MORE: Tax Loss Harvesting

Tax Loss Harvesting

By Vitaliy Katsenelson, CFA

DEFINITION: https://medicalexecutivepost.com/2022/11/06/tax-loss-harvesting-what-it-is/

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Tax Lost Harvesting with Examples

I enjoy writing about taxes as much as I enjoy going to the dentist. But I feel what I am about to say is important. We – including yours truly – have been mindlessly conditioned to do tax selling at the end of every year to reduce our tax bills. On the surface it makes sense. There are realized gains – why don’t we create some tax losses to offset them?

Here is the problem. With a few exceptions, which I’ll address at the end, tax-loss selling makes no logical sense. Let me give you an example.

Let’s say there is a stock, XYZ. We bought it for $50; we think it is worth $100. Fourteen months later we got lucky and it declined to $25. Assuming our estimate of its fair value hasn’t changed, we get to buy $1 of XYZ now for 25 cents instead of 50 cents.

But as of this moment we also have a $25 paper loss. The tax-loss selling thinking goes like this: Sell it today, realize the $25 loss, and then buy it in 31 days. (This is tax law; if we buy it back sooner the tax loss will be disqualified.) This $25 loss offsets the gains we took for the year. Everybody but Uncle Sam is happy.

Since I am writing about this and I’ve mentioned above I’d rather be having a root canal, you already suspect that my retort to the above thinking is a great big NO!

In the first place, we are taking the risk that XYZ’s price may go up during our 31-day wait. We really have no idea and rarely have insights as to what stocks will do in the short term. Maybe we’ll get lucky again and the price will fall further. But we’re selling something that is down, so risk in the long run is tilted against us. Also, other investors are doing tax selling at the same time we are, which puts additional pressure on the stock.

Secondly – and this is the most important point – all we are doing is pushing our taxes from this year to future years. Let’s say that six months from now the stock goes up to $100. We sell it, and… now we originate a $75, not a $50, gain. Our cost basis was reduced by the sale and consequent purchase to $25 from $50. This is what tax loss selling is – shifting the tax burden from this year to next year. Unless you have an insight into what capital gains taxes are going to be in the future, all you are doing is shifting your current tax burden into the future.

Thirdly, in our first example we owned the stock for 14 months and thus took a long-term capital loss. We sold it, waited 31 days, and bought it back. Let’s say the market comes back to its senses and the price goes up to $100 three months after we buy it back. If we sell it now, that $75 gain is a short-term gain. Short-term gains are taxed at your ordinary income tax bracket, which for most clients is higher than their capital gain tax rate. You may argue that we should wait nine months till this gain goes from short-term to long-term. We can do that, but there are costs: First, we don’t know where the stock price will be in nine months. And second, there is an opportunity cost – we cannot sell a fully priced $1 to buy another $1 that is on fire sale.

Final point. Suppose we bought a stock, the price of which has declined in concert with a decrease of its fair value; in other words, the loss is not temporary but permanent.  In this case, yes, we should sell the stock and realize the loss. 

We are focused on the long-term compounding of your wealth. Thus our strategy has a relatively low portfolio turnover. However, we always keep tax considerations in mind when making investment decisions, and try to generate long-term gains (which are more tax efficient) than short term gains. 

We understand that each client has their unique tax circumstances. For instance, your income may decline in future years and thus your tax rate, too. Or higher capital gains may put you in a different income bracket and thus disqualify you from some government healthcare program.

We are here to serve you, and we’ll do as much or as little tax-loss selling as you instruct us to do. We just want you to be aware that with few exceptions tax-loss selling does more harm than good.

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

CITE: https://www.r2library.com/Resource/Title/082610254

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DAILY UPDATE: New IRS 1099-K Reporting Rule

By Staff Reporters

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IRS

The IRS just noted that there are no changes made to the taxability of income but only in the reporting rules for Form 1099-K. Taxpayers are still required to report all income on their tax return unless it is excluded by law. This is whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return.

Previously businesses would generally receive a 1099-K tax form only when their gross payments exceeded $20,000 for the year and the business conducted at least 200 transactions.

According to the new 1099-K rule, the gross payments threshold has been lowered to just over $600 for the year with the transactions threshold no longer applying. Now a single transaction exceeding $600 can trigger a 1099-K. This includes transactions through credit cards, debit cards, banks, PayPal, Uber, Lyft, and other third-party payment settlement entities.

The 1099-K form includes information about the payment processor and the company receiving payments, and a monthly breakdown of total payments, among other information.

According to the IRS, the lower information reporting threshold and the summary of income on Form 1099-K will make it easier for taxpayers to track the amounts received.

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

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Two Year Treasury Yields = HIGH!

By Staff Reporters

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U.S. bond yields just rose to new cycle highs as the fallout from the Federal Reserve’s latest interest rate hike and commentary reverberated across markets. The policy-sensitive 2-year rate broke intermittently above 4.7%, shrinking its spread to the 10-year rate to as little as minus 60.9 basis points in a worrisome sign of the economic outlook. The 2-year yield finished the New York session at its highest level in more than 15 years.

What’s happening

  • The yield on the 2-year Treasury rose 13.1 basis points to 4.699% from 4.568% on Wednesday. Thursday’s level is the highest since July 25, 2007, based on 3 p.m. figures from Dow Jones Market Data.
  • The yield on the 10-year Treasury advanced 6.4 basis points to 4.123% from 4.059% as of late Wednesday. Thursday’s level is the highest since Oct. 24.
  • The yield on the 30-year Treasury climbed 2.9 basis points to 4.151% from 4.122% Wednesday afternoon.

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

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“I” Bonds: DOWN!

By Staff Reporters

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DEFINITION: https://www.treasurydirect.gov/savings-bonds/i-bonds/

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The rate for I bonds, an asset that’s tied to the rate of inflation, was lowered to 6.89% yesterday from its record high of 9.62%. But in the final days of the previous rate, investors hoarded I bonds like crazy.

Now, on Friday, the Treasury sold $979 million of I bonds, nearly as much as the entire amount sold in the three years from 2018 to 2020, per CNBC. The investors also crashed the website.

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

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BREAKING NEWS: The FOMC Raises Short-Term Interest Rate 0.75%

By Staff Reporters

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The Federal Reserve jut raised its short-term borrowing rate another 0.75% to slow key areas of the economy and tame inflation, which is at a 40-year high. The central bank said its new target range is 3.75%-4%, the highest level since January 2008.

The aggressive move is the latest in a string of borrowing cost increases imposed by the Fed in recent months as it tries to slash price increases by cooling the economy and choking off demand. The approach, however, risks tipping the U.S. into a recession and putting millions out of work.

The fourth rate hike of 2022 also arrives less than a week before the midterm elections.

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

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Medical Managed Care IBNR Accounting Claims

Tax Savings Strategies

Claim Anatomy - ipitome

[By Ana Vassallo] AND [Dr. David E. Marcinko MBA]

Managed Care Organizations (MCOs) that accept capitated risk contracts face a potentially significant tax burden for Incurred but Not Reported (IBNR) claims. It is not uncommon that IBNR claims at the end of a reporting period equal one to two months premiums for MCOs under a fee-for-service model. The Internal Revenue Service (IRS) has taken a very strong position relative to the deductibility of these claims by saying that an MCO cannot deduct such losses if they are based on estimates.

Incurred But Not Reported [IBNR] Claims

IBNR is a term that refers to the costs associated with a medical service that has been provided, but for which the carrier has not yet received a claim. The carrier to account for estimated liability based on studies of prior lags in claim submission records IBNR reserves. In capitated contracts, MCOs are responsible for IBNR claims of their enrollees (Kennedy, 1). 

For example, if an enrollee is treated in an emergency room, a plan may not know it is liable for this care for at least 30-60 days. Well-run plans devote considerable attention to accurately estimating such claims because a plan can look healthy based on claims submitted and be financially unhealthy if IBNR claims experience is increasing substantially but is unknown.

Why a Problem for HMO’s/MCOs 

Section 809(d)(1) of the Code provides that, for purposes of determining the gain and loss from operations, a insurance company shall be allowed a deduction for all claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and annuity contracts.  Section 1.809-5(a) (1) of the Income Tax Regulations provides that the term “losses incurred (whether or not ascertained)” includes a reasonable estimate of the amount of the losses (based upon the facts in each case and the company’s experiences with similar cases) incurred but not reported by the end of the taxable year as well as losses reported but where the amount thereof cannot be ascertained by the end of the year. By taking into account for its prior years only the reported losses but not the unreported losses, the taxpayer has established a consistent pattern of treating a material item as a deduction. The effect of the taxpayer’s claim for the first time of a deduction for an estimate of losses incurred but unreported under section 809(d)(1) of the Code, was to change the timing for taking the deduction for the incurred but unreported losses.

Due to the taxpayer consistently deducting losses incurred in the taxable year in which reported, a change in the time for deducting losses incurred under section 809(d)(1) is a change in the method of accounting for such losses to which the provisions of section 446(e) apply (IRS, 14-30). 

In order to qualify for an insurance company under the current IRS regulations, the MCO must have the following criteria (Kongstvedt, 235-256):

· At least 50% of the MCO must come from insurance related activities.

· The MCO must have an insurance company license.

If an MCO did not have these two criteria, the IRS will not deem the manage care company as an eligible insurance company.  Therefore, the MCO would not be able to file for IBNRs with the IRS.

How MCOs/HMOs Intensify IBRN Claims

There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims.  The only reason the IRS would not allow an MCO to deduct IBNR because the financial statements is based on an estimate (IRS, 134-155).

Except through the insurance company exclusion IRS does not allow any taxpayer to deduct losses based on estimates. There has been some precedence set that the IRS will accept an amount for incurred but not reported claims if the amount is supported by valid receipts of claims that the company has in-house prior to the filing of the tax return.

There has been some controversy as to how long of a period of reporting time the IRS will allow you to include in those estimates. There are ranges from 3-6 months to file a claim (IRS, 137). The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the business’ experience with similar cases and historical trends involving claim payment patterns, claim payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes.

There has been no clear indication from the IRS that it will accept an accrual for these losses and entities. Therefore, companies deducting such losses may eventually find themselves in a position where the IRS may challenge the relating deductibility of those losses.

Product DetailsProduct DetailsProduct Details

Evaluating IBNRs from a New Present Value Perspective

The best measure of whether or not a stream of future cash flows actually adds value to the organization is the net present value (NPV).  The best decision rule for NPV to accept or reject a decision problem is if the NPV is greater than zero, the project adds value to the organization.  Although – if the NPV is exactly zero it neither adds nor subtracts value from the organization (McLean 193).  In either case, the project is acceptable.  In addition, if the NPV is less than zero, the project subtracts value from the organization and should not be undertaken (McLean, 193).

The provision for unpaid claims represents an estimate of the total cost of outstanding claims to the year-end date. Included in the estimate are reported claims, claims incurred but not reported and an estimate of adjustment expenses to be incurred on these claims. The losses are necessarily subject to uncertainty and are selected from a range of possible outcomes (Veal, 11). During the life of the claim, adjustments to the losses are made as additional information becomes available. The change in outstanding losses plus paid losses is reported as claims incurred in the current period.

All but the smallest organizations have predictable and unpredictable losses. It is important mentally to separate the two since predictable losses are not risks but normal business expenses. Risk is the degree to which losses vary from the expected. If losses average $85,000 per year but could be as much as $20 million, the risk is $20 million minus $85,000. The $85,000 figure represents reasonably predictable losses (Veal, 12).

IBNR Challenges and Solutions

While I was unable to find an actual amount of the cost of the penalties that can be incurred, the IRS is able to impose penalty fees under Section 4958 of the IRS code (IRS, 255). While penalties differ depending on individual bases, MCOs will be penalizing for any misconduct either by IRS Codes or Court Jurisdiction.

It is prudent that MCOs ensure their organization that they will not incur a financial “meltdown”. They further need to ensure IBNR is funded for period of at least 2-3 months. In some states, the state laws make the MCO financially responsible to pay the providers for a second time if the intermediary fails to pay or becomes insolvent (Cagle, 1).

Paid losses, paid expenses and net premiums are usually deductible; reserves for incurred-but-unpaid losses generally are not, unless the taxpaying entity is an insurance company. Consequently, if a corporation has a high effective tax rate and concedes that it cannot deduct self-insured loss reserves, some of its more cost-effective options may be a paid-loss retro (if state rules are not too restrictive), a compensating balance plan, or the formation of a pool or industry captive. Even these plans may be subject to IRS challenge. To qualify as a tax-deductible expense, a premium or other payment must satisfy two criteria (Cagle, 2):

 

  • There must be transfer of risk: an insurance risk. This differs from investment risk, but there is no authoritative definition of “risk transfer” other than various court decisions (primarily Helvering v. Le Gierse, 312 US 531 — U.S. Supreme Court 1941).
  • There must be both risk shifting and risk distribution. “Risk shifting” means that one party shifts the risk of loss to another, generally not in the same corporate family. “Risk distribution” means that the party assuming the risk distributes the potential liability, in part, among others.

The deductibility of an insurance expense may also be questioned if it is contingent upon a future happening, such as a loss payment, right to a dividend or other credit, or possible forgiveness of future loans or notes (Cagle, 3). This may seem a broad statement, but the Cost Accounting Standards Board states in its Standards for Accounting for Insurance Expense that any expense which is recoverable if there are no losses shall be accounted as a deposit, not an expense. This is essentially the IRS position (IRS, 145).

Assessment

While there are a few solutions to this matter, the IRS is making sure that MCOs will be penalized if MCOs improperly handle IBNRs.  It is also important for organizations to understand the MCO’s policies regarding IBNR reserves and their contractual obligations. And, while the IRS has set limitations for MCOs to file their IBNR claims, MCOs have the major responsibility of allocating these IBNR claims appropriately.  There are severe penalties for not properly filing the IBNR claims appropriately.  However, there is several tax saving strategies to help MCOs properly file their IBNR claims with the IRS.  It imperative that MCO executives and accounting manager consult an expert to properly plan an ethical strategy that will help them build a stable business that is trustworthy and reliable.

Bibliography

1. Cagle, Jason, Esq., Interview, June 8, 2004, interview performed by Ana Vassallo.

2. McLean, Robert A., Net Profit Value, Pages 193-194, 2nd Edition, Thomson/Delmar Learning, Financial Management in Heath Care Organization, 2003.

3. Patient-Physician Network, Managed Care Glossary, Printed 6/11/04 http:/www.drppg.com/managed_care.asp.

4. Internal Revenue Services, IRS.Gov, Printed 6/12/04, http://www.irs.gov/

5. Internal Revenue Services, Revenue Ruling, Printed 6/11/04, http://www.taxlinks.com/rulings/1079/revrul179-21.thm

6. Kongstvedt, Peter R., Managed Care – What It Is and How it Works, Pages 235-256, Jones and Bartlett Publishers, 2003.

7. Veale, Tom, The Return of Captives in the Hard Market, Tristar Risk Management Aug. 22, 2002, San Diego RIMS.

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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IRS: Increases Contribution Limits for Retirement Savings Plans

By Staff Reporters

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The IRS just said that the maximum contribution that an individual can make in 2023 to a 401(k), 403(b) and most 457 plans will be $22,500. That’s up from $20,500 this year.

People aged 50 and over, which have the option to make additional “catch-up” contributions to 401(k) and similar plans, will be able to contribute up to $7,500 next year, up from $6,500 this year. That’s means a 401(k) saver who is 50 or older can contribute a maximum of $30,000 to their retirement plan in 2023.

The IRS also raised the 2023 annual contribution limits on individual retirement arrangements, or IRAs, to $6,500, up from $6,000 this year. The IRA “catch-up” contribution limit remains at $1,000, as it’s not subject to an annual cost of living adjustment, the IRS said.

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IRS: New Taxation Rates and Brackets for 2023

By Staff Reporters

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The IRS just released inflation-adjusted marginal rates and brackets for 2023 on Tuesday, and many workers will see higher take-home pay in the new year as less tax is withheld from their paychecks.

Additionally, the agency released the standard deduction for next year. It is increasing by $900 to $13,850 for single taxpayers, and by $1,800 for married couples, to $27,700. For heads of household, the 2023 standard deduction will be $20,800. That’s an increase of $1,400.

Here are the marginal rates for for tax year 2023, depending on your tax status.

Single filers

  • 10%: income of $11,000 or less
  • 12%: income between $11,000 to $44,725
  • 22%: income between $44,725 to $95,375
  • 24%: income between $95,375 to $182,100
  • 32%: income between $182,100 to $231,250
  • 35% income between $231,250 to $578,125
  • 37%: income greater than $578,125

Married filing jointly

  • 10%: income of $22,000 or less
  • 12%: income between $22,000 to $89,450
  • 22%: income between $89,450 to $190,750
  • 24%: income between $190,750 to $364,200
  • 32%: income between $364,200 to $462,500
  • 35% income between $462,500 to $693,750
  • 37%: income greater than $693,750

Additionally, the maximum Earned Income Tax Credit for 2023 is $7,430 for those who have three or more qualifying children. The maximum contribution to a healthcare flexible spending account is also increasing, from $2,850 to $3,050.

Wealthy Americans will also be able to exclude significantly more assets from the estate tax in 2023. Individuals will be able to transfer up to $12.92 million tax-free to their descendants, up from just over $12 million in 2022. A married couple can pass on double that. And the annual exclusion for gifts increases to $17,000.

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FOMC: Will Raise Interest Rates in November?

By Staff Reporters

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The Fed is poised to raise interest rates just one more time in November before stopping, according to Ed Yardeni. That’s because there is a growing risk that financial markets are on the verge of instability due to a soaring US dollar.

“The soaring dollar has been associated in the past with creating financial crisis on a global basis,” Yardeni just told told Bloomberg.

CITE: https://www.yardeni.com/

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What is a Retirement QCD?

A Tax-Efficient Way to Donate Money to Charity

By Staff Reporters

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A qualified charitable distribution (QCD) is a withdrawal from an individual retirement arrangement (IRA) that’s made directly to an eligible charity.

CITE: https://www.r2library.com/Resource/Title/0826102549

IRA account holders who were at least age 70.5 as of Dec. 31, 2019, can contribute some or all of their IRAs to charity.

LINK: https://6acebc46b9e64340fdc1a8917e0c290a.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html

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Creative Giving Strategies: The QCD - Nebraska Cultural Endowment

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It might seem counterintuitive that anyone would want to give their savings away after making contributions for years in anticipation of the day when they would retire, but there can be tax advantages for doing so.

IRS: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

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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™ book cover

RISK MANAGEMENT: https://www.routledge.com/Risk-Management-Liability-Insurance-and-Asset-Protection-Strategies-for/Marcinko-Hetico/p/book/9781498725989

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PODCAST: What’s Going on at the IRS?

Welcome to The Common Bridge

By Richard Helppie

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Hello, welcome to the Common Bridge.

We’ve got a great topic for you today. It’s all about taxes and the IRS and with us today, two experts from Plante Moran. Welcome, Rachel Keller and Brett Bissonnette, welcome to the Common Bridge. The Common Bridge, of course, is available@substack.com. Please go to substack.com. Enter the Common Bridge in your search engine. Subscribe if you wish, either a paid subscription or a free subscription.

Of course, the Common Bridge is available on all of your podcast outlets. Look for us there and on YouTube TV. And of course, with our friends over at Mission Control radio on your radio garden app. We all listen to debates and commentary about law and policy and especially taxes. And every law, every policy and of course tax regulation require mechanisms to ensure compliance.

Well, our President Joseph R. Biden has stated that the IRS needs to be properly funded in order to carry out its mission on our very complex tax code. Taxpayers have been puzzled by missing records, slow refund late fees for things they paid and other matters including slowness in the support that they get directly from the IRS. So today, we’re going to chat with these two experts who are in the field today actively advising people from all stripes about tax law and tax regulation. They spent a lot of their time interacting with the IRS and making sure that their clients are in compliance with the tax law. So we anticipate some education and maybe some policy ideas. 

From Plante Moran, we welcome Rachel Keller and Brett Bissonnette — Welcome to the Common Bridge.

-Richard Helppie

EDITOR’S NOTE: Richard D. Helppie
Former: CEO and Founder
Superior Consultant Company, Inc.
[SUPC-NASD]

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PODCAST: https://podcasts.apple.com/us/podcast/richard-helppies-common-bridge/id1485396596?i=1000576748851

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UPDATE: The New IRA & IRS with “Pass-Thru” Business Entities

By Staff Reporters

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  • The US Senate passed their climate, health and tax package, including nearly $80 billion in funding for the IRS.
  • The Inflation Reduction Act allocates $79.6 billion to the agency over the next 10 years, with more than half of the money going to enforcement, with the IRS aiming to collect more from corporate and high-net-worth tax dodgers.
  • The remainder of the funding is earmarked for operations, taxpayer services, technology, development of a direct free e-file system and more. Collectively, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031, according to recent estimates from the Congressional Budget Office.

The biggest revenue-raiser of the IRA is a 15% minimum tax on corporations with profits of $1 billion or more, which is expected to generate $258 billion over 10 years. This addresses the problem of the rampant tax dodging among large companies that has mostly benefited wealthy shareholders and executives. The bill includes a 1% excise tax on companies’ stock buybacks, raising an estimated additional $74 billion. This will discourage corporations from siphoning resources into share repurchases that largely benefit shareholders and executives with stock-based pay. Those resources could instead go toward worker wages or other productive investments. And the bill would boost IRS enforcement to ensure the ultra-rich pay.

Finally, the Inflation Reduction Act would also extend a tax limitation on pass-through businesses for two more years. The limitation on how businesses can use losses to reduce taxes is supposed to expire at the start of 2027. A pass-through or flow-through business is one that reports its income on the tax returns of its owners. That income is taxed at their individual income tax rates. Examples of pass-throughs include sole proprietorships, some limited liability companies, partnerships and S-corporations.

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CITE: https://www.r2library.com/Resource/Title/082610254

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

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UPDATE: Markets, Twitter, Theranos and the ‘Pass-Through’ Tax Loophole

By Staff Reporters

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  • Markets: The S&P climbed for its fourth-straight trading day, tying its best winning streak in 2022 (h/t chip and energy companies). But, at 8:30am ET today, with the release of the June jobs report, any sign of a recession will show up.
  • Elon Musk could take drastic action to back out of his $44 billion agreement to buy Twitter, according to the Washington Post. Apparently Musk’s team cannot verify the data on bots that were provided to them and therefore are looking to exit the agreement.
  • Former Theranos executive Sunny Balwani was convicted of defrauding investors and patients in his role as president and COO of the company.

Finally, under proposed IRS changes, individuals who make more than $400,000 annually and couples who make more than $500,000 will have to pay a 3.8% tax on earnings from their pass-through business income. Those revenues would be used to shore up the government-run Medicare healthcare program for the elderly. A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

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What Date has Never Been Known as Tax Day?

By Staff Reporters

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TRIVIA QUESTION: What date has never been known as Tax Day?

A. March 1st
B. March 15th
C. April 15th
D. May 1st

ANSWER: D—May 1st.

After the 16th Amendment cleared the way for the modern version of the federal income tax, the first filing deadline fell on March 1, 1913. Congress shifted Tax Day to March 15 after passing the Revenue Act of 1918, which introduced a progressive income tax structure to increase revenue during World War I. Since 1954, Tax Day for most Americans has been April 15 (or the next business day if the 15th falls on a weekend or holiday).

CITE: https://www.r2library.com/Resource/Title/082610254

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The IRS, Taxation and Virtual Currency!

New Reporting Warning Issued

By Staff Reporters

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Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.

CITE: https://www.r2library.com/Resource/Title/0826102549

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All taxpayers must answer a question about virtual currency on their return.

On March 18th, the IRS issued a new alert warning all taxpayers that they must answer a section about virtual currency on their 2021 tax refund this year, even if they did not deal with any digital transactions. According to the agency, there is a question on the top of all versions of Form 1040 that asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

“All taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either ‘Yes’ or ‘No’ to the virtual currency question,” the IRS explained. “The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021.”

IRS: https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

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UPDATE: IRS Interest Rates Rising, Currency Inflation and Upcoming Earning Reports, etc.

By Staff Reporters

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IRS: The IRS sent out a notice on February 23rd, warning taxpayers about a price hike coming in the next few months. The tax agency said that interest rates will increase for the calendar quarter starting April 1st, 2022. You can accrue interest on two types of payments: over-payment or underpayment. So starting in April, over-payments will have an interest rate of 4 percent, except for corporations which will earn a 3 percent rate and a 1.5 percent rate for the portion of a corporate over-payment that exceeds $10,000. In terms of underpayments, the interest rate will increase to 4 percent overall and 6 percent for large corporate underpayments.

“Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis,” the IRS website explained. The tax agency did not change interest rates in this last quarter, which began Jan. 1, 2022. Before they get changed in April, the rates are currently 3 percent for general over-payments and 2 percent for corporation over-payments, with a 0.5 percent rate for the portion of a corporate over-payment exceeding $10,000. The underpayment interest is 3 percent right now, expect for large corporations which have a 5 percent rate.

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CURRENCY INFLATION: Inflation may occur when the Federal Reserve, or another central bank, adds fiat currency into circulation at a rate that exceeds that of the economy’s growth rate. That creates a situation in which there are more dollars bidding on fewer goods and services. The result is that goods and services cost more. One reason that inflation has been a constant in the US since 1933 is that the FOMC has continually increased the money supply. In response to the 2008 financial crisis, the Fed dropped its lending rate close to zero as a way to inject more liquidity into the economy, which led to increased inflation but not hyperinflation. While those increases have usually moved in step with growth, that hasn’t always been the case.

CITE: https://www.r2library.com/Resource/Title/0826102549

And so, in response to the COVID-19 pandemic and subsequent lock-downs, the Federal Reserve released the equivalent of $3.8 trillion in new liquidity in 2020. That amount was equal to roughly 20% of the dollars previously in circulation. And it is one reason why many investors were watching the CPI closely in 2021.

EARNING REPORTS:

Monday: India GDP data; Earnings from Lordstown Motors, Groupon, HP, SmileDirectClub and Zoom Video

Tuesday: US and China manufacturing data; Earnings from AutoZone, Baidu, Domino’s Pizza, Hostess Brands, J.M. Smucker, Kohl’s, Target, AMC Entertainment and Salesforce

Wednesday: European inflation data; Earnings from Abercrombie & Fitch, Dine Brands, Dollar Tree, Snowflake and Victoria’s Secret

Thursday: ISM Non-Manufacturing Index; Earnings from Best Buy, Weibo, Costco and Gap

Friday: US jobs report

10-Year: Treasuries rallied to 1.902%.

Oil: The rise in oil prices is spilling over at the gas pump: The average gas price in the US has jumped 10 cents, to $3.64/gallon, in the past two weeks.

Partial SWIFT ban: Western governments put aside their hesitations and proposed banning some Russian lenders from SWIFT, the global messaging service that facilitates cross-border transactions. It’s a move that could cause turmoil across global financial markets.

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UPDATE: The Stock Markets and IRS Online Taxpayer ID

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By Staff Reporters

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MARKETS: The S&P 500 fell into a correction for the first time in two years, joining the NASDAQ Composite, as Russia sent troops into pro-Russian regions in Ukraine. The S&P 500 index ended down 1% at 4,304.76, below the correction level at 4,316.91, which would represent a 10% drop from its January 3rd record close. A correction is commonly defined by market technicians as a fall of at least 10% (but not greater than 20%) from a recent peak. The last time the S&P 500 entered a correction was February 27th 2020, when the market was being whipsawed by fears about the outbreak of the COVID pandemic.

And, this bearish market isn’t sparing 2021 winners like Home Depot, which fell the most in nearly two years after supply-chain bottlenecks squeezed its margins. HD was the Dow’s biggest gainer last year.

CITE: https://www.r2library.com/Resource/Title/0826102549

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IRS: According to a news release issued by the IRS, taxpayers now have the option to verify their identities during live, virtual interviews with agents. The agency stresses that no bio-metric data will be required for those interviews.

However, taxpayers once again have the option to verify their identity using ID.me’s facial recognition services. Addressing privacy concerns, the IRS says new requirements are in place to ensure that images provided will be deleted upon verification. That would apply to any new IRS accounts created and those where selfies have already been collected.

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Cryptocurrency Trades and Income Taxes 2021

Virtual Currency – Real Taxation

By Staff Reporters

What you need to report to the IRS

The IRS treats virtual currencies as property, which means they’re taxed similarly to stocks. If all you did was purchase cryptocurrency with U.S. dollars, and those assets have been sitting untouched in an exchange or your cryptocurrency wallet, you shouldn’t need to worry about reporting to the IRS.

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Reporting is required when certain events come into play, most commonly:

  • Trading one cryptocurrency for another.
  • Selling cryptocurrency for fiat dollars (government-issued currency).
  • Using cryptocurrency to buy goods or services (e.g., paying for a cup of coffee with cryptocurrency).

A critical distinction to make is that triggering a taxable event doesn’t necessarily mean you’ll owe taxes, said Andrew Gordon, an Illinois-based certified public accountant and tax attorney. Just because you have to report a transaction doesn’t mean you’ll end up owing the IRS for it.

READ HERE: https://www.msn.com/en-us/money/taxes/yes-you-must-pay-taxes-on-cryptocurrency-trades-heres-how/ar-AATamDL?li=BBnb7Kz

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FINANCE: https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

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IRS TAX DEDUCTION: Home [Medical] Office

By Staff Reporters

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SYNOPSIS: The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. And, now that some doctors and many of us are working remotely, you may be wondering whether working from home will yield any tax breaks. If your small medical or healthcare consulting or other business qualifies you for a home office tax deduction, should you be concerned about triggering an audit? How does a business qualify in the first place; etc?

CITE: https://www.r2library.com/Resource/Title/082610254

Well, to claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.

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Home Office Tax Deduction| White Coat Investor

If I work from home, do I qualify for a home office tax deduction?

If you’re an employee working remotely rather than an employer or business owner, you unfortunately don’t qualify for the home office tax deduction (however, please note that it is still available to some as a state tax deduction). Prior to the Tax Cuts and Job Acts (TCJA) tax reform passed in 2017, employees could deduct unreimbursed employee business expenses, which included the home office deduction. However, for tax years 2018 through 2025, the itemized deduction for employee business expenses has been eliminated.

If I’m self-employed, should I take the home office tax deduction?

You may have heard that taking the home office deduction sends a red flag to the IRS and ups your chances of being audited. Although there may have been some merit to this advice in the past, changes in the tax rules in the late 1990s made it easier for people who work out of their homes to qualify for these write-offs. So if you qualify, by all means, take it.

Do I qualify for the home office tax deduction?

Generally speaking, to qualify for the home office deduction, you must meet one of these criteria:

  • Exclusive and regular use: You must use a portion of your house, apartment, condominium, mobile home, boat or similar structure for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse or garage. It doesn’t include any part of a taxpayer’s property used exclusively as a hotel, motel, inn, or similar business.
  • Principal place of business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients. Some exceptions to this rule include day care and storage facilities.

What is “exclusive use”?

The biggest roadblock to qualifying for these deductions is that you must use a portion of your home exclusively and regularly for your business.

The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room in your home for a full-time business and you work in it ten hours a day, seven days a week. If you let your children use the office to do their homework, you violate the exclusive-use requirement and forfeit the chance for home office deductions.

The exclusive-use rule doesn’t mean:

  • You’re forbidden to make a personal phone call from the office.
  • You have to rush outside whenever a family member needs a moment of your time.

Although individual IRS auditors may be more or less strict on this point, some advisers say you meet the spirit of the exclusive-use test as long as personal activities invade the home office no more than they would be permitted to in an office building. The office can also be a section of a room if the division is clear — thanks to a partition, for example — and you can show that personal activities are excluded from the business section.

What is “regular use”?

There’s no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty room only occasionally and its use is incidental to your business, you’d fail this test. If you work in the home office a few hours or so each day, however, you might pass. This test is applied to the facts and circumstances of each case the IRS challenges.

What does “principal place of business” mean?

In addition to passing the exclusive- and regular-use tests, your home office must be either the principal location of that business or a place for regular customer or client meetings.

If your home office is in a separate, unattached structure — a detached garage converted into an office, for example — you don’t have to meet the principal-place-of-business or the deal-with-clients test. As long as you pass the exclusive- and regular-use tests, you can qualify for home business write-offs.

What if your business has just one home office, but you do most of your work elsewhere?

Remember that the requirement is that your home office is your principal place of business, not your principal workplace. As long as you use the home office to conduct your administrative or management chores and you don’t make substantial use of any other fixed location to conduct those tasks, you can pass this test.

If you’re an employee of another company but also have your own part-time business based in your home, you can pass this test even if you spend much more time at the office where you work as an employee.

This rule makes it much easier to claim home office deductions for individuals who conduct most of their income-earning activities somewhere else (such as outside salespeople or tradespeople).

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29 Dr.'s Office ideas | doctor office, office design, chiropractic office

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What qualifies as a business?

As with the regular-use test, whether your endeavors qualify as a business depends on the facts and circumstances. The more substantial the activities, in terms of time and effort invested and income generated, the more likely you are to pass the test.

Making money from your efforts is a prerequisite, but for purposes of this tax break, profit alone isn’t necessarily enough. If you use your den solely to take care of your personal investment portfolio, for example, you can’t claim home office deductions because your activities as an investor don’t qualify as a business.

Taxpayers who use a home office exclusively to manage rental properties may qualify for home office tax status but as property managers rather than investors.

What if I operate a child care or storage facility?

The exclusive-use test doesn’t apply if you use part of your house to:

  • Provide day care services for children, older adults or individuals with disabilities. If you care for children in your home between 7 a.m. and 6 p.m. each day, for example, you can use that part of the house for personal activities the rest of the time and still claim business deductions. To qualify for the tax break, your home care business must meet any applicable state and local licensing requirements.
  • Store product samples or inventory you sell in your business. Assume your home-based business is the retail sale of home-cleaning products and that you regularly use half of your basement to store inventory. Occasionally using that part of the basement to store personal items wouldn’t cancel your home office deduction. To qualify for this exception, your home must be the principal location of your business.

How do I calculate the home office tax deduction?

Your home office business deductions are based on either the percentage of your home used for the business or a simplified square footage calculation.

The most exact way to calculate the business percentage of your house is to measure the square footage devoted to your home office as a percentage of the total area of your home. If the office measures 150 square feet, for example, and the total area of the house is 1,200 square feet, your business percentage would be 12.5%.

An easier calculation is acceptable if the rooms in your home are all about the same size. In that case, you can figure out the business percentage by dividing the number of rooms used in your business by the total number of rooms in the house.

Special rules apply if you qualify for home office deductions under the day care exception to the exclusive-use test.

  • Your business-use percentage must be reduced because the space is available for personal use part of the time.
  • To do that, you compare the number of hours the child care business is operated, including preparation and cleanup time, to the total number of hours in the year (8,760).

Assume you use 40% of your house for a nursing daycare business that operates 12 hours a day, five days a week for 50 weeks of the year.

  • 12 hours x 5 days x 50 weeks = 3,000 hours per year.
  • 3,000 hours ÷ 8,760 total hours in the year = 0.34 (34%) of available hours.
  • 34% of available hours x 40% of the house used for business = 13.6% business write-off percentage.

Simplified square footage method

Beginning with 2013 tax returns, the IRS began offering a simplified option for claiming the deduction. This new method uses a prescribed rate multiplied by the allowable square footage used in the home.

  • For 2021, the prescribed rate is $5 per square foot with a maximum of 300 square feet.
  • If the office measures 150 square feet, for example, then the deduction would be $750 (150 x $5).
  • The space must still be dedicated to business activities.

With either method, the qualification for the home office deduction is determined each year. Your eligibility may change from one year to the next. Finally, please note that only certain expenses such as rent, mortgage interest and property taxes qualify for the deduction, and the deduction is limited to $10,000.

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DOCTORS & TAX DEDUCTIONS: Top Ten [10] Most Over-Looked

By Staff Reporters

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IRS Lists Top 10 Criminal Tax Investigations in 2021 - Small Business Trends

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The most recent numbers show that more than 45 million of us itemized deductions on our 1040s—claiming $1.2 trillion dollars’ worth of tax deductions. That’s right: $1,200,000,000,000!  That same year, taxpayers who claimed the standard deduction accounted for $747 billion. Some of those who took the easy way out probably shortchanged themselves. (If you turned age 65 in 2021 or earlier, remember that you deserve a bigger standard deduction than younger folks.)

Here are our 10 most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket. Good advice for all physicians, nurse and medical professionals, too.

1. State sales taxes

This write-off makes sense primarily for those who live in states that do not impose an income tax. Especially Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Here’s why this is a factor. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-taxing-states, the state and local income tax deduction is usually the better deal.

For those of you in an income-tax free state, there are two ways to claim the sales tax deduction on your tax return. One, you can use the IRS tables provided for your state to determine what you can deduct. In addition, if you purchased a vehicle, boat, airplane, home or did major home renovations, you may be able to add the state sales tax you paid on these items to the amount shown in the IRS tables up to the limit for your state. Or two, you can you can keep track of all of the sales tax you paid throughout the year and use that.

The best way to see what you can deduct is to use the IRS’s Sales Tax Calculator for this. Keep in mind, the total of your itemized deductions for all of your state and local taxes is limited to $10,000 per year.

2. Reinvested dividends

This isn’t really a tax deduction, but it is a subtraction that can save you a lot of money. And it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the stock or mutual fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.

Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of sale to determine your gain—means overpaying your taxes.

3. Out-of-pocket charitable contributions

It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a qualified nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2021, remember to deduct 14 cents per mile.

4. Student loan interest paid by you or someone else

In the past, if parents or someone else paid back a medical school or other loan incurred by a student, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. You may know that you might be eligible to take a deduction but even if someone else pays back the loan, the IRS treats it as though they gave you the  money, and you then paid the debt. So, a student who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by you or by someone else.

5. Moving expenses

While most taxpayers lost the ability to deduct moving expenses beginning in 2018, one main group of people who can still claim their moving expenses to the IRS. Who are they? Military personnel. If you’re an active duty military member who is relocating, you can still deduct these expenses —if you don’t receive reimbursement from the government for the move.

Also, as long as the move is permanent —and your relocation was ordered by the military — you don’t have to pay tax on qualified moving expense reimbursements. So start getting those receipts out now – because you can claim travel and lodging expenses for you and your family, moving household goods, and the costs for shipping your cars and your beloved pets! And that’s good news for the men and women we thank for bravely serving our country.

Sam (1)

6. Child and Dependent Care Tax Credit

A tax credit is so much better than a tax deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.

But it’s easy to overlook the Child and Dependent Care Credit if you pay your child care bills through a reimbursement account at work. For 2020, the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work. Up to $6,000 in care expenses can qualify for the credit, but the $5,000 from a tax favored account can’t be used. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200 using the minimum 20 percent of the expenses. The credit percentage goes up for lower income households.

However, there are big changes for 2021, The American Rescue Plan signed into law on March 11, 2021 brought significant changes to the amount and way that the child and dependent care tax credit can be claimed only for tax year 2021. The new law not only increases the credit, but also the amount of taxpayers that will benefit from the credit’s highest rate and it also makes it fully refundable.  This means that, unlike previous years, you can still get the credit even if you don’t owe taxes. Changes to the Child and Dependent Care Credit that apply only for tax year 2021 (the taxes you file in 2022) include:

  • The highest credit percentage increased from 35% to 50% of qualifying expenses
  • Qualifying child and dependent care expenses increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
  • The adjusted gross income (AGI) level at which the credit percentage is reduced is increased from $15,000 to $125,000

For example, prior to the 2021 tax year, a taxpayer with one qualifying person, $3,000 in qualifying expenses and an AGI of $60,000 would qualify for a nonrefundable credit of approximately $600 (20% x $3,000). By contrast, under the new law for tax year 2021 only, a taxpayer with the same circumstances can potentially claim a refundable credit of approximately $1,500 (50% x $3,000).

Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.

7. Earned Income Tax Credit (EITC)

Millions of lower-income people take this credit every year. However, 25% of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.

The EITC is a refundable tax credit—not a deduction— with maximum amounts for different filing statuses ranging from $1,502 to $6,728 for 2021. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class”—including many medical colleagues and white-collar workers—are now considered “low income” because they:

  • lost a job
  • took a pay cut
  • or worked fewer hours during the year

The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax return, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.

8. State tax you paid last spring

Did you owe taxes when you filed your 2020 state tax return in 2021? Then remember to include that amount with your state tax itemized deduction on your 2021 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments. Beginning in 2018, the deduction for state and local taxes is limited to a maximum of $10,000 per year.

9. Refinancing mortgage points

When you buy a house, you often get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?

Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.

10. Jury pay paid to employer

Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren’t taxed on money that simply passes through your hands.

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SOME TAX BENEFITS: Senior Healthcare Professionals

By Staff Reporters

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See the source image

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Tax planning can be quite a tedious process, but there are benefits for all seniors to make it less taxing. And senor medical professionals should take particular note:

  • Free Advice: IRS-certified volunteers will help older taxpayers with tax return preparation and electronic filing between January 1st and April 15th each year.
  • No Withdrawal Penalties: Anyone aged 59 years or over can withdraw money from an IRA, without incurring the common 10% tax.
  • Catch-Up Contributions: Healthcare Workers aged 50 or older can defer income tax on an extra $6,500 or a total of $26,000 if contributed to a 401(k) plan, resulting in a tax savings of $6,240 for an older worker in the 24% tax bracket.
  • Additional IRA Contribution: Workers age 50 and older can contribute an additional $1,000 to an IRA, or a total of $7,000 in 2020.
  • CITE: https://www.r2library.com/Resource/Title/082610254

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IRS Tax Reduction Issues for Self-Employed Physician Executives

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By Dr. David Edward Marcinko MBA CMP®

SPONSOR: http://www.CertifiedMedicalPlanner.org


INTRODUCTION

Whether you do contract work or have your own small business, tax deductions for the self-employed physician consultant and/or medical executive or nurse consultant, etc., can add up to substantial tax savings.

Welcome Tax Season: https://www.msn.com/en-us/money/taxes/tax-season-2022-irs-now-accepting-tax-returns-what-to-know-before-filing-taxes-about-your-refund/ar-AAT53rR?li=BBnb7Kz


With self-employment comes freedom, responsibility, and a lot of expense. While most self-employed people celebrate the first two, they cringe at the latter, especially at tax time. They might not be aware of some of the tax write-offs to which they are entitled.

When it comes time to file your returns, don’t hesitate to claim the benefits you get for being the boss. As a self-employed success story, you’ve earned them.

FORM 1099 NEC: Form 1099 NEC is one of several IRS tax forms used in the United States to prepare and file an information return to report various types of income other than wages, salaries, and tips. The term information return is used in contrast to the term tax return although the latter term is sometimes used colloquially to describe both kinds of returns.

READ: https://turbotax.intuit.com/tax-tips/self-employment-taxes/how-to-file-taxes-with-irs-form-1099-misc/L3UAsiVBq?tblci=GiC9aWPDzN9yXLpSuE8LDo3YRMDPuoFwO9ycCY6qixKJ8CC8ykEo94-H7prplp7cAQ

CITE: https://www.r2library.com/Resource/Title/082610254

“Many times an overlooked deduction is educational expenses. If one is taking courses or buying research material to be more effective in their work, this can be deductible.”

Individual Retirement Plans (IRAs)

One of the best tax write-offs for the self-employed physician consultant is a retirement plan. A person with no employees can set up an individual 401 (k). “You can contribute $19,500 in 2021 as a 401(k) deferral, plus 25 percent of net income.”

If you have employees, consider a SIMPLE (Savings Incentive Match Plan for Employees) IRA—an IRA-based plan that gives small employers a simplified method to make contributions to their employees’ retirement. As of 2021, an employee may defer up to $13,500 and employees over 50 may contribute an additional $3,000.

“A third retirement plan is Simplified Employee Pension IRA (SEP IRA).” The employer may contribute the lesser of 25 percent of income or $58,000 in 2021. If the employer has eligible employees, an equal percentage of their income must be contributed.

Recall that retirement plans are “absolutely the No. 1 tax deduction. The government is helping fund retirement.”

Business use of home or dwelling

Now, most self-employed taxpayers’ businesses start as home-based businesses. These people need to know portions of business costs are deductible and so “It is very important that you keep track of expenses relating to your housing costs.”

If your gross income from your business exceeds your total expenses, then you can deduct all of your expenses related to the business use of your home. If your gross income is less than your total expenses, your deduction will be limited to the difference between your gross income and the sum of all business expenses you would pay if the business was not in your home. Those expenses could include telephone lines, the Internet, and other costs to do business.

You must also have a home office that is truly used for work and the Internal Revenue Service may require you to document this.

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Deducting automobile expenses

If you travel for business, even short distances within your own city, you may deduct the dollar value of business miles traveled on your tax return. The taxpayer may file the actual expense s/he incurred, or use the standard mileage rate prescribed by the IRS, which is 56 cents as of 2021. The IRS allowable mileage rates should be checked every year as they can change.

“If you decide to use actual car expenses, be sure to include payments, depreciation, registration, insurance, garage rent, licenses, repairs and maintenance, and parking and toll fees.” AND, “If you decide to use the standard mileage rate, it would be in your best interest to keep a log—daily, weekly or monthly—of miles driven to distinguish personal use from business use.”

Depreciation of property and equipment

Some self-employed people may purchase property and equipment for a business. If they expect that property to last longer than one year, it should be depreciated on the tax return.

Claims regarding property, according to the IRS, must meet the following criteria: You must own the property and it must be used or held to generate income. The property should have an estimated useful life, meaning you should be able to guess how long you can generate income with it. It may not have a useful life of one year or less, and may not be purchased and disposed of in the same year.

Certain repairs on property used for business may also be deducted.

Educational expenses

Any educational expense is potentially tax-deductible.

“Many times an overlooked deduction is educational expenses. “If one is taking courses or buying research material to be more effective in their work, this can be deductible.”

Think about any books, web courses, local college courses, or other classes or materials that you have purchased to improve your job or business. It’s easy to forget a work-related webinar or business e-book that was purchased online, so remember to save e-receipts.

Also recall that subscriptions to trade or professional publications and donations to business organizations, both of which are frequently necessary for the continuation and growth of your business.

Other areas to explore

Other deductions that can be easily missed are advertising and promotional expenses, banking fees, and air, bus, or train fare. Restaurant meals and other entertainment costs may be written off as long as they are necessary business expenses.

And, consider health insurance premiums, which in most cases represent a credit rather than a tax deduction. “A credit goes directly against one’s taxes, rather than a reduction of income.”

Regardless of which expenses you discover that you may write off, the most important thing is to keep accurate records throughout the year. Save receipts, including e-mail receipts, and file or log them so you have easy access to them at tax time. Not only does keeping receipts, mileage logs, and other expense records make filing taxes easier, but it also facilitates a system that allows you to track changes from year to year.

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Long-term tax-saving strategies

Don’t just look at last-minute write-offs when considering self-employment tax deductions. Think about laying down some long-term strategies for money savings from year to year—particularly if you are a high earner.

“Accountants typically tell you what you have to pay but they don’t always tell you strategies to reduce your payments.”

To reduce your gross taxable income, consider setting up a defined-benefit pension plan. This plan is based on your age and income: The older you are and the higher your earnings, the more you are allowed to contribute. An alternative plan is an age-weighted profit-sharing plan, which is similar and can benefit those who have several employees.

Another strategy for high-earning business owners who own their own building through a limited liability company or similar business structure is to pay themselves rent. This rent is used to pay down the mortgage, but it is also considered a business expense for tax purposes.

Self-employed professionals required to have liability insurance should consider setting up their own insurance company. A captive insurance company is one that insures the risks of the business—or businesses, in the case of a cooperative. Its premiums can be tax-deductible.

But, if money accumulates and claims are minimal, the money taken out is taxable under capital gains. This is not a retirement strategy, but that it can save you money by allowing you to “pay yourself” instead of an insurance company and still deduct the premiums.

Assessment

With any of these more complicated, long-term strategies, consult with a business attorney, CPA/EA or financial planner to ensure you have the best plan possible for your business.

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2021 TAXES: 8 Things All Physicians Must Know

By Staff Reporters

CITE: https://www.r2library.com/Resource/Title/082610254

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Here are eight things to keep in mind as you prepare to file your 2021 taxes.

1. Income tax brackets have shifted a bit

There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2021, the following rates and income ranges apply:

Tax rateTaxable income brackets: Single filersTaxable income brackets: Married couples filing jointly (and qualifying widows or widowers) 
10%$0 to $9,950$0 to $19,900
12%$9,951 to $40,525$19,901 to $81,050
22%$40,526 to $86,375$81,051 to $172,750
24%$86,376 to $164,925$172,751 to $329,850
32%$164,926 to $209,425$329,851 to $418,850
35%$209,426 to $523,600$418,851 to $628,300
37%$523,601 or more$628,301 or more

Source: Internal Revenue Service

2. The standard deduction has increased slightly

After an inflation adjustment, the 2021 standard deduction has increased slightly to $12,550 for single filers and married couples filing separately and $18,800 for single heads of household, who are generally unmarried with one or more dependents. For married couples filing jointly, the standard deduction has risen to $25,100.

3. Itemized deductions remain the same

For most filers, taking the higher standard deduction is more practical and saves the hassle of keeping track of receipts. But if you have enough tax-deductible expenses, you might benefit from itemizing.

The following rules for itemized deductions haven’t changed much for 2021, but they’re still worth pointing out.

  • State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000. 
  • Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017, will still be able to deduct the interest on that loan. 
  • Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2021. 
  • Charitable donations: The cash donation limit of 100% of AGI remains in place for 2021, if donations were made to operating charities.1
  • Miscellaneous deductions: No miscellaneous itemized deductions are allowed. 
     

4. IRA and 401(k) contribution limits remain the same 

The traditional IRA and Roth contribution limits in 2021 remain the same as in 2020. Individuals can contribute up to $6,000 to an IRA, and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. If you’re able to max out your IRA, consider doing so—you may qualify to deduct some or all of your contribution.

The 2021 contribution limit for 401(k) accounts also stays at $19,500. If you’re age 50 or older, you qualify to make an additional $6,500 catch-up contribution as well.

5. You can save a bit more in your health savings account (HSA) 

For 2021, the max you can contribute into an HSA is $3,600 for an individual (up $50 from 2020) and $7,200 for a family (up $100). People age 55 and older can contribute an extra $1,000 catch-up contribution.

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA

6. The Child Tax Credit has been expanded 

For 2021, the American Rescue Plan Act (ARPA) has temporarily modified the Child Tax Credit requirements and amounts for household incomes below $75,000 for single filers and $150,000 for married filing jointly. 

First, the ARPA has raised the age limit for dependents from 16 to 17. In addition, the child tax credit has increased from $2,000 to $3,000 for children age 6 through 17 and up to $3,600 for children under 6. If your income exceeded the above limits but was below $200,000 for single filers or $400,000 for joint filers, you’ll receive the standard child tax credit of $2,000 per child. 

The IRS began sending monthly advance Child Tax Credit payments to eligible families in July and sent its last advance in December. If your dependent didn’t qualify for the child tax credit, you may still qualify for up to $500 of tax credits under the “credit for other dependents” (see IRS Publication 972 for more details). Tax credits, which reduce the tax you owe dollar for dollar, are generally better than deductions, which reduce your taxable income. 

7. The alternative minimum tax (AMT) exemption has gone up

Until the AMT exemption enacted by the Tax Cuts and Jobs Act expires in 2025, the AMT will continue to affect mostly households with incomes over $500,000. Still, the AMT has investment implications for some high earners. 

For 2021, the AMT exemptions are $73,600 for single filers and $114,600 for married taxpayers filing jointly. The phase-out thresholds are $1,047,200 for married taxpayers filing a joint return and $523,600 for all other taxpayers.  

8. The estate tax exemption is even higher

The estate and gift tax exemption, which is indexed to inflation, has risen to $11.7 million for 2021. But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn’t act. 

The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, stays at $15,000 per recipient.

Don’t get caught off guard

As you prepare to file your taxes for 2021, here are a few additional items to consider. 

  • If you’re not retired, the 10% early withdrawal penalty that was waived for retirement account distributions in 2020 has been reinstated for 2021.
  • If you’re age 72 or older, make sure you’ve taken your required minimum distribution (RMD) from your retirement accounts or else you face a 50% penalty on any undistributed funds (unless it’s your first RMD, in which case, you can wait until April 1, 2022).

If you haven’t contributed to your retirement accounts already, now is the time. Review your earnings for the year and take advantage of any deductions that can lower your tax bill. Also, keep an eye on Washington for any last-minute tax changes that could affect your return before you file. Tax season will be here before you know it, and it’s never too early to start preparing.

1Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). You can use the Tax Exempt Organization Search tool on IRS.gov to check an organization’s eligibility.

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UPDATE: Markets and Medicine

By Staff Reporters

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The Federal Reserve announced that it will stop buying bonds about three months earlier than initially planned. The Fed now plans to trim its monthly Treasury and mortgage-backed security purchases by $30 billion a month starting next month. The new pace is expected to put an end to bond buying by March.

CITE: https://www.r2library.com/Resource/Title/0826102549

The Fed also announced that it would leave interest rates unchanged at near-zero percent. The announcement paves the way for three interest rate hikes by the end of 2022, which could weigh on tech and growth stocks.

UPDATE: https://www.msn.com/en-us/money/news/tech-takes-a-beating-as-central-banks-pull-back/vi-AARTp0n

  • Markets: Stocks reversed their post-Federal Reserve announcement rally with a stinker of a day—especially tech stocks. Semiconductor companies like AMD and Nvidia got particularly thwacked.
  • Covid: The CDC recommended adults use Moderna’s and Pfizer’s Covid vaccines over J&J’s due to the risk of developing rare but serious blood clots.

MORE: https://www.msn.com/en-us/money/markets/stocks-fall-as-investors-digest-feds-latest-move/vi-AARTm2C

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Marriage Penalty Fading – Single Penalty Rising

A Curated Report

By Staff Reporters

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The marriage penalty has faded in recent years, particularly after the 2017 Republican tax cuts that targeted high incomes. But the singles penalty remains — the tax code is still written to benefit people in 1950s middle-class marriages who own their homes. That’s not great for the millions of households who are shouldering other cost burdens around single life.

CITE: https://www.r2library.com/Resource/Title/0826102549

Progressive tax codes are intended, at least theoretically, to ensure equitable distribution of the costs of maintaining civilization. They should (again, theoretically) be readjusted when a certain group begins to shoulder a disproportionate amount of that burden — like, for instance, single or divorced people. That’s not what’s happened, not for couples with two earners and not for the growing number of single or solo households. The reality of how people live and who works has changed. The policy has not kept pace.

The same principle holds true for Social Security, which was created first and foremost as a means of protecting the elderly from living out their final years in the literal poorhouse. The idea was simple: You and your employers pay in part of your salary now, and when you retire, you have enough to survive.

READ FULL REPORT HERE: https://www.vox.com/the-goods/22788620/single-living-alone-cost

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Two Vital IRS Audit Flags for Physicians

For Doctors and all Investors

By Hayden Adams

Image result for irs

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Red Flag #1: Under reporting income

Generally speaking, all income is taxable unless it’s specifically excluded, as is the case with certain gifts and inheritances. In most instances, the income you earn will be reported to both you and the government on an information return, such as a Form 1099 or W-2. If the income you report doesn’t match the IRS’s records, you could face problems down the road—so be sure you include the income from all of the following forms that are applicable to your situation:

  • 1099-B: The form on which financial institutions report capital gains.
  • 1099-DIV: The form on which financial institutions report dividends.
  • 1099-MISC: The form used to report various types of income, such as royalties, rents, payments to independent contractors, and numerous other types of income.
  • 1099-R:The form on which financial institutions report withdrawals from tax-advantaged retirement accounts.
  • Form 1099-INT: The form on which financial institutions report interest income.
  • Form SSA-1099:The form on which the Social Security Administration reports Social Security benefits (a portion of which may be taxable, depending on your level of income).
  • Form W-2:The form on which employers report total annual compensation, payroll taxes, contributions to retirement accounts, and other information.

If you receive an inaccurate statement of income, immediately contact the responsible party to request a corrected form and have them resend the documents to both you and the IRS as soon as possible to avoid delaying your tax return. Also, be aware that you must report income for which there is no form, such as renting out your vacation home.

CITE: https://www.r2library.com/Resource/Title/0826102549

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Red Flag #2: Misreporting investment gains

When you sell an investment, you’ll need to know both the cost basis (what you paid for the investment) and the sale price to determine your net gain or loss. The cost basis of your investment may need to be adjusted to account for commissions, fees, stock splits, or other events, which could help reduce your taxable gain or increase your net loss.

Financial institutions are required to adjust your investments’ cost basis and provide that information on a Form 1099. However, brokerages aren’t required to report the cost basis for investments purchased prior to a certain date, which means you’ll be responsible for supplying that information (see the table below). Be sure to keep records of all investment purchases and sales—even those for which your brokerage is responsible.

Your reporting responsibility

Depending on security type and date of purchase, you—rather than your brokerage—could be responsible for reporting the cost basis of your investment to the IRS.

CITE: https://www.r2library.com/Resource/Title/0826102549

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Security typeInvestor’s responsibility if
Stocks (including real estate investment trusts)Acquired before 01/01/2011
Mutual funds, exchange-traded funds, and dividend reinvestment plansAcquired before 01/01/2012
Other specified securities, including most bonds, derivatives, and options

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Clue-Less Physicians and Taxes

OVER HEARD IN THE DOCTOR’S LOUNGE

Dr.s' Lounge دكتورز لونج - Identity Design by YaStudio

A PHYSICIAN POLL

[IRS Tax Day – May 17, 2021]

“I read a poll on SERMO (a doctor-only web forum) asking what percentage of income was paid in taxes. The lowest option was <20%.  I thought it ridiculous since I make about an average salary and paid about 8% in Federal tax, 3.5% in payroll tax, and 4% in state income taxes. So, I spoke up about it. 

After a few days of correspondence, it became evident that most doctors have no idea what they pay in taxes, or that they pay far too much in taxes.  For example, of 58 responses on the poll, I was the only one who paid less than 20% in taxes.  Keep in mind that more than half of doctors make less money than I do.

I found it hilarious that 4 doctors thought they paid more than 50% in taxes.  I can’t quite figure out how to pull that off; even if you are single, make a ton of money, take a standard deduction, are self-employed, and pay ridiculous state and local income taxes. Really … more than 50%!  You’re either mistaken or stupid … hopefully; just mistaken.

Or is the problem simply that doctor’s have no idea what their effective tax rate is”?

DJ. Morgane DO

[Internal Medicine]

Your thoughts are appreciated.

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How You Can Deduct Your Medical Expenses

Reduce Taxes, Bunch Deductions

By Rick Kahler MSFS CFP®

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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.

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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™

The Home Office Tax Deduction Explained

What it is – How it works?

By Dr. David Edward Marcinko MBA CMP™
http://www.CertifiedMedicalPlanner.org

A taxpayer’s business use of his or her home may give rise to a deduction for the business portion of expenses related to operating the home.

The basic requirement:

1. There must be a specific room or area that is set aside for and used exclusively on a regular basis as:
a. The principal place of any business, or
b. A place where the taxpayer meets with patients, clients or customers in the normal course of their trade or business, or
c. A separate structure that is used in the taxpayer’s trade or business and is not attached to their house or residence.

2. An employee can take a home office deduction if he or she meets the regular and exclusive use test and the use is for the convenience of the employer.

Deductions

Deductible expenses include business portions of mortgage interest, property taxes, depreciation, repairs and maintenance to the overall home that help the business use area, janitorial services or maid, utilities, insurance as well as other expenses directly related to the operating the remainder of the home.

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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.

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More on Recent Interest Rate Hikes

Impending IRs and … the Economy

By http://www.MCOL.com

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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:

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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Update on the FOMC and Interest Rates

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What if the Fed DOESN’T Raise Rates?

Michael-Gayed-sepia

 

 

 

 

 By Michael A. Gayed CFA

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With odds high for the Federal Reserve’s first rate hike in nearly a decade, and seemingly everyone predicting that rising rates are coming in the next few weeks, why in the world is the yield curve not steepening aggressively?

Something curious is happening

There is a mistaken notion out there that if the Fed raises rates, the cost of capital on everything is going to rise.  This is far too simplistic a way of viewing the bond market.  If the Fed raises rates and the market perceives it as being too early, then longer duration bond yields likely would actually fall and credit spreads likely would widen.  In other words, some rates could fall because the Fed is raising short rates.

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gv

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In a healthy environment, Fed hiking would coincide with a steepening yield curve, as growth and inflation expectations become more aggressively priced in. As of late, it seems as though the bond market vastly disagree with the Fed’s December timing.

Of course all this could change, as probabilities continuously change

So, if the Fed decides not to raise rates, and the yield curve continues to flatten, then something very serious may be underway in terms of 2016 economic expectations.  It does seem plausible that from a cycle perspective, the era for passive buy and hold investing in large-cap stocks is nearing its end, allowing for more active alpha opportunities to present themselves.

This would likely translate into more volatility in equities, which we believe our alternative Morningstar 4 Star overall rated ATAC Inflation Rotation Fund (Ticker: ATACX, rating as of 9/30/15 among 234 Tactical Allocation Funds derived from a weighted average of the fund’s 3-year risk-adjusted return measures) is distinctly qualified to handle given our focus on being defensive in Treasuries at the right time.

Having said that, despite my own personal believe the Fed will raise rates, it is concerning to see how longer duration bonds are behaving.

The key needs to be a comeback in commodities and emerging market stocks

For the yield curve in the United States to steepen, and for the Federal Reserve to “get it right,” likely a surprise recovery is needed in cyclical growth sentiment.  Commodities and emerging markets are among the most sensitive areas of the investable landscape to that, so it stands to reason that their movement would show the whites of the eyes of that happening.  The issue however is that every time is looks like budding momentum is about to become more entrenched, that momentum quickly reverses and creates a false positive on rising growth expectations.

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gears

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Recent manufacturing data confirms that not much has changed on the growth side of the equation.  So far, broader equities seem to not care given historically favorable December seasonality.  That doesn’t mean one should not be considering this in an overall asset allocation policy.

Complicating-The European Central Bank

In many ways, crushing the Euro through more stimulus has the same effect as Federal Reserve tightening precisely because a rising Dollar is a contractionary force to exports.  European stimulus is Fed tightening IF it results in a Dollar super-spike.  Should that occur, the Fed would be more likely that not to not raise rates and actually do another round of stimulus.

Assessment

Insane sounding?  Maybe.  But; so is an environment where no amount of money printing seems to be accelerating the economy.

ABOUT

The ATAC Rotation Mutual Funds are managed by Pension Partners, LLC, an independent registered investment advisor.  The strategies were developed by Co-Portfolio Managers Edward M. Dempsey, CFP® and Michael A. Gayed, CFA. The Funds rotate offensively or defensively based on historically proven leading indicators of volatility, with the goal of taking less risk at the right 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:

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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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?]

***

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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Financial Planning MDs 2015

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

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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TEXTBOOK

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

 

Low Interest Rate Traps

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IRs at Historic Lows

[By David K. Luke MIM CMP™ http://www.NetWorthAdvice.com]

David K. LukeWhile our economy is still in a “Land of Make Believe”, despite the “mini-crash” today and with interest rates still at historic low levels, now is a good time to remind ourselves of a couple tempting financial missteps:

Taking On New Debt

Debt is Debt!

When you borrow money to buy that second home, nice boat, or remodel the kitchen, it is easier to justify considering the lower monthly payments at 3 to 6%. That $110,000 Sea Ray 300 Sundeck boat you have always wanted is only $729 a month (240 months @ 5% no down). Affordable, right?

Whether or not it easily fits within your budget is one thing, but the low interest rate does not negate the fact that you now have an $110,000 liability on your Balance Sheet. Depending on depreciation and resale factors, you may also be draining your net worth with such a purchase if you end up “upside down” on the value.

Neglecting Existing Debt

Your mortgage is under 3.5%. Your practice just scored a low interest rate on a needed new piece of medical equipment. Your local bank just quoted you 1.99% on a new car loan. Life is good for medical professionals!

Perhaps because the emotional benefits of paying off debt is difficult to quantify, paying off low interest rate loans is not usually a priority for most physicians. Professor Obvious states: “Once a debt is paid, you have freed yourself of future recurring interest costs and an outstanding obligation.” While this seems like a trite concept, the point is that funds that have been previously used to pay interest, no matter how low the rate was, can be used for other purposes. Unfortunately physicians and financial advisors, CPAs, estate planning attorneys tend to be over analytical and miss the “happiness factor” of getting out of debt and owning your abode and other assets. For the strictly number-oriented person or over analytical physician, this can be a sticking point. After all, why pay off a 3.5 % mortgage (that after tax is costing you around 2.5% or less)?

***

Euro Debt

***

A physician would never remortgage their home to invest in a mutual fund. In fact, it is now accepted by FINRA, the SEC, and other regulatory bodies in the financial services industry that a financial advisor that encourages a client to leverage principle residence equity (take out a 1st or 2nd mortgage) to make a security investment is akin to committing malpractice. Yet I hear the rationale that funds are being deployed to other “investments” rather than paying off a low interest rate mortgage.

Life Is Good!

From a financial planning perspective, avoiding new debt and retiring existing debt obligations as soon as reasonable gives a physician and his or her family more options. Taking a locum tenens position, retiring early, and working less hours are just a few of these options.

Assessment

With a little consideration and restraint on your personal debt situation, even at these low interest rates, financial freedom and the resulting empowerment is achievable earlier.

Conclusion

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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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How a Doctor’s Job Seach May Lower Taxes

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Same line-of-work Tax Tips

By Andrew D. Schwartz CPA

Andrew SchwartzSummer is often a time when doctors and other people make major life decisions. Common events include buying a home, getting married or changing jobs; especially for hospitalist physicians.

If you’re looking for a new job in your same line of work, you may be able to claim a tax deduction for some of your job hunting expenses.

The Tax Tips

Here are seven things the IRS wants you to know about deducting these costs:

1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.

2. You can deduct employment and job placement agency fees you pay while looking for a job.

3. You can deduct the cost of preparing and mailing copies of your résumé to prospective employers.

4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.

5. You can’t deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.

6. You can’t deduct job search expenses if you’re looking for a job for the first time.

7. You usually will claim job search expenses as a miscellaneous itemized deduction. You can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.

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jobs

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Conclusion

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How the IRS’s Nonprofit Division Got So Dysfunctional

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The IRS Controversy

By Kim Barker and Justin Elliott

ProPublica, May 17, 2013, 5:14 p.m.

The IRS division responsible for flagging Tea Party groups has long been an agency afterthought, beset by mismanagement, financial constraints and an unwillingness to spell out just what it expects from social welfare nonprofits, former officials and experts say.

The controversy that erupted in the past week, leading to the ousting of the acting Internal Revenue Service commissioner, an investigation by the FBI, and congressional hearings that kicked off Friday, comes against a backdrop of dysfunction brewing for years.

Moves launched in the 1990s were designed to streamline the tax agency and make it more efficient. But they had unintended consequences for the IRS’s Exempt Organizations division.

Checks and balances once in place were taken away. Guidance frequently published by the IRS and closely read by tax lawyers and nonprofits disappeared. Even as political activity by social welfare nonprofits exploded [1] in recent election cycles, repeated requests for the IRS to clarify exactly what was permitted for the secretly funded groups were met, at least publicly, with silence.

All this combined to create an isolated office in Cincinnati, plagued by what an inspector general this week described [2] as “insufficient oversight,” of fewer than 200 low-level employees responsible for reviewing more than 60,000 nonprofit applications a year.

A Major Mistake

In the end, this contributed to what everyone from Republican lawmakers to the president says was a major mistake: The decision by the Ohio unit to flag for further review applications from groups with “Tea Party” and similar labels. This started around March 2010, with little pushback from Washington until the end of June 2011.

“It’s really no surprise that a number of these cases blew up on the IRS,” said Marcus Owens, who ran the Exempt Organizations division from 1990 to 2000. “They had eliminated the trip wires of 25 years.”

Of course, any number of structural fixes wouldn’t stop rogue employees with a partisan ax to grind. No one, including the IRS [3] and the inspector general [4], has presented evidence that political bias was a factor, although congressional and FBI investigators are taking another look.

But what is already clear is that the IRS once had a system in place to review how applications were being handled and to flag potentially problematic ones. The IRS also used to show its hand publicly, by publishing educational articles for agents, issuing many more rulings, and openly flagging which kind of nonprofit applications would get a more thorough review.

All of those checks and balances disappeared in recent years, largely the unforeseen result of an IRS restructuring in 1998, former officials and tax lawyers say.

“Until 2008, we had a dialogue, through various rulings and cases and the participation of various IRS officials at various ABA meetings, as to what is and what is not permissible campaign intervention,” said Gregory Colvin, the co-chair of the American Bar Association subcommittee that dealt with nonprofits, lobbying, and political intervention from 1991 to 2009.

“And there has been absolutely no willingness in the last five years by the IRS to engage in that discussion, at the same time the caseload has exploded at the IRS.”

IRS

Stone Walling

The IRS did not respond to requests for comment on this story.

Social welfare nonprofits, which operate under the 501(c)(4) section of the tax code, have always been a strange hybrid, a catchall category for nonprofits that don’t fall anywhere else. They can lobby. For decades, they have been allowed to advocate for the election or defeat of candidates, as long as that is not their primary purpose. They  also do not have to disclose their donors.

Social welfare nonprofits were only a small part of the exempt division’s work, considered minor when compared with charities. When the groups sought IRS recognition, the agency usually rubber-stamped them. Out of 24,196 applications for social welfare status between 1998 and 2009, the exempt organizations division rejected only 77, according to numbers compiled from annual IRS data books.

Into this loophole came the Supreme Court’s Citizens United decision in January 2010, which changed the campaign-finance game [5] by allowing corporate and union spending on elections.

Sensing an opportunity, some political consultants started creating social welfare nonprofits geared to political purposes. By 2012, more than $320 million in anonymous money poured into federal elections.

A couple of years earlier, beginning in 2010, the Cincinnati workers had flagged applications of tiny Tea Party groups, according to the inspector general, though the groups spent almost no money in federal elections.

Main Question

The main question raised by the audit is how the Cincinnati office and superiors in Washington could have gotten it so wrong. The audit shows no evidence that these workers even looked at records from the Federal Election Commission to vet much larger groups [6] that spent hundreds of thousands and even millions [7] in anonymous money to run election ads.

The IRS Exempt Organizations division, the watchdog for about 1.5 million nonprofits, has always had to deal with controversial groups. For decades, the division periodically listed red flags that would merit an application being sent to the IRS’s Washington, D.C., headquarters for review, said Owens, the former division head.

In the 1970s, that meant flagging all applications for primary and secondary schools in the south facing desegregation. In the 1980s, during the wave of consolidation in the health-care industry, all applications from health-care nonprofits needed to be sent to headquarters. The division’s different field offices had to send these applications up the chain.

“Back then, many more applications came to Washington to be worked — the idea was to have the most sensitive ones come to Washington,” said Paul Streckfus, a former IRS lawyer who screened applications at headquarters in the 1970s and founded the industry publication EO Tax Journal [8] in 1996.

Because this list was public, lawyers and nonprofits knew which cases would automatically be reviewed.

“We had a core of experts in tax law,” recalled Milton Cerny, who worked for the IRS, mainly in Exempt Organizations, from 1960 to 1987. “We had developed a broad group of tax experts to deal with these issues.”

In the 1980s, the division issued many more “revenue rulings” than issued in recent years, said Cerny, then head of the rulings process. These revenue rulings set precedents for the division. Revenue rulings along with regulations are basically the binding IRS rules for nonprofits.

“We would do a revenue ruling, so the public and agents would know,” Cerny said. “Over the years, it apparently was felt that a revenue ruling should only be published at an extraordinary time. So today you’re lucky if you get one a year. Sometimes it’s less than that. It’s amazing to me.”

Other checks and balances had existed too. Not only were certain kinds of applications publicly flagged, there was another mechanism called “post-review,” Owens said. Headquarters in Washington would pull a random sample every month from the different field offices, to see how applications were being reviewed. There was also a surprise “saturation review,” once a year, for each of the offices, where everything from a certain time period needed to be sent to Washington for another look.

So internally, the division had ways, if imperfect, to flag potential problems. It also had ways of letting the public know what exactly agents were looking at and how the division was approaching controversial topics.

For instance, there was the division’s “Continuing Professional Education,” or CPE, technical instruction program. These articles were supposed to be used for training of line agents, collecting and putting out the agency’s best information on a particular topic — on, say, political activity [9] by social welfare nonprofits in 1995.

“People in a group would write up their thoughts: ‘Here’s the law,’” said Beth Kingsley, a Washington lawyer with Harmon, Curran, Spielberg & Eisenberg who’s worked with nonprofits for almost 20 years. “It wasn’t pushing the envelope. It was, ‘This is how we see this issue.’ It told us what the IRS was thinking.”

The system began to change in the mid-1990s. The IRS was having trouble hiring people for low-level positions in field offices like New York or Atlanta — the kinds of workers that typically reviewed applications by nonprofits, Owens said.

In Cincinnati

The answer to this was simple: Cincinnati.

The city had a history of being able to hire people at low federal grades, which in 1995 paid between $19,704 and $38,814 a year — almost the same as those federal grades paid in New York City or Chicago. (Adjusted for inflation, that’s between $30,064 and $59,222 now.)

“That was well below what the prevailing rate was in the New York City area for accountants with training,” Owens said. “We had one accountant who just had gotten out of jail — that’s the sort of people who would show up for jobs. That was really the low point.”

So in 1995, the Exempt Organizations division started to centralize. Instead of field offices evaluating applications for nonprofits in each region, those applications would all be sent to one mailing address, a post-office box in Covington, Ky. Then a central office in Cincinnati would review all the applications.

Almost inadvertently, because people there were willing to work for less than elsewhere, Cincinnati became ground zero for nonprofit applications.

For the time being, the checks remained in place. The criteria for flagged nonprofits were still made public. The Continuing Professional Education text was still made public. Saturation reviews and post reviews were still in place.

But by 1998, after hearings in which Republican Senator Trent Lott accused the IRS of “Gestapo-like” tactics, a new law mandated the agency’s restructuring. In the years that followed, the agency aimed to streamline. For most of the ‘90s, the IRS had more than 100,000 employees. That number would drop every year, to slightly less than 90,000 [10] by 2012.

Change Will Come

Change also came to the Exempt Organizations division.

The IRS tried to remove discretion from lower-level employees around the country by creating rules they had to follow. While the reorganization was designed to centralize power in the agency’s Washington headquarters, it didn’t work out that way.

“The distance between Cincinnati and Washington was such that soon Cincinnati became a power center,” said Streckfus, the former IRS lawyer.

Following reorganization, many highly trained lawyers in Washington who previously handled the most sensitive nonprofit applications were reassigned to focus on special projects, he said.

Owens, who left the IRS in 2000 but stayed in touch with his old division, said the focus on efficiency meant “eliminating those steps deemed unimportant and anachronistic.”

In 2003, the saturation reviews and post reviews ended, and the public list of criteria that would get an application referred to headquarters disappeared, Owens said. Instead, agents in Cincinnati could ask to have cases reviewed, if they wanted. But they didn’t very often.

“No one really knows what kinds of cases are being sent to Washington, if any,” Owens said. “It’s all opaque now. It’s gone dark.”

By the end of 2004, the Continuing Professional Education articles stopped [11].

Recommendations [12] from an ABA task force for IRS guidelines on social welfare nonprofits and politics that same year were met with silence.

Even the IRS’s Political Activities Compliance Initiative, which investigated [13] complaints of charities engaged in politics — primarily churches — closed up shop in early 2009 after less than five years, without any explanation.

Both before and after the changes, the Exempt Organizations division has been a small part of the IRS, which is focused on collecting money and chasing delinquent taxpayers.

US capitol

IRS Employee Count in 2012

Rulings and Agreements, the division that handles applications of all nonprofits, accounted for less than 0.5 percent of all IRS employees in 2012.

Source: IRS Data Books [14], IRS Exempt Organizations Annual Report [15]

Of the 90,000 employees at the agency last year, only 876 worked in the Exempt Organizations’ division, or less than 1 in 1,000 employees.

Of those, 335 worked in the office that actually handles applications of nonprofits.

Most of those — about 300 — worked in Cincinnati, Streckfus estimates. The rest were at headquarters, in Washington D.C.

In Cincinnati, the employees’ primary job was sifting through the applications of nonprofits, making determinations as to whether a nonprofit should be recognized as tax-exempt. In a press release [16] Wednesday, the IRS said fewer than 200 employees were responsible for that work.

In 2012, these employees received 60,780 applications. The bulk of those — 51,748 — were from groups that wanted to be recognized as charities.

But the number of social welfare nonprofit applications spiked from 1,777 in 2011 to 2,774 in 2012. It’s impossible to say how many of those groups indicated whether they would engage in politics, or why the number of applications increased. The IRS said Wednesday that it “has seen an increase in the number of tax-exempt organization applications in which the organization is potentially engaged in political activity,” including both charities and social welfare nonprofits, but didn’t specify any numbers.

Total 501(c)(4) [17] Nonprofit Applications from 2002 to 2012

From 2011 to 2012, applications increased by more than 50 percent.

Source: IRS Data Books [14]

On average, one employee in Cincinnati would be responsible for going through roughly one application per day.

Some would be easy — say, a local soup kitchen. But to evaluate whether a social welfare nonprofit has social welfare as its primary purpose, the agent is supposed to use a “facts and circumstances” test. There is no checklist. Reviewing just one social welfare nonprofit could take days or weeks, to look through a group’s website, track down TV ads and so forth.

“You’ve got 60,000 applications coming through, and it’s hard to do that with the number of agents looking at them,” said Philip Hackney [18], who was in the IRS’s chief counsel office in Washington between 2006 and 2011 but said he wasn’t involved in the Tea Party controversy. “The reality is that they cannot do that, and that’s why you’re seeing them pick stuff out for review. They tried to do that here, and it burned them.”

As we have previously reported, last year the same Cincinnati office sent ProPublica [19] confidential applications from conservative groups. An IRS spokeswoman said the disclosures were inadvertent.

The Commissioner Speaks

Mark Everson, IRS commissioner for four years during the George W. Bush administration, said he believed the fact that the division is understaffed is relevant, but not an excuse for what happened. “The whole service is under-funded,” he pointed out.

And Dan Backer, a lawyer in Washington who represented six of the groups held up because of the Tea Party criteria, said he doesn’t buy the notion that low-level employees in Cincinnati were alone responsible.

“It doesn’t just strain credulity,” Backer said. “It broke credulity and left it laying on the road about a mile back. Clearly these guys were all on the same marching orders.”

The inspector general’s audit was prompted last year after members of Congress, responding to complaints by Tea Party groups, asked for it.

Like former officials interviewed by ProPublica, the audit suggests that officials at IRS headquarters in Washington were unable to manage their subordinates in Cincinnati. When Lois Lerner, the Exempt Organizations division director in Washington, learned [20] in June 2011 about the improper criteria for screening applications, she instructed that they be “immediately revised.”

But just six months later, Cincinnati employees changed [21] the revised criteria to focus on “organizations involved in limiting/expanding government” or “educating on the Constitution.” They did so “without executive approval.”

“The story people are overlooking is: Congress is complaining about underpaid, overworked employees who are not adequately trained,” said Bryan Camp, a former attorney in the IRS chief counsel’s office.

Assessment

In the end, after all the millions of anonymous money spent by some groups to elect candidates in 2012, after all [22] the groups [23] that said in their applications that they would not spend money to elect candidates before doing exactly that, after the Cincinnati office flagged conservative groups, the IRS approved almost all the new applications. Only eight applications were denied.

Source: http://www.propublica.org/article/how-irs-nonprofit-division-got-so-dysfunctional

Conclusion

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How Doctors Can Avoid an IRS Tax Audit

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Resources and Tax Tps for 2013

Dr. David Edward Marcinko MBA

www.CertifiedMedicalPlanner.org

Dr. MarcinkoTax season is again upon us!

So, here are a few links to help you avoid an IRS audit.

Got Audited?

But, if it happens to you, keep calm and carry on. An audit isn’t the end of the world. The IRS has a video series explaining the whole audit process. Usually, it’s just a notice or phone call asking for details about a few numbers on your return. It rarely requires an in-person interview or an agent showing up at your door.

But, if you do get selected for an audit, don’t forget about Form 911 (.pdf file). It’s used to request help from the Taxpayer Advocate Service. The number might seem like a joke, but the service is an independent department of the IRS that helps people who can’t afford professional representation.

And … Even More Links:

Internal Revenue Servicewww.irs.govSocial Security Administrationwww.ssa.gov – Mass. Dept. of Revenue – www.mass.gov/dor – Mass. Attorney General – www.mass.gov/ag – NIH Loan Repayment Program – http://www.lrp.nih.gov/index.aspx

Other State Departments of Revenue/Taxation

California – http://www.boe.ca.gov – Connecticut – www.ct.gov/drs/site/default.asp – Illinois – http://www.revenue.state.il.us – Maine – http://www.state.me.us/revenue – New Hampshire – http://www.nh.gov/revenue/index.htm – New York – www.tax.state.ny.us – New Jersey – http://www.state.nj.us/treasury/taxation – Rhode Island – www.tax.state.ri.us – Vermont –http://www.state.vt.us/tax/index.shtml

Assessment

Enjoy, and profit from these links and resources.

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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