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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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Even More IRA Mistakes

Three More Critical Mistakes to Avoid

By Rick Kahler CFP®

Previously, I discussed two critical IRA mistakes, based on information I learned from Jeff Levine of Fully Vested Advice, Inc., at the 2018 spring conference of the National Association of Personal Financial Advisors. This week I will cover three more.

1. Failing to understand beneficiary options on inherited IRAs. You may well be among the millions of Americans, most of them spouses, who will inherit IRAs. Knowing the options you have can save you thousands of dollars in benefits and taxes.

Spouses have the right to remain as a beneficiary of the plan or roll it over into their own IRA. Which to choose depends upon the age of the person who has died, and the age and financial needs of the beneficiary. The “99% rule” says beneficiaries under age 59½ should retain the plan as an inherited IRA; those over 59½ should roll it over. The “1%” scenario is when the deceased spouse was over age 70½ and the beneficiary is more than 11 years younger. A rollover is best if the beneficiary doesn’t need any IRA distributions until after age 59½.

Another option for IRA owners is to name a trust as the beneficiary of the IRA. Levine suggests not doing this if you can accomplish your goals without it. But there are many cases when a trust will accomplish things that giving the IRA outright to a beneficiary won’t do. Estate planning attorney Ilene McCauley, from Scottsdale, AZ, says some of those instances are when you want to protect the IRA from a divorce of a beneficiary or guarantee that the proceeds go to your children when your spouse dies or remarries. McCauley recommends using a living trust as the IRA beneficiary rather than a testamentary trust established through a will.

2. Not understanding the RMD aggregation rules. These are widely misunderstood even by advisors. Levine asked the group of about 50 advisors this question: “If a 72-year-old client had two traditional IRAs, two 401ks, and two 403bs, how many RMD checks would need to be issued?” Only three advisors got the right answer—four. You can aggregate the RMDs from the two traditional IRA accounts and take the combined RMD out of just one account. You can do the same with the two 401k accounts. But with the 403b accounts you must take the RMD separately from each account. You can’t aggregate them or you face penalties and taxes.

3. Not doing periodic reviews of IRA beneficiaries. It’s important to review your IRA beneficiaries regularly. This is especially crucial when a beneficiary dies or you get remarried. For example, assume you want your employer’s retirement plan to go to your children upon your death. You remarry, but don’t have your new spouse sign a disclaimer waiving rights to your retirement plan. If you die after one year of marriage your new spouse, not your children, inherits the employer’s retirement plan funds.

The reverse is true with an IRA or a 403b. Let’s assume you listed your kids as the beneficiaries on either of these accounts. If you remarry and want the proceeds to go to your new spouse but you forget to sign a change of beneficiary form, there is no one-year rule as there is with an employer’s plan. Your kids , not your spouse, will inherit the account.

Assessment

The bottom line is that, to get the most benefit from a retirement plan, you need to do your homework and seek appropriate advice. The money you save by avoiding IRA mistakes can make a big difference in your security and standard of living in retirement. 

Conclusion

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Avoid Costly IRA Mistakes

Avoid These 2 Mistakes

By Rick Kahler CFP®

Investing through an IRA is a foundational method of retirement saving. Opening and contributing to an individual retirement account is not hard. That doesn’t mean IRAs are simple and easy to understand.

National Association of Personal Financial Advisors

I was reminded of this at the 2018 spring conference of the National Association of Personal Financial Advisors, where I attended a workshop by Jeff Levine of Fully Vested Advice, Inc., on “10 Critical IRA Mistakes.”

Top on his list of mistakes was failing to make charitable contributions out of your IRA when you are over 70½. These are called Qualified Charitable Distributions (QCDs). Here is why giving to charity directly from your IRA is a good idea.

For traditional IRAs, at age 70½ you must begin to withdraw required minimum distributions (RMDs) whether you want to or not. An RMD is taxable at ordinary income rates. Further, if you make a charitable donation and you are over age 65, you now must have over $13,300 of itemized deductions per person to get any portion of it deductible. By donating out of your IRA, you can reduce your RMD by an amount equal to your charitable gift. This makes your charitable gift 100% deductible and lowers your adjusted gross income, which can also help lower your Medicare premiums.

Here’s an example

Assume you are age 71, give $9,000 a year to charity, your property taxes on your home are $2,500, you are in the 22% tax bracket, and your RMD is $10,000. Without planning you will take your $10,000 RMD and pay $2,200 of income tax on it. Since you only have $11,500 in itemized deductions you will take the standard deduction of $13,300.

If instead you contribute $9,000 to charity out of your IRA, you reduce your taxable RMD from $10,000 to $1,000, slashing your tax liability on it from $2,200 to $220. The savings of $1,980 would cover most of your property tax.

If you make a QCD like this, it’s essential to inform your tax preparer. There is no required written evidence from your IRA custodian that your RMD needs to be offset by the amount of your gift. It’s your responsibility to tell your accountant so they report the correct reduced amount of the RMD on your tax return.

In Bankruptcy

Another significant source of mistakes is the complex asset protection rules for IRAs and retirement plans. Protection differs between bankruptcy and non-bankruptcy creditor actions.

In bankruptcy, all employer plans (ERISA), SEP and SIMPLE IRAs, and rollovers from retirement plans to IRAs are 100% protected from creditors. Amounts you personally contributed to traditional and Roth IRAs are protected up to a total of $1,283,025. However, inherited IRAs are not covered. You can see why it’s important to keep traditional, rollover and inherited IRAs in separate IRA accounts.

To make it even more complicated, different rules apply if creditors sue in non-bankruptcy proceedings. ERISA plans are 100% protected in all states. All IRAs are 100% protected in most states, except California, Georgia, Maine, Mississippi, Nebraska, South Dakota, and Wyoming, where they have limited to no protection.

Solo 401(k), SEP IRA, and SIMPLE IRA plans are fully protected from non-bankruptcy proceedings in about half of the states. The others, including South Dakota, have limited or no protection. If you live in one of these states and have a Solo 401(k), SEP, or SIMPLE, you want to roll it into an IRA as soon as circumstances allow.

Assessment

Mistakes like the two described here can be costly. To avoid them, especially if your circumstances are at all complex, it’s wise to get tax and IRA withdrawal advice from qualified financial advisors.

Conclusion

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On “Forced” Required Minimum Distributions

Mandatory RMDs

By Rick Kahler CFP®

Planning is important for all things financial, including retirement, which is inevitable no matter how far into the future it may seem. The financial decisions you make in your 20s through your 60s will greatly impact the quality of your lifestyle during retirement. Social Security and family won’t be enough to get you through 30 years of retirement. If you haven’t worked for a branch of government, you will rely heavily on income you’ve stashed in 401(k)s and IRAs.

Traditional IRAs

One of the big advantages of a traditional IRA or 401(k) is being able to save pre-tax dollars and let them grow tax deferred until you need them. Hopefully, when you take the distributions in retirement, you will be in a lower tax bracket than when you made the contribution. The downside is that traditional IRA funds become 100% taxable when you withdraw them.

Deferrals

Deferring distributions from your IRA only works until age 70½, when you’ll be forced to take money out whether you want to or not. This is called a Required Minimum Distribution, or RMD. If, at age 70½, you don’t need to withdraw funds to live on but are faced with an annual RMD, there are several things you can do to minimize your tax hit.

The easiest is don’t stop earning an income if you have a substantial 401(k). Employees are not required to take RMDs when they are still working, even part-time. This only applies to your employer’s 401(k). You will need to take RMDs from personal IRAs or 401(k)s and IRAs from previous employer plans.

***

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However, if you plan ahead you may be able to bypass this. If you have IRAs that are rollovers from previous 401(k)s, your employer may allow you to roll them into your current plan. By consolidating previous qualified employer plans into your current plan, you can defer taking an RMD until you quit working.

If you give to charities, you can give any portion or all of your RMD to a charity and not pay any taxes on the distribution. This can really save you a lot of money if you are currently giving to charities out of taxable accounts. When you turn 70½, simply redirect your charitable giving from taxable accounts to your IRA. You can give up to $100,000 annually without paying taxes on those distributions.

Another strategy we use commonly with clients is converting traditional IRA funds to Roth IRAs. Money in a Roth is not subject to RMDs. Of course, the downside is that you must pay taxes on the funds converted from your traditional IRA to a Roth.

For a conversion to make financial sense, two important factors must apply. You generally want to do a Roth conversion when your current tax bracket is lower than you anticipate it will be in the future. The most obvious scenario here is when you delay Social Security until age 70 and you are currently in a 10% or 15% tax bracket. It’s highly possible that Social Security and RMDs all kicking in at the same time may put you into the 25% tax bracket. Moving as much money at the 15% bracket prior to age 70 can make a lot of sense. It’s also important that the money to pay the taxes needs to come from a taxable account.

Assessment

As with all financial strategies that are crammed into a 600-word article, there are variations and nuances I am not able to go into. If you think one of these strategies may apply to you, don’t try it on your own. First get advice from a competent tax advisor or financial professional.

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

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http://www.CertifiedMedicalPlanner.org

***

The New DOL Rule Survey

A Conversation?

[By Rick Kahler MS CFP®]

I recently learned about an unexpected response to the new Department of Labor rule which mandates that all financial advisors and brokers act as fiduciaries (that is, in the best interest of the consumer) when dealing with customers’ retirement plans.

This means brokers will be discouraged from selling high fee and commission products to a customer’s IRA or similar retirement plan. The ruling may force many brokers to revamp for IRA products that have lower fees and commissions.

The Survey

However, according to a J. D. Power survey as reported in Financial Planning, customers are not happy with their brokers charging them lower fees. While the survey found that the clients of fee-only advisors were “generally more satisfied with what they pay their firm,” it also found that commission-based clients are going to leave in droves if their advisors switch to a lower-cost, fee-only model.

Let me get this straight

A broker who until now has owed no fiduciary duty to the customer, and who sells high fee and commission products to that customer, will now be forced by their company to place the consumer’s interest first. When dealing with the customer’s IRA, the broker cannot receive commissions and can only earn a lower fee. The broker places a low-fee product in the client’s IRA.

The result?

The client is so upset they will take their business to another firm.

According to J. D. Powers, that is correct. Their survey says around 60% of the customers of brokerage firms that may have to switch to fee-only when dealing with customer’s IRAs will “probably” or “definitely” take their business to another firm.

***

***

I am imagining the following conversation between a customer and a broker

Broker:

“Because of the new DOL regulations I can no longer sell you a high fee and commission variable annuity to be owned by your IRA. To comply with the ruling, my company has eliminated the 7% upfront commission on this annuity; we will now charge you a 1% annual fee. They also reduced the annual management expenses from 3% to 1%. Plus, now any advice I give you or product I recommend must be in your best interests.”

Customer:

“So you are eliminating the upfront 7% commission and replacing that with a 1% annual fee, which means 7% more of my money immediately goes to work for me in the investment, right?”

Broker:

“That’s right.”

Customer:

 “And instead of the upfront commission you are charging a new 1% annual fee, but reducing the annual management costs of the investments from 3% to 1%. So I’ll still make an additional 1% every year I own this, in addition to saving 7% up front, right?”

Broker:

“That’s right.”

Customer:

 “And further, you’re now going to look out for my best interests rather than the best interests of your company.”

Broker:

 “Yep.”

Customer:

“This is ridiculous. I’m outta here!”

Broker:

“Where are you going?”

Customer:

“To find a firm that will continue to sell me high commission, high fee products for my IRA and that will work against my best interests!”

Broker:

“You probably won’t find any. Every financial company selling investment products to IRAs has to comply.”

Customer:

 “I’ll find someone, somewhere. Goodbye!”

Assessment

This defies all logic. I can only make up stories as to why the survey found the majority of brokerage customers would leave. Might some believe the new fees would cost them more than they currently pay?

My best assumption is that there was no explanation of what “fee-only” or “fiduciary” meant. So, if the results of the J. D. Power survey don’t make a lot of sense to you, join the crowd.

Conclusion

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Proposed IRA Changes in the Obama Federal Budget

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Reviewing Potential IRA Changes 

Rick Kahler MS CFP

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

The President has fired the first warning shot indicating that politicians are eying the tax advantages of the Roth IRA. For years I’ve strongly encouraged maximum funding of Roth IRAs & 401(k)s.

Physician-Clients have sometimes expressed concern that politicians would someday retroactively change the rules and strip the plans of their tax advantages. I’ve seen that concern as a possibility (for example, in 2008 Argentina confiscated the assets in IRAs and 401(k)s and replaced them with less than desirable Argentinian Government Bonds), but not much of a probability. 

With the introduction of the President’s 2016 budget, the probability of losing some Roth IRA tax benefits has increased.  

Each February the President submits a budget to Congress which is about far more than spending requests. It also contains scores of proposed changes to existing tax laws. One such proposal in the current budget would eliminate two tax advantages of the Roth IRA.  

The first change would require required minimum distributions (RMDs) for Roth IRAs as well as traditional IRAs.  

Currently, one of the benefits of a Roth IRA is not having to take RMDs. At age 70 1/2, owners of traditional IRAs are required withdraw a certain percentage annually, often around 4%. They must pay the tax due and, if they don’t need the funds for living expenses, must invest the remainder in a taxable account. The RMD denies them the option of leaving the money in the tax-deferred environment of the IRA and further compounding.  

Under the President’s proposal, owners of Roth IRAs will need to start withdrawing funds annually at age 70 1/2. While there won’t be any taxes due because contributions to Roths are post-tax, it will remove the funds from the tax-free environment, decreasing future returns by up to 40%. That’s a big deal. 

The second proposed change would eliminate tax-deferred inheritance of IRAs (sometimes called “stretch IRAs) for anyone except spouses. All other inherited IRAs would need to be dissolved and the funds distributed and taxed within five years after death. This will really impact Baby Boomers counting on their parents’ IRAs to assist them with their own retirement needs. 

Other budget proposals would also end Roth conversions to any after-tax IRAs, limiting them to IRAs where the contributions were before taxes. This would prohibit taxpayers with earnings above the traditional and Roth IRA threshold from making non-deductible contributions to a traditional IRA and then doing a Roth conversion. 

The final proposal would limit new IRA contributions for total retirement savings totaling over $3.4 million. This includes the aggregate total of IRAs, 401(k)s, and any other pension plan balances. Once the total reaches $3.4 million at the end of the tax year, no new contributions are possible. 

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Capping IRA Growth?

To many Americans, especially the youth, this looks like a cap they will never see in their lifetime. Yet consider what $3.4 million will be worth in purchasing power 40 years from now, when today’s 30-year-olds will have to start RMDs. If inflation maintains its historical average of 3%, in 40 years $3.4 million will have the purchasing power of just over $1 million today. If someone wants to be assured they will never run out of money in retirement, $1 million only provides $30,000 a year of retirement income.

Capping IRA growth is another big deal.

Assessment 

These are a few of the tax changes proposed by the President’s budget. The chances for any to become law in 2016 are remote, given that Congress is currently controlled by Republicans. However, the proposals do signal the current thinking of lawmakers. In considering their retirement planning, taxpayers would be advised to pay attention to such signals.

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

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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.

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Next-Gen Physicians

[Future High Income-Earners?]

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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.

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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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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:

Financial Planning MDs 2015

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants

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