under the age of 17 at the end of the taxable year. The child credit generally is available only to the extent of a taxpayer’s regular income tax liability. However, for a taxpayer with three or more children, this limitation is increased by the excess of Social Security taxes paid over the sum of other nonrefundable credits and any earned income tax credit allowed to the taxpayer. For 2015 (as in previous years), the income threshold is $3,000.

For more information concerning these financial planning ideas, please call or email us.

More: Enter the CMPs

ABOUT  DR. GARY L. BODE MSA CPA CMP [Hon]

Dr. Gary L. Bode was Chief Executive Officer of Comprehensive Practice Accounting, Inc., a firm specializing in providing tax solutions to medical professionals. Originally, he was a board certified podiatrist and managing partner of a multi-office medical practice for a decade before earning his Master of Science degree in Accounting from the University of North Carolina. He then served as Chief Financial Officer [CFO] for a private mental healthcare facility. Today, Dr. Bode is a nationally known Certified Public Accountant, financial author, educator, and speaker. Areas of expertise include producing customized managerial accounting reports, practice appraisals and valuations, restructurings, and innovative financial accounting as well as proactive tax positioning and tax return preparation for healthcare facilities. He has been quoted in Newsweek.

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Product DetailsProduct DetailsProduct Details

The Economic “American Dream”

On Income Earners

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Understanding the Top 50 Percent

[By Anonymous Reader]

QUESTION: How much do you need to make to be in the top 50 percent of earners?

ANSWER: Just $36,055. Fall below that level and you are in the bottom half, along with about 68 million of your fellow taxpayers. All told, that group earned just 11.1 percent of the AGI reported on 2012 Federal returns.

Half of all taxpayers earn less than $35,055

If the top one percent where the decision makers live were to quit squeezing so hard, the rest of the population might be subject to paying more taxes.

The problem with the American Dream sold to the masses is that it is not achievable for them. Yet, they keep on voting for it. The biggest problem with voters is they do not have a solid grounding in economics.

Thus, they cannot judge economic policy in any rational way. If the voting public voted for what was truly in their interest, the top one percent would see their influence wane rapidly. It is the height of insanity that the public keeps on voting for politicians who espouse policies that are designed to benefit the economic elite.

***

Tax

***

Note: A recent finding by Oxfam that the top one percent will control fifty percent of the worlds’ wealth by 2016.

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Product DetailsProduct DetailsProduct Details

Understanding MD Employee Accident and Health Benefits

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Tax-free benefits provided to employees

[By Perry D’alessio CPA]

perry-dalessio-cpaMore and more physicians are employees; not employers.

So, here are the most common types of tax-free benefits provided to employees.

They include payments for health care insurance, payment to a fund that provides accident and health benefit directly to the employee, company direct reimbursements for employee medical expenses and contributions to an Archer MSA (medical savings account).

The IRS definition of employee, for health care benefit purposes, is very broad

Health benefits are exempt from income, FICA and FUTA (Federal Unemployment Tax).    This saves the employer 7.65% that would otherwise be the “matching” 6.2% Social Security tax and the 1.45% Medicare Tax components due if these were true wages.  The employer also saves the 0.8% FUTA tax, but since FUTA taxes only the first $7,000 of calendar year wages, per employee, this usually doesn’t factor in.

Calculation:

If you pay the full state unemployment tax, then your FUTA tax = Gross Salary * .08% – The maximum amount is $56 per employee:

  • $50,000 Salary = ($7,000)*(.8%) = $56.00
  • $5,000 Salary = ($5,000)*(.8%) = $40.00

The hospital employee saves federal income taxes on health benefits received, at their marginal tax rate, and, their components of FICA taxes. Depending on the coverage provided, these plans, when fully funded by the employer, can save the employee thousands of dollars in taxes each year.

IRS restrictions include:

  • Certain payments to S Corporation employees who are 2% shareholders are subject to FICA taxes.
  • Certain long term care benefits.
  • Certain payments for highly compensated employees.

Example 1: Let’s say the annual cost of providing medical coverage for an employee, age 50, with a spouse and two minor children is $7,500. An employee in the 30% tax bracket who received this amount in cash each year and then paid for his or her own medical coverage would be liable for as much as $2,250 in income taxes. In addition, FICA taxes save another 7.65% or $574, for a total savings to the employee of $2,824. The employer saves $574 in FICA taxes.

Benefits

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Do You Have a Taxable Investment Account – Doctor?

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Is it Time to Harvest?

[By Lon Jefferies MBA CFP®]

Lon JeffriesTax harvesting is the process of selling assets for the purpose of creating either long-term capital gains or losses to minimize your tax bill. This procedure is usually conducted near the end of a calendar year.

While many people are familiar with the concept of tax loss harvesting, fewer physicians or clients are familiar with the more recently developed process of tax gain harvesting. Between these two procedures, virtually everyone with a taxable (not tax-advantaged) investment account should make adjustments to their portfolio before the year ends.

Who Qualifies For the 0% Capital Gains Rate?

First, it is important to understand that capital gains (the growth on investments within a taxable, non retirement investment account) are taxed differently than ordinary income (wages, pensions, Social Security, IRA distributions, etc.). While short-term capital gains (recognized on the sale of assets held less than a year) are essentially considered ordinary income, long term capital gains, or recognized gains on assets held more than a year, are taxed at advantageous tax rates. While ordinary income tax rates range from 10% to 39.6%, capital gains tax rates range from 0% to 20%.

Second, it is crucial to understand what enables a taxpayer to qualify for the 0% capital gains rate. If a taxpayer is in the 10% or 15% ordinary income tax bracket, they qualify for the 0% long-term capital gains rate.

For a married couple filing jointly, the 15% tax bracket ends at $73,800 of taxable income ($36,900 for single taxpayers). Thus, if a married taxpayer has a taxable income (which includes long-term capital gains but is also after deductions and exemptions) of less than $73,800, all their long-term capital gains will be tax free. If the taxpayer is in a tax bracket anywhere between 25% and 35% (taxable income of $73,800 and $457,600, or between $36,900 and $406,750 for single tax filers), they will pay long-term capital gains taxes at 15%. Only those in the top tax bracket of 39.6% (married taxpayers with a taxable income over $457,600 and single taxpayers with taxable income over $406,750) will pay capital gains taxes at 20%.

Tax Loss Harvesting

During the calendar year, assets have been purchased and sold in most taxable investments accounts. The sale of an asset creates a net gain or loss, both having tax implications. Investors should have an understanding of what their long-term capital gains tax rate will be so they can determine whether a taxable gain or loss is preferable.

For instance, an individual who does not qualify for the 0% capital gains tax rate may wish to minimize the amount of taxable gains they recognize during the year, which would reduce their tax bill. If the investor currently has a net long-term capital gain (which is probable after the strong year the market had in 2013), then it is likely worthwhile to sell any assets in the portfolio that are currently worth less than the investor’s purchase price. This tax loss harvesting would reduce the net gain recognized during the year and lower the investor’s tax bill.

In some cases, by taking advantage of all potential losses within a portfolio an investor has the ability to negate all capital gains created during the year, completely eliminating their capital gains tax bill. Further, the IRS will allow investors to recognize a net capital loss of up to a -$3,000 per year. This -$3,000 loss can be used to lower the taxpayers ordinary income. This is particularly advantageous in that the capital loss reduces a type of income that is taxed at higher tax rates.

Harvesting Gains

Harvesting gains from a taxable portfolio is a more recently developed concept. Once the 0% long-term capital gains tax rate became a permanent part of the tax code with the passing of the American Taxpayer Relief Act of 2012 (signed January 2nd, 2013), in some scenarios it began making sense to recognize long-term capital gains on purpose to potentially avoid a larger tax bill in the future.

Suppose a taxpayer’s taxable income is consistently $65,000 a year. Additionally, suppose our hypothetical taxpayer won’t withdraw funds from his taxable account during the next few years, but may need a large lump sum distribution five years down the road. Recall that the 0% capital gains rate ends when a married taxpayer’s taxable income (which includes long-term capital gains) exceeds $73,800. Consequently, this hypothetical taxpayer has the ability to recognize $8,800 ($73,800 – $65,000) in long-term capital gains every year without increasing his tax bill. If this $8,800 in gains is recognized every year by simply selling and immediately repurchasing appreciated assets, he would raise the cost basis of his investment by $44,000 ($8,800 gain recognized annually for five straight years). He could then sell and withdraw that $44,000 without creating a tax liability.

Alternatively, if the investor does not harvest gains during the years when no distributions are taken, withdrawing $44,000 of gains five years down the road would create a sizable tax bill. He would still be able to recognize $8,800 of gains tax free in the year of distribution, but the remaining $35,200 of gains would cause his taxable income to be over the $73,800 limit, eliminating access to the 0% capital gains rate. That $35,200 would be taxed at the 15% capital gains rate, creating a federal tax bill of $5,280. With proper planning, this significant tax bill can be avoided.

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Portfolio analysis

***

The Bottom Line

Tax harvesting has no purpose in tax-advantaged retirement accounts such as IRAs and 401ks because all distributions from these accounts are taxed as ordinary income. However, taxable individual or trust investment accounts can almost certainly benefit from tax harvesting. Speak to your accountant and financial planner to understand whether capital gains or losses are desirable for you this year and determine the amount of taxable gains already recognized. This will help you determine what type of harvesting should take place.

Tax harvesting can be a difficult and confusing concept. However, a competent financial planner who utilizes this procedure within your taxable investment account can significantly lower your tax bill. Speak to your adviser to ensure you are reaping the tax benefits available to you.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Financial Planning MDs 2015

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Year End MEGA Tax Planning “Tips” for Physicians

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For Medical Professionals … and Us All

[By PERRY D’ALESSIO CPA] http://www.dalecpa.com

A SPECIAL ME-P REPORT

perry-dalessio-cpaYear-end tax planning is especially challenging this year, for EVERYONE, because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).

For Individuals

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

For Businesses

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Bigger Earners

Higher-income-earners, like some doctors, have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an un-indexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears; a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax.

For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.

Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

The Checklist[s]

I’ve have compiled a checklist of additional actions, for ME-P readers, based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

***

Next-Gen Physicians

[Future High Income-Earners?]

***

Year-End Tax Planning Moves for Individual Medical Providers 

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done.

For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

Let’s consider the following:

  • Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • 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. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2014. If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by re-characterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
  • It may be advantageous to try to arrange with your PHO, medical group, clinic, hospital or employer to defer a bonus that may be coming your way until 2015.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014 if doing so won’t create an alternative minimum tax (AMT) problem.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2014 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn’t viable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax.
  • Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015-the amount required for 2014 plus the amount required for 2015. Think twice before delaying 2014 distributions to 2015-bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you are 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 2014. This is so even if you first became eligible on Dec. 1st, 2014.
  • 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 $14,000 in 2014 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also 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.

***

Target MD

[Future IRS Targets?]

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Year-End Tax-Planning Moves for Medical Practices & Physician Executives 

  • Medical practices, clinics and businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership year.
  • Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), don’t neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2014.
  • A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.
  • If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
  • To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses. If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

Assessment

These are just some of the year-end steps that you can take to save taxes. So, contact your CPA to tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don’t miss out on any resuscitated tax saving opportunities.

Conclusion

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Drilling Down on Camouflaged Annuity Taxation

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A Fee by any other Name

[By Rick Kahler MS CFP®] http://www.KahlerFinancial.com

Rick Kahler CFPWe South Dakotans can be smug about the economic advantages of residing in our income tax-free state. While those advantages are big, we do have a few lesser-known taxes.

These include a 6% franchise tax on banks and a 4.5% energy minerals severance tax on mining and oil companies. Like many other states, we also tax life insurance premiums; our rate is 2.5%.

The Hidden Annuity Premium Tax

I recently learned about another “hidden” tax, one on annuity premiums. A recent article in Investment News lists the eight states or territories that have such a tax: California, Florida, Maine, Nevada, Puerto Rico, South Dakota, West Virginia, and Wyoming. The tax ranges from 1% in Florida, West Virginia, and Wyoming to a whopping 3.5% in Nevada. South Dakota’s rate is 1.25%.

If you have purchased an annuity while living in one of these jurisdictions, you’ve paid this tax. You may have not been aware of it, as there are many hidden fees associated with purchasing annuities.

The Fee that is a Camouflaged Tax

I learned about the tax when our client service specialist questioned a 1.25% expense charged by the company on a new “no load” annuity. I thought the company had charged a commission of some type to the account, which was puzzling since we don’t accept any commissions. After sorting things out, we discovered the fee was actually the 1.25% premium tax that South Dakota charges on every contribution going into an annuity.

Impact

While states charge the tax just once on new money invested into the annuity, it still serves to decrease the total return of the annuity. If you held an annuity for a year, the premium tax would reduce your overall return by 1.25%. If you held the annuity for 10 years, the overall impact would be much less, reducing the return by 0.125% annually.

Specifics

The states leave the method of collecting the tax up to the annuity company. Most annuity companies that pay a salesperson a commission to sell the product build the fee into the overall costs. This is often easy, since the upfront commissions can range up to 10% and annual expenses up to 7% a year. I have seen more than one annuity where the fees and commissions eat up the majority of any potential return. Many no-load annuities, like Jefferson National, charge the tax to their customers.

The States

If you live in a state that taxes annuity premiums, you might have the idea of buying an annuity in a non-taxing state. This isn’t an option, as companies must levy the tax based on your state of residency.

On the surface, there appears to be some good news for residents of Maine, Nevada, South Dakota, and Wyoming. Residents who purchase an annuity in a qualified plan like an IRA or 401(k) don’t pay the tax. That benefit is somewhat moot, as owning an annuity in a qualified plan is rare. It generally makes little sense for a tax-deferred qualified plan to own a tax-deferred annuity, especially considering the annuity fees.

***

Tax

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Rule-Outs?

If you live in a state that taxes annuity purchases, should you automatically rule out annuities? Not necessarily. Just be aware you will have to pay the piper. For residents of South Dakota, Florida, and Wyoming, lawmakers argue that maybe the tax isn’t such a heavy burden since these states don’t have an income tax.

Assessment

Still, no matter how you want to figure it, a tax is a tax. It’s one more factor to consider in deciding whether a given annuity product is right for you. Whatever amount you pay in state taxes is just that much less of your money that goes to work for you.

Conclusion

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Income Tax Brackets and Rates for 2014

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An ME-P Update

[By Internal Revenue Service]

***

Tax Brackets

***

More:

Conclusion

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More on Medical Professional Job Hunting Expenses

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How to deduct some job hunting costs?

By Andrew Schwartz, CPA

Andrew SchwartzMany people change their job in the mid to late summer; especially doctors, nurses and medical professionals.

So, if you look for a new job in the same line of work, you may be able to deduct some of your job hunting costs.

Key Facts

Here are some key tax facts you should know about if you search for a new job:

  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Work-Search Break.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You usually deduct your job search expenses on Schedule A, Itemized Deductions. You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

***

Healthcare Center

More:

For more on job hunting refer to Publication 529, Miscellaneous Deductions on IRS.gov. You can also call 800-TAX-FORM (800-829-3676) to get it by mail.

IRS YouTube Videos:

IRS Podcasts:

Conclusion

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ALERT – Phone Call Scammers Claiming to be IRS Agents

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Doctors – Beware!

By Andrew Schwartz, CPA

Andrew SchwartzYikes!  I got the call.

As I’ve noted before; identity theft in connection with federal tax filings is on the rise.

One specific fraud involves people receiving phone calls from scammers posing as IRS agents and then being aggressively instructed to wire money directly to the scammer to pay off a fictitious tax debt.

The Transcript

Here is a transcript of the automated voicemail message left on my home phone last month by someone trying to commit this fraud on me:

You received this message.  I need you or your retained attorney to return this call.  The issue at hand is extremely time sensitive.  I’m officer Hannah Gray from the Internal Revenue Service and the hot line to my position is 415-251-9813.  I repeat, it’s 415-251-9813.  Don’t disregard this message and return this call before we take any legal allegation against you.  Goodbye and take care.

If I weren’t aware that this scam existed, my initial reaction would have been to call the number left by the scammer as soon as possible.  But remember, the IRS does not send e-mails or make phone calls like these to taxpayers. Instead, the IRS is continually warning taxpayers about scams like this; including the following press release issued last Halloween:

IRS Warns of Pervasive Telephone Scam

IR-2013-84, Oct. 31, 2013

WASHINGTON — The Internal Revenue Service today warned consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country.

Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.” Werfel noted that the first IRS contact with taxpayers on a tax issue is likely to occur via mail.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov.  Please add “IRS Telephone Scam” to the comments of your complaint.

***

Calling

***

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

Assessment

More information on how to report phishing scams involving the IRS is available on the genuine IRS website, IRS.gov.

More:

Conclusion

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Financial Planning MDs 2015

When Financial Assets Get a ½ Step-Up in Cost Basis

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Unique to Spouses

By Lon Jefferies MBA CFP®

Lon JeffriesMany doctors are aware that when the owner of a taxable asset passes away, the party that inherits that asset does so at a stepped-up cost basis.

For example, suppose a husband owns a stock in a taxable investment account that he purchased for $100,000 but is now worth $150,000. If the husband sells the stock, there will be taxes due on the $50,000 of growth, or the difference between the current value and the cost basis.

However, if the husband passes away and a wife inherits the stock, the wife’s cost basis gets increased to the full $150,000, the value of the account on the date the husband passed away. This enables the wife to sell the stock and keep the full $150,000 of value without paying taxes.

Jointly Owned with Rights of Survivorship

However, what happens to assets that are owned jointly with a right of survivorship when one spouse passes away? Did you know in this scenario, it is possible for assets to receive a ½ step-up in basis? The formula looks like this:

(Date-of-death fair market value + Old basis) / 2 = New Basis

In a practical example, suppose John contributes $10,000 to a joint account with a right of survivorship and Jane contributed $5,000 to the same account. When John passes, the account is valued at $20,000. This will cause Jane to get a step-up in basis to $17,500 on the taxable account.

($20,000 + $15,000) / 2 = $17,500

Jane receives a ½ step-up in basis on each position within the investment account. She is unable to claim a full-step up on one stock within the account and no step-up on other assets.

Unique to Spouse

Notice that even though the spouse’s contributed different amounts to the account, they each share a full 50% share of the property for inclusion in their estates. However, this is unique to spouses with right of survivorship and the issue is more complex if the parties involved are not married.

Spouses

Assessment

To be clear, this step-up only occurs on taxable assets like physical property or taxable investment accounts. A step-up does not occur on tax-deferred investments like IRAs or 401(k)s.

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Understanding Healthcare Employment Benefits that are NOT Taxed at Full Economic Value

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On Entirely Legal AUTOMOBILE Employment Fringe Benefit Strategies 

[By Perry Dalessio CPA]

perry-dalessio-cpaWhen an employment fringe benefit does not qualify for exclusion under a specific statute or regulation, the benefit is considered taxable to the recipient.  It is included in wages for withholding and employment-tax purposes, at the excess of its fair market value over any amount paid by the employee for the benefit.

Examples:

For example, hospitals often provide automobiles for use by employees. Treasury regulations exclude from income the value of the following types of vehicles’ use by an employee:

  • Vehicles not available for the personal use of an employee by reason of a written policy statement of the employer
  • Vehicles not available to an employee for personal use other than commuting (although in this case commuting is includable)
  • Vehicles used in connection with the business of farming [in which case the exclusion is equal to the value of an arbitrary 75% of the total availability for use, and the value of the balance may be includable or excludable, depending upon the facts (Treas. Regs. § 1.132-5(g)) involved)]
  • Certain vehicles identified in the regulations as “qualified non-personal-use vehicles,” which by reason of their design do not lend themselves to more than a de minimus amount of personal use by an employee [examples are ambulances and hearses].
  • Vehicles provided for qualified automobile demonstration use
  • Vehicles provided for product testing and evaluation by an employee outside the employer’s work place

If the employer-provided vehicle does not fall into one of the excluded categories, then the employee is required to report his personal use as a taxable benefit. The value of the availability for personal use may be determined under one of several approaches.

jag346_SWHT

Assessment

Under any of the approaches, the after-tax cost to the employee is substantially less than if the employee used his or her own dollars to purchase the automobile and then deducted a portion of the cost as a business expense.

Conclusion

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Product Details

How Much Money Do You Make – Doctor?

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Ruminations on the Last Taboo!

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“How much money do you make?”

We don’t ask people, let alone doctors and medical professionals, that question; but we’d love to know the answer.

In this country, we’re fixated on a person’s annual income. That’s the primary measure we use to determine social status and define success.

Income Qualifier?

Income also is the qualifier for government welfare programs. It defines people as poor, middle class, or rich. And, of course, it determines how much of your income the government will take. The more you bring in, the higher the percentage of your earnings you will pay in federal, state, and local taxes.

Income as a Poor Indicator of Net Worth

While we project a lot of things onto someone’s income, most of what we project is untrue. Income is not the best indicator of a person’s wealth or net worth.

Examples:

Last year Dr. Brent’s tax return showed an adjusted gross income of $20,000. Dr. Bill’s was $2 million. Who is richer? Most people would say Bill. The US and state governments also would say Bill. Actually, Brent is far and away the wealthier of the two.

Why and How?

Consider these two real-life examples:

  • Dr. Bill lives in New York, New York, which has both high property taxes and a city income tax. Paying city, state, and federal income taxes, plus property taxes on his luxurious home, takes around half of his salary. With take-home pay of about $1 million, Bill spends $1.2 million a year on his mortgage payments, college and private school tuition, and his lifestyle. He overspends his net income by $200,000 a year. He owes more on his condo than it’s worth, and he has significant credit card debt. When you total his assets and liabilities, he has a negative net worth of $1 million. He has managed to hold everything together so far, but technically, Bill is bankrupt.

Jaguar XJ

  • Dr. Brent lives in Rapid City, South Dakota. He is retired, owns a modest home which is paid for, and lives on about $40,000 a year. He didn’t pay any income taxes last year, partly because some of his income is from tax-free municipal bonds and mostly because he wrote off a large investment loss which left him with $20,000 of adjusted gross income. Brent has no debt. His net worth is $5,000,000.

Steering Jaguar

The truth is that what people make tells us very little about whether they are rich or not. In these examples, judging from income alone, it would be easy to reach the inaccurate conclusion that Bill must be far wealthier than Brent. His lifestyle is certainly more lavish—which of course is part of the reason he isn’t wealthy.

Many people who have high incomes but are heavily in debt might have lifestyles lower than others who make significantly less but have no debt. It’s not uncommon that people with high incomes choose to live a lifestyle that is far below what they could afford. In fact, this is one of the best ways to build real wealth.

The Income Non-Indicator

Income is a poor indicator of whether someone is rich. Even more important, it’s a poor indicator of how they handle money. I once worked with a family with an annual income of around $5 million who had a net worth of minus $3.5 million. They may have looked like “millionaires,” but they were not.

On the other hand, I work with many clients who have annual incomes around $100,000 a year, spend $60,000 a year, and are worth $2 to $5 million.

Assessment

The bottom line is that wealth is defined by net worth, not income. A high income doesn’t equal wealth; it equals a better opportunity to build wealth. Not everyone is wise enough to take advantage of that opportunity.

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How Your 2013 Federal Tax Dollars Were Spent

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A Spreadsheet Breakdown

By Lon Jefferies MBA CFP

Lon JeffriesClick here for a calculator that shows you how the tax you paid in 2013 was spent.

Simply input the amount you paid in federal income tax in 2013 and you’ll see a breakdown of how your money was utilized.

  1. What would you cut in the budget?
  2. What areas would you spend more, or less, on?

 

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The Superior Retirement Account – Will that be Traditional or Roth?

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Weighing the Costs

Lon Jeffries[By Lon Jefferies MBA CFP®]

As an informed investor and reader of this ME-P, you’re likely familiar with the difference between a traditional IRA/401(k) and a Roth IRA/401(k).

While the traditional account enables you to postpone taxes on both the income invested and its growth until the funds are withdrawn, a Roth account does not provide an initial tax benefit but investment growth is tax free. So which is better?

Let’s answer the question with some simple math. Suppose an investor in the 25 percent federal tax bracket invests $1,000 of pre-tax income, obtains an 8 percent annual return over the next 10 years, and is still in the 25 percent tax bracket in the future. Would this investor profit more investing in a traditional or a Roth account?

As the chart below illustrates, the investor in this scenario would end up with the exact same amount in either a traditional or a Roth account.

So does the decision to invest in a traditional or Roth retirement account not matter? Not so fast.

Constant Tax Rate
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,619

Lower Tax Bracket in Future

Let’s assume our investor will have a reduced income when she retires in 10 years, causing her to be in the 15 percent tax bracket in the future. Perhaps the worker is in her prime earning years and will have less income during retirement. In this scenario, due to the up-front 25 percent tax bill, investing the funds in a Roth would lead to the same after-tax value of $1,619. But investing the funds in a traditional account would allow the full $1,000 to experience growth for 10 years, with a reduced future tax bill of 15 percent, leaving $1,835 of after-tax value in the account. This investor would benefit from delaying taxes into the future when she would be in a lower tax bracket.

Lower Tax Rate in the Future
Traditional Roth
Initial Tax Bill (25%) $0 $250
Invested Amount (after-tax) $1,000 $750
Future Investment Value $2,159 $1,619
Future Tax Bill (15%) $324 $0
After-Tax Value in 10 Years

$1,835

$1,619

Higher Tax Bracket in Future

On the other hand, if the investor was in the 15 percent tax bracket this year but expected to be in the 25 percent bracket during retirement (potentially a young employee expecting his earnings to rise), paying taxes now at 15 percent would allow $850 to be invested, which after 10 years of 8 percent growth would be worth $1,835 tax free.

Higher Tax Rate in the Future
Traditional Roth
Initial Tax Bill (15%) $0 $150
Invested Amount (after-tax) $1,000 $850
Future Investment Value $2,159 $1,835
Future Tax Bill (25%) $540 $0
After-Tax Value in 10 Years $1,619 $1,835

Roth Advantages

What if you expect to pay a comparable tax rate both now and in the future? A Roth account offers several advantages in this scenario.

First, as taxes have already been paid on a Roth account, the government doesn’t require investors to take required minimum distributions (RMDs) from these accounts, whereas RMDs are required from traditional retirement accounts beginning at age 70½. Without RMDs, Roth accounts can grow tax free for the investor’s entire lifespan.

Additionally, upon death, Roth accounts pass to an investor’s heirs without any tax liability, while those who inherit a traditional retirement account must pay taxes on the assets.

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IRA

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Second, money withdrawn from a traditional retirement account before the investor is 59½ may be subject to a 10 percent penalty. Yet contributed funds to a Roth account (but not the growth on the contributed funds) can be withdrawn at any time without penalty. While withdrawing funds before retirement isn’t advisable, the added liquidity of the Roth account can prove useful in emergencies.

Finally, even if your income is expected to remain constant, investing in a Roth account allows you to lock in your taxes at today’s rate as opposed to taking the risk that national tax rates might be raised in the future.

If you’re unsure how your future tax bracket will compare to your current rate, diversify. Nothing prevents you from having both a traditional and a Roth retirement account. This not only allows you to hedge your bets, but puts you in a position during retirement to take distributions from your tax-deferred account in low-income years and from the tax-free account in years when you are in a high tax bracket.

Assessment

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Why You Should [Still] Know Your Marginal Tax Rate?

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And … Other Financial Planning Topics of Import

Lon JefferiesBy Lon Jefferies MBA CFP®

In 2014, the federal tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. For a taxpayer who is married and files jointly, regardless of how much the household makes, the first $18,150 of income after accounting for deductions and exemptions will only be taxed at the 10% rate.

Similarly, any income the household makes that is more than $18,150 but less than $73,800 is taxed at the 15% rate. At that point, the next $75,050 is taxed at 25%, and so on.

Consequently, not all income a household makes during the course of the year is taxed at the same rate. A marginal tax bracket is the tax rate that applies to the last dollar the household made.

It is crucial for all taxpayers to know their marginal tax rate. This information can help a client identify which type of investment accounts fits their situation best, how to structure an investment portfolio, and how to determine the value of certain deductions when filing their tax return.

Roth or Traditional Retirement Accounts

Contributions to traditional retirement accounts like IRAs and 401(k)s allow taxpayers to avoid recognizing income earned during the tax year and push the need to acknowledge the revenue into a future year. This is valuable because many people are in a higher tax bracket during their working years than they are during retirement. For instance, for a person who is currently in the 25% marginal tax bracket, it may be advantageous to delay recognizing the income until the investor retires and has less income, causing him to be in only the 15% marginal tax bracket. Doing this would enable the taxpayer to pay taxes at only 15% as opposed to 25%.

Alternatively, a Roth IRA or Roth 401(k) allows an investor to pay taxes on contributed income during the year it was earned but the money then grows tax-free. Consequently, a Roth retirement account is great for someone who believes they may be in a higher marginal tax bracket in the future. For example, a young employee in the early stages of his career who is in the 15% tax bracket but believes he may be in the 25% or 28% bracket in the future would benefit from paying all taxes on the income at his current rate of 15% and then getting tax-free investment growth. This would prevent the investor from having to pay the higher future tax rate of 25% or 28% on the invested dollars.

Knowing your marginal tax bracket can help you determine if you would favor paying taxes on your invested dollars at your current tax rate or if you believe you may benefit from pushing the need to recognize the income into a future tax year. This is a critical decision when planning for retirement and it can’t accurately be made without knowing your marginal tax rate.

Capital Gains Rate

A long term capital gains tax rate is the rate that applies to the growth of any asset held for longer than a year that is not within a tax-advantaged account. If you buy stock outside a tax-advantaged account, or purchase investment property, any growth in the value of the investment will be taxed as capital gains when sold.

An investor’s capital gains tax rate is determined by the investor’s marginal tax rate. For most taxpayers the long term capital gains tax rate is 15%. However, if a taxpayer is in the 10% or 15% marginal tax bracket, the long term capital gains tax rate is an amazing 0%! Additionally, many taxpayers in either the 35% or 39.6% tax bracket may end up paying capital gains at a rate of 20%.

Clearly, knowing your marginal tax bracket will help you analyze the appeal of making investments outside of tax-advantaged accounts. People who qualify for the 0% capital gains tax should actively search for ways to take advantage of this benefit.

Additionally, knowing your marginal tax rate can help you determine the best time to recognize long-term capital gains. If your marginal tax rate will be 25% in 2014 — leading to a capital gains tax rate of 15% — but you believe your marginal rate will be 15% in 2015 — leading to a capital gains tax rate of 0% — it would save you money and lower your tax bill to defer recognizing long-term capitals gains until next year.

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FP

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Annuities

Annuities are promoted as a way for invested dollars to obtain tax-deferred growth. However, when money is withdrawn from an annuity it is taxed at the investor’s marginal tax rate as opposed to his long term capital gains tax rate. Knowing your marginal tax bracket can help determine whether an annuity adds any value to your portfolio, or whether it could actually be detrimental.

Suppose an investor is in the 15% marginal tax bracket. If this person invests in an annuity, he will avoid paying taxes on any of the investment’s growth until the funds are withdrawn from the annuity. However, at that point the investment’s growth will be taxed at the taxpayer’s marginal income tax bracket of 15%. Alternatively, if this same investor utilized a taxable investment account rather than an annuity, the investment’s growth would be taxed at the investor’s capital gains tax rate of 0% when sold. In this case, investing in an annuity actually created a tax bill for this investor!

Clearly, knowing your marginal tax rate and your resulting capital gains tax rate can help you determine the best type of investment accounts for your personal situation.

Itemized Deductions

The value of your itemized deductions is essentially determined by your marginal tax bracket. For a simplified example, consider a taxpayer who could generate an additional $10,000 of deductions. Doing so would mean the individual would pay taxes on $10,000 of income less than he would without the deduction. If the individual is in the 15% tax bracket, generating the deduction would lower the person’s tax bill by $1,500 dollars ($10,000 x 15%). However, if the individual is in the 25% tax bracket, the same deduction would lower the person’s tax bill by $2,500 ($10,000 x 25%).

Consequently, knowing your marginal tax bracket can help determine when large itemized deductions should be taken. If you would like to donate funds to your favorite charitable institution, knowing which year you will be in the highest marginal tax bracket can help you determine the best time to make the contribution.

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FA

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Marginal Tax Rates Change

Many people’s income is relatively constant year-after-year. For these people, there may not be much fluctuation in their marginal tax bracket. However, any time you have a significant increase or decrease in income recognized during a year, your marginal tax rate may change. Whenever possible, it is best to anticipate how your current marginal tax rate might compare to your future marginal tax rate.This is another strong factor that can impact all the key financial decisions effected by your marginal tax rate.

Conclusion

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What is a Structured Settlement?

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What it Is – How it Works?

[By Staff Reporters]

A structured settlement (sometimes called a “periodic payment settlement”) is a claim settlement under which some of the proceeds will be payable in deferred installments in lieu of immediate cash.

Meaning

What does that mean to you? Settlements paid in the form of a single lump sum, especially in catastrophic injury cases, place claimants, and their families, in the position of having to manage money which may be intended to provide for a lifetime of medical and income needs.

Most people are not experienced in handling large sums of money and as a result, the money is often either spent too quickly or invested leaving little or nothing to cover the future needs of the seriously injured person.

History

Structured settlements were developed in order to create a more stable financial footing for claimants.  In 1982, the use of structured settlements was encouraged by Congress and special tax code was written. Instead of receiving a single lump sum, guaranteed payments can be made to you over time, through the purchase of an annuity, to better meet your financial needs.

IRS

The Internal Revenue Service determined that since the money you receive through a structured settlement is compensation for an injury, you will never pay taxes on any of the payments (principal or interest). There are two primary articles of legislation governing the tax treatment of structured settlements.

For more information regarding tax treatment of structured settlements, please visit the following pages: IRC 104 (a)(2) and IRC 130.  For other legislative actions and tax codes related to structured settlements, please click on one of the following links:  The Periodic Payment Settlement Act of 1982, 468B, 72(u) or 5891.

Schedules

Payments from a structured settlement can be scheduled for any length of time, even for your lifetime. Payment designs can include bi-weekly, monthly, quarterly or annual payments as well as future lump sums. Ongoing payments can be in level amounts or can keep up with inflation by using a Cost of Living Adjustment (“COLA”). Since you work with the Structured Settlement Consultant to determine the payment design, you can remain confident that your future financial needs are addressed.

If a single lump sum payment is taken as compensation for an injury, it is tax-free but any additional income (called “Interest Income”) you receive from investing the lump sum will be taxable. The bottom line is that structured settlements provide you with a unique opportunity to take advantage of an investment without risk OR tax consequences.

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policies

***

Assessment

At the core of the federal tax code’s explicit recognition of structured settlements is the concept of” constructive receipt”.

For a concise explanation about Congress’ intent and how the Internal Revenue Service has traditionally interpreted the application of constructive receipt, click here for the National Structured Settlement Trade Association (NSSTA) brochure, Structured Settlements: Explaining Constructive Receipt.

To download the NSSTA brochure, Structured Settlements and Qualified Assignments: How Federal Tax Rules Benefit all Parties in a Claim, click here.

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Does the Method of Tax Filing Change IRS Audit Potential?

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Will that be a Paper or Electronic Tax Return?

[By Dr. David Edward Marcinko MBA CMP™]

dr-david-marcinko5I’ve prepared and filed personal, medical practice as well as PC, S and C corporate tax returns for many years now. I bought my first computer in 1988, participated on dial-up bulletin boards with modem soon thereafter, and have been on the internet since 1995.

But, I do to have a definitive answer to this question.

Two Competing Theories

Some CPAs suggest filing the old-school way if you’re worried about an audit. Why? Paper filing means more work for the IRS to access all the information in your return. Others disagree:

Philosophy in Favor of Paper Returns

Some suggest that a paper tax return might reduce your chance of an audit because the IRS must transcribe your information into a computer by hand. The IRS does not transfer all of the information in your return as a result of the prohibitive cost of transcribing returns. When you file a return electronically, a computer instantly analyzes your return for errors and discrepancies.

Source: http://www.ehow.com/info_8488086_filing-increase-chances-irs-audit.html#ixzz2yh9m8pEy

Philosophy in Favor of Electronic Returns

Filing an electron tax return reduces the number of math mistakes on your return and the chance that the IRS makes a mistake when it transfers data by hand. Overall, electronic returns contain fewer errors than paper returns which increase the chance of audits. Also, the IRS may perform an automatic audit when its electronic scanning system cannot read your handwriting.

Source: http://www.taxdebthelp.com/tax-problems/tax-audit/irs-audit-statistics#ixzz2yLVTp0l1

Tax

Assessment

Remember, your duty as a taxpayer is to be truthful and accurate, but you don’t have to make it easy for the IRS.

Conclusion

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The [Financial] Case Against Marriage?

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Popular with Older Couples

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“Two can live as cheaply as one.”

This old saying is mostly true. However, when it comes to death, divorce, and taxes; two people are probably better off financially if they don’t marry. Intentionally or not, many federal and state laws reward couples who choose to live together without marriage.

Insurance and Tax Examples

Laws relating to Worker’s Compensation insurance are one example of this. Someone whose spouse has died in a work-related accident may be eligible to receive a monthly benefit, paid for the rest of his or her life. However, most state laws provide that the benefits end if the recipient remarries. This puts a real cost to remarrying.

Example:

Consider as an example a woman who at age 50 loses her husband to a work-related accident and receives a settlement of $2,000 a month for life. Assuming she will live another 35 years and could invest the proceeds in a 3% bond, the present value of that income stream is $520,000. That means a person would need $520,000, invested at 3%, to give a monthly income of $2,000 for 35 years.

Therefore, if this woman fell in love and wanted to remarry two years into receiving the payments, the remaining 33 years of monthly payments she would forfeit has a value of $502,000. This puts a rather quantifiable cost on one’s social, emotional, and religious values.

Tax Code

The tax code also encourages couples to remain unmarried.

Example:

Take a couple who both earn high incomes. Suppose each has taxable income of around $400,000, which is the breakpoint where the 39.6% tax bracket begins. As two singles, as long as their taxable income is $400,000 or less, they both remain in the 35% tax bracket. However, if they marry, their joint income goes to $800,000 while the 35% tax bracket only expands to $450,000 for couples. That means they now pay an additional 4.6% in federal income taxes on the excess of $350,000, or $12,600. Some may be quick to dismiss that amount as trivial, given their income level, but the point is still that marriage for them brings a tangible cost in higher taxes.

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Heart

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Prior Marriages

Those with previous marriages may find another disincentive to marriage in the challenge of passing on assets to children upon your death or if the new marriage should end in divorce. If leaving assets to children is a priority, you will probably need to negotiate a prenuptial agreement with your finance. This is especially important for couples with unequal assets.

A prenuptial agreement is a real romance killer. It highlights the reality that every marriage is a business deal, with the added emotional weight of negotiating the divorce settlement before there is a wedding. Some couples find it easier to live together without marriage and keep their assets largely separate.

The Un-Marrieds

For couples that decide not to marry, the potential tax planning is ripe with opportunity.  Such couples can do anything that the tax code or state statutes prohibit married or related parties from doing. This provides some great tax savings and asset protection opportunities.

For example, spouses cannot be the trustees of each other’s irrevocable or asset protection trusts, but unmarried partners absolutely can.

Choosing not to marry is becoming especially popular with older couples. This is because many older people with previous marriages have accumulated two things: assets and children. They find marriage less compelling when they and their new partner won’t have children together.

Assessment

Younger couples who do plan to have children still recognize that marriage is important. For many reasons, marriage isn’t going out of style any time soon. Few of those reasons, however, are financial ones.

Conclusion

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Sale of a Personal Residence

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Tax Implications

By Perry D’Alessio CPA [D’ALESSIO TOCCI & PELL CPA] http://www.DaleCPA.com

perry-dalessio-cpa

For many medical professionals, a home is their largest asset.  In addition, it is their largest tax shelter as well.

Historical Review

Certain costs of the purchase and ownership of the home are deductible expenses if the taxpayer itemizes (i.e. interest with total loan balance not to exceed one million dollars, interest on home equity loan interest up to $100,000, and property taxes). The law regarding the sale of a personal residence changed in mid-1997.

This change in the tax law has been one of the most overlooked by all taxpayers.  The new law states that the first $250,000 ($500,000 for married taxpayers filing jointly) of gain from the sale of a residence will be free of federal income tax.

How to Qualify?

To qualify for this exclusion the medical professional taxpayer must have owned the residence and occupied it for at least two of the last five years prior to the sale.  In addition, if the taxpayer does not meet the above requirement due to change in employment, health or various other reasons, s/he may receive an “exclusion” for a portion of the above amount.  An added bonus is that the taxpayer may take advantage of this same exclusion again after a two-year waiting period.

Assessment

Compared to the old law where a taxpayer had to “buy up” into a higher priced home in order to defer the gain on sale of the old residence, this is a huge benefit.  For healthcare professionals this is an especially fortuitous change in the law.  Depending on the state you reside in a residence is, for the most part, creditor proof, this tends to be one of the investments that is maximized. The potential to reap rather large tax-free treatment is something to keep in mind.

Drs. Home

Conclusion

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