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How You Can Deduct Your Medical Expenses

Reduce Taxes, Bunch Deductions

By Rick Kahler MSFS CFP®

***

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

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

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

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

Example:

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

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

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

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

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

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

·         Health and long-term care insurance premiums

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

·         Inpatient alcohol and drug treatment programs

·         Modifications made to your home for medical reasons

·         Transportation to and from medical appointments

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

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

Assessment

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

Conclusion

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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™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.

***

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

Conclusion

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***

More on Recent Interest Rate Hikes

Impending IRs and … the Economy

By http://www.MCOL.com

***

***

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™

***

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

***

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.

***

gv

***

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.

***

gears

***

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™

****

Year End MEGA Tax Planning “Tips” for Physicians

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For Medical Professionals … and Us All

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

A SPECIAL ME-P REPORT

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

For Individuals

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

For Businesses

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

Bigger Earners

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

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

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

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

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

The Checklist[s]

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

***

Next-Gen Physicians

[Future High Income-Earners?]

***

Year-End Tax Planning Moves for Individual Medical Providers 

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

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

Let’s consider the following:

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

***

Target MD

[Future IRS Targets?]

***

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

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:

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

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:

Financial Planning MDs 2015

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.

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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.

###

jobs

###

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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

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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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Explaining the New Taxpayer Relief Act

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aka … The Fiscal Cliff Deal Wake-Up Call

By Lon Jefferies MBA CFP®

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Lon JeffriesBelow is a brief summary of the major implications of the Taxpayer Relief Act that was passed by congress. The changes under the act are permanent and do not expire like the previous round of Bush tax cuts. Note, however, that laws can always be changed.

The Tax Increase That Will Impact Us All

As of December 31, 2012, the Payroll Tax Cut expired. The cut reduced the FICA tax rate by 2% in 2011 and 2012. Consequently, this Social Security tax rate will return to 6.2% for employees (as opposed to the 4.2% rate during the last two years). This tax will apply to any income below the Social Security Wage Base of $113,700.

Essentially, this change will cause an average taxpayer earning $50k per year to pay $1,000 more in federal taxes.

Income Tax Brackets

The top tax bracket will increase from 35% to 39.6% and will apply to individuals with taxable income in excess of $400k and married couples with incomes over $450k. No other changes were made to the federal income tax.

Income Tax Brackets

Taxpayers in the 10% or 15% or income tax bracket will continue paying 0% tax on long-term capital gains and dividends. A 15% capital gains and dividend tax will continue to apply to all other taxpayers not in the highest tax bracket (again, individuals with incomes above $400k and married couples with incomes above $450k). For taxpayers in the top tax bracket, the capital gains and dividend tax effectually rises to 23.8% – consisting of 20% for capital gains or dividends plus an additional 3.8% Medicare tax to boot.

Phaseout of Deductions and Exemptions

Total itemized deductions are reduced by 3% of any excess income over an established limit. That limit is adjusted gross income (AGI) of $250k for individuals and $300k for married couples. Personal exemptions are also phased out once AGI is above the same limits. The exemptions are reduced by 2% for each $2,500 of excess income over these limits.

Professional Wake Up Call

Estate Taxes

While the top estate tax rate has been increased from 35% to 40%, individuals will continue to pay no taxes on estates less than $5,120,000. This figure will continue to rise with inflation. Note: couples essentially get two of these exemptions, allowing them to pass $10,240,000 to heirs without paying estate taxes.

Alternative Minimum Tax

The new AMT exemption amount will be $50,600 for individuals and $78,750 for married couples. These figures will be adjusted annually for inflation. Speak to an account to determine how this impacts your tax return.

Bonus – Potential 401k to Roth 401k Conversions

If your employer offers Roth 401k accounts, you can now convert your traditional 401k investments to the Roth plan while still employed. This process will be similar to converting a traditional IRA to a Roth IRA and taxes will be due upon conversion. However, your employer isn’t required to offer a Roth 401k, so speak to your employer’s HR department to determine if this is an option. Further, speak with your financial planner for information on whether this is a strategy you should explore.

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Update on Pension Plans for 2013

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The IRS Announces Major Changes

By Children’s Home Society of Florida Foundation

In IR 2012 77 (18 Oct 2012), the IRS announced multiple pension adjustments for 2013:

1. Elective Deferral – An individual with a 401(k) or 403(b) plan may defer income up to $17,500.

2. Catch-Up Contributions – Individuals age 50 and older may contribute an additional amount of $5,500 to a 401(k) or 403(b).

3. IRA Phase-Out – Contributions to a traditional IRA are phased out for individuals with a workplace retirement plan and modified adjusted gross incomes from $59,000 to $69,000. For married couples where the contributing spouse is covered by a workplace retirement plan, the phase-out range is $95,000 to $115,000. If the married couple IRA owner is not covered by a workplace plan, the phase-out range is $178,000 to $188,000.

4. Roth IRA Contributions – Taxpayers who are married may make Roth IRA contributions with a phase-out AGI of $178,000 to $188,000. Singles and heads of household have a phase-out range of $112,000 to $127,000.

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Update on Tax Inflation Adjustments in 2013

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Tax Bracket Changes Alert

By Children’s Home Society of Florida Foundation

Each year the IRS publishes multiple changes in various tax brackets and amounts that are increased to reflect the rate of inflation. In Rev. Proc. 2012-41; 2012-45 IRB 1 (18 Oct 2012), the IRS released the inflation-adjusted items for 2013.

There were moderate changes in many items. The following includes some of the more significant income tax adjustments:

1. Kiddie Tax – The exclusion for the Kiddie Tax for 2013 is increased to $1,000. For most children, net unearned income in excess of double the exclusion is taxed at the parent’s rate.

2. Savings Bonds for Higher Education – The phase-out for taxpayers receiving income from United States savings bonds used to pay for qualified higher education expenses will start at $112,050 for joint returns and $74,700 for other returns.

3. Medical Savings Accounts – For self-only coverage, the deductible may range from $2,150 to $3,200 and out-of-pocket expenses may not exceed $4,300. For family coverage, the deductible range is $4,300 to $6,450 and the expense limit is $7,850.

4. Token Benefits for Charitable Gifts – A low-cost item is defined as one that has a value of $10.20 or less. It should include the logo, colors or other identification of the charitable organization. Donors who make gifts in excess of $51 may receive a low-cost item and still qualify for a full deduction. A charity may give an insubstantial benefit to a donor provided that the benefit does not exceed 2% of the value of the gift or a maximum of $102.

Gift and Estate Taxes

There are also several provisions that affect gift and estate taxes:

1. Special Use Valuation – Under Sec. 2032A the qualified property may be reduced in value by up to $1,070,000.

2. Annual Exclusion – The present interest annual exclusion is increased to $14,000 in 2013.

3. Gifts to Non-Citizen Spouse – The applicable limit is $143,000.

4. Reduced Interest on Estate Tax – The installment estate tax “2% portion” for Sec. 6166 is $1,430,000.

Conclusion

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IRS Cracking Down on Tax Identity Fraud

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About Stolen Identity Refund Fraud [SIRF]

[By Children’s Home Society of Florida Foundation]

The IRS, the Justice Department and Congress all recognize that stolen identity refund fraud (SIRF) is a major and growing problem. With the increase in electronic filing, individuals are obtaining the Social Security numbers and names of other persons and filing to claim their tax refunds. The Justice Department estimates that there could be up to $26 billion in fraudulent refunds over the next five years.

Assistant Attorney General Kathryn Keneally of the Tax Division of the Justice Department conducted a briefing on September 27 in Washington. She acknowledged, “The stolen identity refund fraud cases present a different kind of crime than we usually see.” Keneally continued and explained the depth of the problem. Treasury officials understand that greater efforts are needed by the IRS, Department of Justice and U.S. Attorney’s Office to confront the problem.

How Identity Thieves Work

How do most identity thieves operate? The essential information for an identity thief is a name and a Social Security number. There are at least three ways that identity thieves are collecting this information and receiving tax refunds.

  1. First, some have persuaded a postal employee to intercept multiple refunds to an address.
  2. A second strategy might involve the use of a doorman to direct refund checks to the identity thief.
  3. Third, bank tellers have been bribed to collect the personal information necessary for the identity thief to file and obtain a fraudulent refund.

Geographic Dispersion

Two areas of the country are particularly affected. Southern District of Florida U.S. Attorney Wilfredo Ferrer acknowledged the problem there. He stated, “This is the fastest growing and most insidious fraud in this district right now. It’s sort of like the crime du jour.” He is regularly finding victims “from all walks of life” who had their identities stolen so the thief could collect a “bogus tax refund.” Ferrer disclosed that there are even victims who work in the office of the U.S. Attorney.

Another area with a significant problem is the Southern District of New York. Deputy U.S. Attorney Richard Zabel pointed out that many New York thieves are involved in tax fraud. He stated, “It’s like Willy Sutton – Why do you rob banks? Because … that’s where the money is!

Well, if you’re doing identity theft, the big money is in the Federal Government’s bank account.”

e-Filing Challenges

The IRS recognizes the challenge with eFiling. On the one hand, the IRS has greatly improved the speed of refunds for lawful taxpayers who eFile. In addition, the eFiling of tens of millions of tax returns saves a huge amount of time and cost for the government in processing tax returns.

However, the challenge with eFiling is that the thieves are able to obtain information and file before the legitimate taxpayer. By the time the actual taxpayer files, the thief has received the refund. In some cases, thieves have promptly transferred the funds outside of the United States.

Large Scale Networks

Some thieves are operating on a fairly large scale. Attorney Zabel referred to one case in New York in 2009. Two individuals filed 7,000 false returns and requested a total of $72 million in refunds. Because the refunds were sent to the same address, the fraud was discovered.

Congressional Legislation

Congress has several bills under consideration that would address the problem. Keneally noted that there are also several regional tax task forces that are moving forward to find and prosecute identity thieves. The Department of Treasury, Department of Justice and the U.S. Attorney’s offices are all cooperating.

Assessment

In addition, the IRS is updating its computer software. If there are multiple refunds to one address or indications that the refund may not be appropriate, the software will “flag” the return for greater review.

Conclusion

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Presidential Debate Prep – Why Doctors Need to Understand Mitt Romney’s Tax Policy

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The 2012 Presidential Election

By Andrew D. Schwartz, CPA

The conventions have passed and the presidential debate season is upon us. And the 2012 Presidential Election is just a few months away. Let’s take a look at Mitt Romney’s tax policy based on information posted on his campaign’s official website www.mittromney.com.

Extend the Bush Tax Cuts:

If Congress doesn’t act by the end of the year, the 2001 Bush tax cuts will expire on December 31st causing tax rates across the board to increase. According to Mitt Romney:

While the entire tax code is in dire need of a fundamental overhaul, Mitt Romney believes in holding the line against increases in marginal tax rates. The goals that President Bush pursued in bringing rates down to their current level— to spur economic growth, encourage savings and investment, and help struggling Americans make ends meet—are just as important today as they were a decade ago. Letting them lapse, as President Obama promises to do in 2012, is a step in precisely the wrong direction. If anything, the lower rates established by President Bush should be regarded as a directional marker on the road to more fundamental reform.

Eliminate Taxes on Investment Income for People Earning Below $200k:

Romney’s Tax Policy includes a provision to cut taxes for taxpayers earning less than $200k. Let’s see what the Romney Campaign calls the Middle-Class Tax Savings Plan:

As with the marginal income tax rates, Mitt Romney will seek to make permanent the lower tax rates for investment income put in place by President Bush. Another step in the right direction would be a Middle-Class Tax Savings Plan that would enable most Americans to save more for retirement. As president, Romney will seek to eliminate taxation on capital gains, dividends, and interest for any taxpayer with an adjusted gross income of under $200,000, helping Americans to prepare for retirement and enjoy the freedom that accompanies financial security. This would encourage more Americans to save and to invest for the long-term, which would in turn free up capital for investment flowing back into the economy and helping to facilitate economic growth.

Implement Tax Simplification:

Promising tax simplification is nothing new. When I started practicing accounting in 1987, President Reagan had just signed the huge Tax Reform Act of 1986 into law. That Tax Act really complicated the tax code, and it has continued to become increasing more complex over the past 25 years. Remember Steve Forbes? He ran two presidential campaigns on his Flat Tax Platform.

Here is Romney’s spin on tax simplification:

In the long run, Mitt Romney will pursue a conservative overhaul of the tax system that includes lower and flatter rates on a broader tax base. The approach taken by the Bowles-Simpson Commission is a good starting point for the discussion. The goal should be a simpler, more efficient, user-friendly, and less onerous tax system. Every American would be readily able to ascertain what they owed and why they owed it, and many forms of unproductive tax gamesmanship would be brought to an end. Conversely, tax reform should not be used as an under-the-radar means of raising taxes. Where reforms that simplify the code or encourage growth have the effect of increasing the tax burden, they should be offset by reductions in marginal rates. Washington’s problem is not too little revenue, but rather too much spending.

Mitt Romney also wants to eliminate the Death Tax and repeal the Alternative Minimum Tax. You can read Mitt Romney’s complete Tax Policy atwww.mittromney.com/sites/default/files/shared/TaxPolicy.pdf

President Obama’s Rebuttal:

There actually isn’t very much information about Obama’s tax policy on his campaign’s official website. Check out The President’s Record on Taxes available at: www.barackobama.com/record/taxes?source=issues-nav and all you will find is mention of the Buffett rule and these four bullet points:

  • President Obama has cut taxes for middle-class families and small businesses. One of the first things he did in office was cut taxes for 95 percent of working families. He has also signed 18 tax cuts for small businesses and extended the payroll tax cut for all American workers and their families, putting an extra $1,000 in the typical middle-class family’s pocket.
  • For too long, the U.S. tax code has benefited the wealthy and well-connected at the expense of the vast majority of Americans. A third of the 400 highest income taxpayers paid an average rate of 15 percent or less in 2008.
  • That’s why President Obama proposed the Buffett Rule, asking millionaires and billionaires to do their fair share. But if you’re one of the 98 percent of American families who make under $250,000 a year, your taxes won’t go up.
  • The President has asked Congress to take action to reform our tax code and close tax loopholes for millionaires and billionaires, as well as hedge fund managers, private jet owners, and oil companies.

President Obama’s official campaign site also includes a link to a report that pokes holes in the Romney Tax Policy, available at:www.taxpolicycenter.org/UploadedPDF/1001628-Base-Broadening-Tax-Reform.pdf.

Which Candidate’s Tax Policy Makes the Most Sense?

Tough question. What makes it tougher is that the President doesn’t write the laws. Instead, the President’s job is to sign bills that have been passed by Congress into law. Even so, having an understanding of the tax philosophy of the country’s two presidential candidates is probably a prudent idea.

Assessment

As an interesting exercise, check out President Obama’s views on taxes from the prior election cycle in our article called What’s The Tax Plan, Man? included in ourOctober 2008 Newsletter, and compare his suggestions from 2008 to what’s been enacted during his first term. A few of the items that he proposed during his previous campaign, including raising the Social Security taxes on people earning more than $250k and implementing a “Make Work Pay” tax credit, have come to fruition during his first term in office.

Conclusion

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How Long to Keep Tax Records?

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Understanding the IRS Position

By Andrew D. Schwartz, CPA

At my public accounting firm, we get this question all the time from our medical professional and lay clients:

Q: “How long do I need to keep my tax records?”

Here is the IRS answer to this question:

Well organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.

What to Keep – Individuals.

In most cases, keep records that support items on your tax return for at least three years after that tax return has been filed. Returns filed before the due date are treated as filed on the due date. Examples include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed. You should typically keep records relating to property at least three years after you’ve sold or otherwise disposed of the property.

Examples include a home purchase or improvement, stocks and other investments, Individual Retirement Account transactions and rental property records.

What to Keep – Doctors as Small Business Owners.

Typically, keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Also, keep records documenting gross receipts, proof of purchases, expenses, and assets. Examples include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices, credit card charges and sales slips. Forms 1099-Misc, canceled checks, accounts statements, petty cash slips and real estate closing statements. Electronic records can included databases, saved files, e-mails, instant messages, faxes and voice messages.

There is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For filing a claim for a loss from worthless securities the time to make the claim is 7 years from when the return was due.

Assessment

For more information from the IRS, check out:

  • Publication 552, Recordkeeping for Individuals, provides more information on recordkeeping requirements for individuals.
  • Publication 583, Starting a Business and Keeping Records
  • Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses.

For a more complete listing, please check out: Record Retention Guide Compiled by the Massachusetts Society of CPAs.

Conclusion

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2012 Year End Tax Planning for Medical Professionals

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How to Reduce Exposure to Higher post-2012 Taxes on Investment Income and Gains

By Perry Dalesandro CPA perry@dalecpa.com

Doctors and most all individuals face the prospect of a darker tax climate in 2013 for investment income and gains. Under current law, higher-income taxpayers will face a 3.8% surtax on their investment income and gains under changes made by the Affordable Care Act. Additionally, if current tax-reduction provisions sunset, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers also will face higher rates on their ordinary income. This Alert explores year-end planning moves that can help reduce exposure to higher post-2012 taxes on investment income and   gains. This first part explains who has to worry about the 3.8% surtax and what it covers. It also briefly discusses key sunset rules, and begins examining some essential year-end moves.

Future parts will describe other planning moves in detail.

Who has to worry about the 3.8% Surtax and what it covers

For tax years beginning after Dec. 31, 2012, a 3.8% surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the 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). MAGI is adjusted gross income (AGI) increased by the amount excluded from income as foreign earned income (net of the deductions and exclusions disallowed with respect to the foreign earned income).

Illustration 1: For 2013, a single taxpayer has net investment income of $50,000 and MAGI of $180,000. He won’t be liable for the tax, because his MAGI ($180,000) doesn’t exceed his threshold amount ($200,000).

Illustration 2: For 2013, a single taxpayer has net investment income of $100,000 and MAGI of $220,000. He would pay the tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the surtax would be $760 ($20,000 × 3.8%).

Observation: An individual will pay the 3.8% tax on the full amount of his net investment income only if his MAGI exceeds his threshold amount by at least the amount of the net investment income.

Ilustration 3: For 2013, a single taxpayer has net investment income of $100,000 and MAGI of $300,000. Because his MAGI exceeds his threshold amount by $100,000, he would pay the tax on his full $100,000 of net investment income. Thus, the tax would be $3,800 ($100,000 × .038).

The tax is taken into account in determining the amount of estimated tax that an individual must pay, and is not deductible in computing an individual’s income tax.

What is net investment income? For purposes of the Medicare contribution tax, “net investment income” means the excess, if any, of:

(1) the sum of:

… gross income from interest, dividends, annuities, royalties,   and rents, unless those items are derived in the ordinary course of a trade or business to which the Medicare contribution tax doesn’t apply (see below),

… other gross income derived from a trade or business to which the Medicare contribution tax does apply (below),

… net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t apply, over

(2) the allowable deductions that are properly allocable to that gross income or net gain.

Trades and businesses to which tax applies. The 3.8% surtax applies to a trade or business if it is a passive activity of the taxpayer, or a trade or business of trading in financial instruments or commodities.

Investment income won’t include amounts subject to self-employment tax. Specifically, net investment income won’t include any item taken into account in determining self-employment income and subject to the self-employment Medicare tax

Observation: Thus, the same item of income can’t be subject to both self-employment tax and the Medicare contribution tax. If self-employment tax applies, the Medicare contribution tax won’t apply.

The tax doesn’t apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation. But income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax.

Exception for certain active interests in partnerships and S corporations. Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as net investment income only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

Retirement plan distributions. Investment income doesn’t include distributions from tax-favored retirement plans, such as qualified employer plans and IRAs.

Looming Sunsets Would Affect Almost all Taxpayers

Unless Congress acts, the Bush-era tax breaks-those in the EGTRRA and JGTRRA legislation of 2001 and 2003-will come to an end (i.e., they will sunset) at the end of 2012. Depending on how the November elections play out, the sunsets may be: (1) abolished for everyone, (2) deferred for everyone (as they were in December of 2010, when they originally were to   sunset), or (3) deferred for all taxpayers other than those with higher incomes. Still a fourth, albeit unlikely, possibility is that the parties will not be able to agree on remedial legislation and the Bush-era tax breaks actually will sunset at the end of 2012 for everyone.

There are scores of income tax rules that would be altered if the Bush-era tax breaks sunset at the end of 2012, but arguably the most important ones are as follows:

Tax brackets. The 10% bracket will disappear (lowest bracket will be 15%); the 15% tax bracket for joint filers &  qualified surviving spouses will be 167% (rather than 200%) of the 15% tax bracket for individual filers; and the top four tax brackets will rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6%.

Taxation of capital gains and qualified dividends.  Currently, most long-term capital gains are taxed at a maximum rate of 15%, and qualified dividend income is taxed at the same rates that apply to   long-term capital gains. Under the sunset, most long-term capital gains will be taxed at a maximum rate of 20% (18% for certain assets held more than five years). And, dividends paid to individuals will be taxed at the same rates that apply to ordinary income.

If the EGTRRA/JGTRRA sunset rules go into effect at the end of 2012 and dividends and interest are taxed at ordinary income rates up to 39.6% in 2013, it seems highly unlikely that dividends and interest also would be subjected to a 3.8% surtax on net investment income (i.e., Congress would at least repeal the surtax).

Year-end Planning for Investments

Beginning below, and to be continued in future articles, are specific steps that taxpayers can take now in order to reduce or avoid exposure to the 3.8% surtax as well as possibly higher tax rates on capital gains and dividend income.

Accelerate Home Sales

The sale of a residence after 2012 can trigger the 3.8% surtax in one of two ways. It also can expose taxpayers to a higher capital gain tax rate if the sunset rules affect them next year.

  •  Under Code Sec. 121, when taxpayers sell their principal residences, they may exclude up to $250,000 in capital gain if single, and $500,000 in capital gain if married. Gain on a post-2012 sale in excess of   the excluded amount will increase net investment income for purposes of the 3.8% surtax and net capital gain under the general tax rules. And if  taxpayers sell a second home (vacation home, rental property, etc.) after 2012, they pay taxes on the entire capital gain and all of it will be subject to the 3.8% surtax.

Recommendation: A taxpayer expecting to realize a gain on a principal residence substantially in excess of the applicable $250,000/$500,000 limit who is planning to sell either this year  or the next should try to complete the sale before 2013. Doing so rather than selling after 2012 will remove the portion of the gain that doesn’t qualify for the Code Sec. 121 exclusion from the reach of the 3.8% tax. It also will reduce the taxpayer’s exposure to possibly higher rates of tax on capital gains under the sunset rules.

Illustration 4: A married couple  earn a combined salary of $260,000. They plan to sell their principal residence for $1.2 million, and should net a gain of about $700,000, of which $500,000 will be excluded under Code Sec. 121. If they sell this year they  will pay a tax of $30,000 (15%) on their $200,000 of taxable residence gain.  If they wait till next year to sell, their gain will be fully exposed to the  surtax, which in their case equals 3.8% multiplied by the lesser of: (1) $200,000 of net investment income; or (2) $210,000 ($460,000 of MAGI  [$260,000 salary + $200,000 of taxable home sale gain] − the $250,000  threshold). Thus, the tax on their gain will be at least $37,600 ([.15 +   .038] × $200,000). The tax could be even more if they are subject to a higher capital gains tax next year under the sunset rule (or a modified sunset rule).

Illustration 5: A single taxpayer earns a salary of $170,000 and also has $30,000 of investment income (interest and dividends). He plans to sell his vacation home for $500,000 and will net a gain of approximately $400,000. If he sells this year, he’ll pay a $60,000 tax on his gain (.15 × $400,000). If he waits till next year, his MAGI will swell to $600,000 ($170,000 salary + $30,000 investment income +  $400,000 gain). He will pay an additional $15,200 of tax on his vacation home  gain (3.8% of $400,000), on top of the regular capital gain tax.  Additionally, sale of the vacation home in 2013 will expose his $30,000 of  investment income to an additional $1,140 of tax (3.8% of $30,000).

Conclusion

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On Hospital Tax-Exempt Debt

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An important means of external financing for hospitals

By Calvin W. Wiese CPA CMA

By Dr. David Edward Marcinko MBA

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Tax-exempt debt has become an important means of external financing for hospitals, primarily because its cost is very attractive. Interest rates on tax-exempt financing are lower than interest rates on financing that is not tax-exempt because the interest income earned by the holders is exempt from federal income tax. In some states, it is also exempt from state income tax and in some cities; it is also exempt from city income tax. Thus, the holders of these debt instruments (usually bonds) are willing to accept lower rates of interest.

State and Local Governments Only

Hospitals themselves are not capable of issuing tax-exempt debt. Only state and local governments are. A state or local government issues tax-exempt debt for hospitals and then loans the proceeds to hospitals. This is called “conduit” financing: the state or local government acts as a conduit through which hospitals can access tax-exempt debt markets. State and local governments are authorized to loan proceeds of their bond issues to hospitals through state statutes, and each state statute is different. Some states authorize any state or local government to issue bonds to loan to hospitals. Other states restrict such power to special purpose governmental entities only. And some states restrict this power to a single governmental entity that is specially formed for the sole purpose of issuing tax-exempt bonds on behalf of hospitals.

The IRS

The Internal Revenue Service (IRS) regulates the issuance of tax-exempt financing. While the IRS code nominally provides that debt instruments issued by state and local governments are exempt from federal income tax, it imposes special rules on conduit issues. Thus, tax-exempt issues whose proceeds are loaned to hospitals must comply with special IRS rules. Although very complex, these rules primarily regulate the use of proceeds, restricting the use of tax-exempt proceeds to the acquisition of property, plant components and equipment.

Given state statutes, IRS code and applicable security laws (both state and federal), issuing tax-exempt bonds is legally complex. Many lawyers get paid handsome fees every time tax-exempt debt is issued. The quarterback of the legal team is the bond counsel who represents the interests of the bondholders; the bond counsel issues the critical tax opinion that investors rely upon to claim tax-exemption on the interest from these instruments. Everything revolves around getting this opinion.

The Underwriter’s

Given its critical nature, only highly qualified lawyers are accepted by the market to provide this opinion. Underwriter’s counsel represents the interests of the investment bankers; their primary concern is compliance with security laws. Issuer’s counsel represents the interests of the state or local government, and hospital counsel represents the interests of the hospital; both have relatively minor roles. In the event credit enhancement is involved, credit enhancement counsel represents their interests and has significant influence on the process.

The Trustees

Another unique party to most tax-exempt bond issues is the bond trustee. The bond trustee is usually a bank who performs a fiduciary duty on behalf of the bond holders throughout the life of the bonds. The face of the faceless bond holders, they act on their behalf. And they, too, are represented by counsel in the bond issuance process.

State or local government typically appoints bond counsel. In many cases, they work with only a single firm. Not unusually, these relationships are quite cozy, and often result in fees being paid that are well in excess of what otherwise would be paid.

The Documents

An excess of documents is involved in most tax-exempt financings. The heart of the documents is the indenture, which is the agreement between the bond trustee (on behalf of the bond holders) and the state or local government issuer. It contains the promises made to the bond holders, and it describes the work of the bond trustee. The bond trustee will only perform actions on behalf of bond holders that are explicitly set forth in the bond indenture. The bond indenture is the security given to the bond holders, describing all their recourses.

Assessment

The bond indenture is typically supported by the loan agreement between the state or local government that issues the bonds and the hospital to which the proceeds are loaned. Its terms complement the terms of the bond indenture, which together, form the conduit.

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IRS Tips for Charity Minded Medical Professionals

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IRS Help for Charitable Taxpayers

[By Children’s Home Society of Florida Foundation]

The IRS has published a series of six tips that are designed to help charitable taxpayers.  Both the Department of the Treasury and the IRS hope to enable donors to support various charities.  The six recommendations will help donors to be certain that their gifts are deductible.

1.  Tax Exempt Status

A charity must be qualified under the IRS guidelines for a gift to be deductible.  At www.irs.gov there is an “Exempt Organization Select Check” that allows donors to be certain the charity is qualified to receive deductible gifts.

2.  Itemizing

Your charitable gifts are deductible only if you itemize deductions on IRS Form 1040, Schedule A.

3.  Fair Market Value

Gifts of cash are deductible at face value.  Gifts of appreciated stock, land and many other types of property are often deductible at fair market value.  There are special rules for cars, boats, clothing and household items.  If the charity gives value in return, such as goods, services, admission to a charity banquet or sporting event, that amount will reduce the value of your charitable deduction.

4.  Good Records

You need to maintain records of all donations.  All cash gifts must be documented even if they are quite small.  You should keep cancelled checks, bank or credit card statements, payroll deductions or a statement from the charity with its name, contribution, date and amount for your gifts.

5.  Larger Gifts

If your gift is $250 and above, you must receive a receipt or written acknowledgement from the charity.  The acknowledgement should state the amount of the gift and may include a description and fair market value for property gifts.  It must state whether the charity provided goods or services for your gift.  Non-cash gifts over $500 require you to file IRS Form 8283, Non-Cash Charitable Contributions, with your Form 1040.  If the non-cash property is over $5,000 and is not a public stock, bond or mutual fund, you usually must obtain a property appraisal from a qualified appraiser who holds himself or herself out to the public for that purpose.  In some cases, the appraisal must be attached to the return with a signed Form 8283.

6.  Timing

If you make a pledge, the gift will be deductible only when it actually is made.  For example, a donor may make a pledge in November and then make the gift the following March.  The gift is deductible in the year it is made.  End-of-year donations by check or credit card are generally deductible in the year that they are made or placed in the U.S. mail.

Editor’s Note:  In nearly all cases, your charitable gifts will qualify for a substantial reduction in your taxes.  For specific information, go to www.irs.gov and search for IRS Publication 526, Charitable Contributions.  Valuation rules are available in IRS Publication 561, Determining the Value of Donated Property.

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Healthcare Job Expenses Can be Tax Deductible

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Appreciating the Medical Academic Calendar

By Andrew D. Schwartz, CPA

Many healthcare professionals work based on the Academic Calendar. That means that a lot of Doctors switch jobs over the summer. According to our friends at the IRS in their IRS Summertime Tax Tip 2012-06:

Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.

The Seven Tips

Here are seven things the IRS wants you to know about deducting costs related to your job search:

  1. To qualify for a deduction, your expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
  2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
  3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
  4. If you travel to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area to which you travelled. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
  5. You cannot deduct your job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
  6. You cannot deduct job search expenses if you are looking for a job for the first time.
  7. In order to be deductible, the amount that you spend for job search expenses, combined with other miscellaneous expenses, must exceed a certain threshold. To determine your deduction, use Schedule A, Itemized Deductions. Job search expenses are claimed as a miscellaneous itemized deduction. The amount of your miscellaneous deduction that exceeds two percent of your adjusted gross income is deductible.

Assessment

  • For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Schedule A, Itemized Deductions ( PDF)
  • Publication 529, Miscellaneous Deductions ( PDF)

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The Case for Major Tax Reform in 2013

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Tax Code is “Beast with Hundreds of Heads”

By Children’s Home Society of Florida Foundation

Senate Finance Committee Chairman Max Baucus (D-MT) has been holding a series of hearings in preparation for major tax reform in 2013. In an address on June 11 to the Bipartisan Policy Center, Baucus outlined the basic guidelines for major tax reform. He compared the current tax code to “Hydra, the mythical Greek beast with hundreds of heads.” Baucus noted that the last major tax reform of the entire code was 1986. Since that time, Congress has made 15,000 changes to the Tax Code. He suggested it is long past time to “get rid of the deadwood and simplify the code.” Baucus believes that the Tax Code needs to reflect the major changes in America since 1986.

Deficits and Debt:

There has been a rapid growth in both the deficit and the debt in the past decade. The public debt is now 73% of America’s gross domestic product (GDP). This is the highest level of debt since World War II. In addition, with the reduction in tax revenue from capital gains and other business revenue, the total receipts by the government are the “lowest they have been since World War II.” A combination of higher spending and lower revenues has created a serious debt and deficit problem. Tax reform will need to be accompanied by a sound budget that reduces the national debt and deficit. This will include both tax increases and spending reductions.

World Competition:

All of America faces major challenges because of the changing world. The U.S. economy has grown 88% since 1986. However, most of the gains have gone to upper-income individuals. In the past 15 years, America has 15% more college graduates. However, some of the other nations in the third world have increased their number of graduates by 90%. All of these new college graduates throughout the world are creating substantial competition for job growth. Families have also changed significantly. In 1986, there were more couples with one breadwinner. Now there are more single persons and working couples. There are fewer manufacturing jobs. The American economy has moved steadily from manufacturing to exporting financial services, software and engineering.

Finally, many foreign nations have acted aggressively to modernize their education systems, infrastructure and tax codes. Foreign companies increasingly have grown to join the members of the Fortune Global 500. Many of these large foreign companies have been acquiring U.S. companies and reducing the jobs in this nation. For example, when the European company Unilever acquired the U.S. company Alberto Culver, it closed an Illinois production facility and moved hundreds of jobs overseas.

A Solution?

Baucus foresees a four-part solution. A new tax code will be needed that has a focus on jobs, competition, innovation and opportunity.

1. Jobs.

The primary factor that will increase employment is to reduce personal income tax rates. This will require reducing or eliminating tax expenditures (such as deductions for medical care, retirement plans, mortgage interest, state and local taxes and charitable giving).

2. Competition.

The foreign nations have all reduced their corporate tax rates. America now has the highest corporate tax rate in the industrial world. The corporate tax rate will need to be reduced by eliminating many corporate deductions.

3. Innovation.

America will need to encourage research and new technologies with appropriate incentives.

4. Opportunity.

In the present world, education is more important than ever before. Therefore, a new tax code will need to facilitate higher education opportunities. Baucus stated that he is “making progress on a detailed tax reform proposal that will attract bipartisan support.”

Editor’s Note: Chairman Baucus and House Ways and Means Chair Dave Camp (R-MI) are both holding hearings. They believe that 2013 is the “once-in-a-generation” opportunity for them to craft comprehensive new personal and corporate tax codes.

Conclusion

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Why Physicians Should Double-Check Their 2012 Taxes

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A New AICPA Service

The American Institute of CPAs (AICPA) is offering a new service on the Total Tax Insights Website.

Surveys by the AICPA show that most Americans do not realize how much they are paying in federal, state and local taxes. AICPA President Barry C. Melancon noted, “Our recent national poll showed that taxpayers do not know the percentage of their income that goes to pay taxes or how many types of tax they pay annually. AICPA’s goal is to make federal, state and local taxes more transparent and the total tax insights calculator does that.”

In AICPA surveys, two-thirds of Americans did not understand the amount of tax that they were paying. Many did not realize that they were paying 10 to 20 different taxes over the course of a year.

The Total Tax Insights Website

AICPA’s website, www.totaltaxinsights.org is designed as a public service to help everyone understand taxes. AICPA believes that understanding taxes will be very helpful to Americans in their monthly financial planning.

The Total Tax Insights calculator enables taxpayers to enter their basic information. This includes their city, marital status, adjusted gross income and number of dependents. The optional entries include medical deductions, property taxes, charitable deductions and similar items.

After entering in your information, the calculator will show your federal income tax, state income tax and 10 to 15 other potential taxes. In addition to the list of potential taxes, there also is a pie-chart that shows the total amount and the percentage of each tax.

Assessment

Your identification is protected on the site. There is no name or identification required. The AICPA offers the educational website and calculator as a public service. So doctors, check it out and tell us what you think?

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Where Tax Dollars Go?

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Tax Freedom Day is April 17th 2012

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Working 107 days for Uncle Sam

By Children’s Home Society of Florida Foundation

Each day the Tax Foundation publishes the “Tax Freedom Day.” For this year, Tax Freedom Day will be on April 17, 2012. Based on averages of incomes and taxes, Americans will work 107 days from January 1 to April 17 to pay the combined 29.2% tax bill for federal, state and local taxes. If the budget deficit amount were paid for through taxes, Tax Freedom Day would be extended to May 14, an additional 27 days.

Varying Dates

Tax Freedom Day has typically arrived earlier during the past five years. The latest Tax Freedom Day was May 1, 2000, when the total tax revenue was 33%. Generally, because of tax reductions in the stimulus bill enacted in 2008, Tax Freedom Day has come earlier during the past four years.

State Taxes

Several states collect lower taxes and have an earlier Tax Freedom Day. These states’ Tax Freedom Day include Tennessee on March 31, Louisiana and Mississippi on April 1 and South Carolina on April 3rd. The highest tax state is Connecticut, with Tax Freedom Day on May 5. However, New Jersey and New York both celebrate Tax Freedom Day on May 1st. The Tax Foundation also estimates the number of days that you may work to pay taxes in these separate categories.

 

Tax   Category Days
Federal   Income 32
State/Local   Income 8
Fed.   Social Insurance 23
State.   Social Insurance 1
Fed.   Sales 2
State   Sales 12
Property   Taxes 12
Fed.   Corporation 9
Other   Fed. 3
State   Corp 1
Other   State 4

Editor’s Note: The Tax Foundation publishes these calculations each year. They are based on overall tax payment averages. Other publications have observed that the dates would change if the numbers were calculated based upon taxpayer income tiers. However, no other publication calculates Tax Freedom Days for low-income, mid income and high-income taxpayers.

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Tax Facts for Taxpayers and Young Physicians

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The Tax Foundation

By Children’s Home Society of Florida Foundation

The Tax Foundation, a nonpartisan research organization, monitors the taxes paid by Americans each year.  On April 11, 2012, they released their report for the past year.  As Americans prepare to file before the April 17 deadline this year, many may be interested in the impact of taxes on their daily lives.

In tax year 2010, the total federal income taxes paid were $945 billion.  143 million families filed tax returns.  85 million paid taxes and 58 million were not required to make tax payments.  The taxpayers with more modest incomes received refundable credits of $105 billion.

The following table shows the income, effective tax rates and percent of the total tax paid by three groups of taxpayers.

Effective Tax Rates and Payments

Income Effective Tax Rate Percent of Taxes Paid
$0 – $50,000 3.5% 6.7%
$50,000 – $250,000 14.1% 47.6%
$250,000+ 23.4% 45.7%

About one-third of taxpayers chose to itemize deductions.  Twenty-five percent of taxpayers deducted mortgage interest and saved approximately $381 billion.  Charitable gifts were reported by 27% of taxpayers.  These gifts produced a tax savings of $158 billion.

The tax code continues to grow in size and complexity.  It now has expanded to 3.8 million words.  For the past decade, there has been an average of one change to the tax code every day.  What is the time required to complete taxes this year?  Over seven billion hours will be devoted to complying with the tax code.

Editor’s Note:  There is great debate on many aspects of tax law.  However, there is a general agreement by Americans from all walks of life that a tax code with 3.8 million words is too long and too complicated.  When Congress turns its efforts toward major tax reform in 2013, it hopefully will be able to reduce the size and complexity.  By working diligently, perhaps Congress might be able to reduce the Internal Revenue Code to only 3.7 million words.

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IRS Announces Online “EO” Search Tool

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About “Exempt Organizations Select Check”

By Children’s Home Society of Florida

The IRS announced last week that it has created an online search tool called Exempt Organizations Select Check. The new search tool is very useful in understanding whether a charitable organization currently qualifies for deductible gifts.

Internal Revenue Service Website

On www.IRS.gov, select Charities and Nonprofits – More Topics. On the right side of the screen, select Search for Charities and load the Exempt Organizations Select Check page.

The new page allows three types of searches.

1. Exempt Organization Publication 78 Organizations qualified to receive deductible contributions.

2. Non-exempt Organizations – Because many smaller organizations did not file Form 990-N (ePostcard), their exemptions were automatically revoked.

3. Qualifying Form 990-N Organizations Those organizations that did comply with the ePostcard notice are listed.

Editor’s Note: Advisors or board members of charities may find the new EO Select Check useful in determining whether a charity has complied with the requirements to file IRS Form 990, Form 990-EZ or IRS Form 990-N. If an organization is no longer exempt it may be appropriate to file a new IRS Form 1023 and apply for exempt status.

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Why the White House Proposed Corporate Tax Reform

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Twenty-Five Years Since Last Revision

By Children’s Home Society of Florida Foundation

On February 22nd 2012, Treasury Secretary Timothy Geithner spoke to Congress and outlined the White House proposal for corporate tax reform. Geithner noted that there has not been a comprehensive corporate tax reform for 25 years. Since the last major corporate tax reform, there have been many significant events. These include the following changes.

  1. Internet is widely used.
  2. Cell phones are now common place.
  3. China and India have become significant economies.
  4. Global trade has greatly expanded.
  5. Nearly all other industrial societies have lowered their corporate rates.

The Five Elements of Reform

  1. Reduced Rates – The elimination of tax loopholes and subsidies will permit a reduction of the corporate tax rate from 35% to 28%.
  2. Manufacturing Incentives – The effective tax rate for manufacturing companies will be reduced to 25% through incentives.
  3. International Taxation System – Companies could pay penalties for shifting income overseas.
  4. Simplification – Small businesses would benefit from reduced complexity in the Tax Code.
  5. Revenue Neutrality – The reduced rates are achieved through eliminating various tax deductions.

Assessment

Treasury Secretary Geithner indicated that he plans to meet with Senate Finance Chair Max Baucus (D-MT) and House Ways and Means Chair Dave Camp (R-MI). He hopes that it will be possible to build a bipartisan consensus for corporate tax reform.

Editor’s Note: Sen. Baucus and Chairman Camp have been holding hearings and proposing corporate tax reform for the past year. With the White House announcement, that the President, the House and the Senate agree that there should be simplification and a lower corporate top rate. The challenge will come when the government grapples with the question of which major corporate deductions (such as bonus depreciation) will actually be removed in order to lower rates. Because of the magnitude of major tax reform, it is not likely that an actual bill could be passed before 2013.

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Is there an IRS Smart Phone App for Taxes?

Yep –  Now Doctors Can Get IRS2GO

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By Children’s Home Society of Florida Foundation

IRS Commissioner Doug Shulman was pleased to just announce a substantially enhanced application for iPhone and Android phones.  The IRS2GO application was first announced in 2011 and had 350,000 downloads.  Commissioner Shulman expects the new application to be widely used.

He stated, “The new smartphone app provides an easy way for people to get helpful information about their taxes.  IRS2GO reflects a wider commitment at the IRS to find innovative ways to serve taxpayers in a rapidly changing world.”

The Top Five [5]

The new version has five major sections:

1. YouTube – The smartphone app includes links to many short YouTube videos.  The videos have titles such as “Tax Tips: Taxable and Non-Taxable Income,” “Tax Tips: When Will I Get My Refund,” “Healthcare: Small Business Healthcare Tax Credit,” and “Free Help Preparing Your Tax Return.”

2. News – The IRS periodically produces news releases.  These news items may be viewed on your iPhone or Android phone.

3. Get My Tax Record – By entering your Social Security Number and other identifying information, you may have access to your personal tax records.

4. Get My Refund Status – By entering your Social Security Number and other information, it is possible to obtain your refund status.

5. Follow Us – If you so desire, you may follow the IRS on Twitter.

Editor’s Note:  The IRS has developed a good smartphone application.  It is easy to use and includes very helpful content.  This updated IRS application will be very popular with taxpayers.  Finally, it is not very often that your editor uses the words “IRS” and “popular” in the same sentence.

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Are We Finally Lifting the Secret IRS Veil on Un-Paid Taxes?

The Tax Gap Increases to $450 Billion

By Children’s Home Society of Florida Foundation

By Dr. David Edward Marcinko MBA, CMP

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Each year the IRS conducts a survey to determine the amount of unpaid taxes. The “tax gap” is defined as the amount of taxes that are owed by taxpayers but not paid on time.

2006 Results

For the year 2006, revised figures released this week showed that the tax gap increased.  The previous estimate of the 2006 tax gap was $345 billion but it increased to $450 billion. The “net tax gap” is a smaller number that reflects the ability of the IRS to collect some of the unpaid taxes.  When the additional $65 billion in taxes collected later is subtracted from the $450 billion, the net tax gap is $385 billion.  The net tax gap number increased from $290 billion in 2001 to the larger number by 2006.

Tax Compliance Level

The compliance level for taxpayers remains 83.7%.  This indicates that the majority of Americans are continuing to calculate and pay their taxes correctly.

Sen. Max Baucus (D-MT) is Chairman of the Senate Finance Committee.  He responded to the IRS survey by noting,

“This report shows that closing the tax gap needs to be a major focus of tax reform.  An improved tax code that’s simple and fair to all Americans will help close the tax gap, boost our economy and create jobs.”

Editor’s Note: 

Both Sen. Baucus and House Ways and Means Committee Chair Dave Camp (R-MI) have been conducting hearings that will lead to major tax reform in 2013.  For the vast majority of Americans who pay their fair share of taxes, it is beneficial if Baucus and Camp are able to simplify the tax system and reduce the tax gap.  More effective collection of revenue decreases the need to raise taxes on those who are currently paying their fair share.

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Doctors May Save Some Money with These 2011 IRS Tax Changes

A Brief IRS Tax Code Update

By Children’s Home Society of Florida Foundation

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In an information letter, the IRS outlined seven specific changes in the 2011 law that will be useful to doctors and all taxpayers filing their tax returns this year. And, some of these 2011 tax law changes may reduce your taxes:

1. Energy Credits – The energy credit was reduced from the $1,500 limit for 2010 to a maximum of $500 for 2011. Up to 10% of qualified expenditures for high-efficiency heating and air conditioning systems, water heaters, biomass stoves, energy-efficient windows and doors and other energy improvements will qualify. The 2011 limit is $500. This credit is reduced by previously-taken energy credits and will generally be available for taxpayers who made their first energy improvements in 2011.

2. 2008 Homebuyer Credits – Some purchasers of new homes in 2008 qualified for a first-time homebuyer credit. The credit was essentially an interest-free loan to be paid back over 15 years. For these taxpayers, the second repayment of the credit amount will apply for 2011.

3. Capital Gains and Losses – Previously, capital gains and losses were recorded on Schedule D. There is a new Form 8949 to report gains and losses. Schedule D will still be used for a summary of capital gains and losses.

4. Roth Conversions – Those individuals who converted a traditional IRA to a Roth IRA in 2011 must report their taxable income. In previous years, only half of the income was reported each year for two years. However, for 2011 conversions the full amount is reportable.

5. Standard Mileage Rates – The standard mileage rates changed on July 1 for business use, medical travel, moving or charitable services. For the first half of 2011, the rates are business travel at 51 cents, medical and moving travel at 19 cents, and charitable travel at 14 cents per mile. For July 1 through the end of the year, business travel is 55.5 cents, medical and moving travel at 23.5 cents and charitable travel remains 14 cents per mile.

6. Alternative Minimum Tax Exemption – The AMT exemption for 2011 will be $74,450 for a married couple, $37,225 for married persons filing separately and $48,450 for single person or heads of household.

7. Health Insurance – Generally, self employed persons who operate a small business will qualify for deduction of health insurance premiums.

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End of Year Tax Giving Tips for Charitable Giving

On IRS published IR-2011-18

By Children’s Home Society of Florida Foundation

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On December 14, 2011, the IRS published IR-2011-18 and suggested a number of tax tips for end-of-year charitable giving. These included several specific recommendations.

1. IRA Rollover – For individuals age 70½ and older who are IRA owners, they may have their IRA custodian make a direct transfer to qualified charities of up to $100,000. These direct transfers may fulfill part or all of the required minimum distribution for this year.

2. Clothing and Household Goods – Deductions for gifts of clothing and household goods are permitted if they are in “good used condition or better.” A gift item that has a value over $500 may be of a different quality, provided that there is an appraisal.

3. Gifts of Money – All gifts of money must be documented through a bank record or receipt. The gift should show the date, amount of the gift and the name of the charitable organization. Bank records may include a cancelled check, a bank statement or a credit card statement. Gifts may also be made through payroll deductions. In this case, the taxpayer should retain a pay stub, Form W-2 or a pledge card that shows the amount, the date of the gift and the name of the charity. If the gift is $250 or more, a contemporaneous written acknowledgement from the charity is required. This receipt must be in the taxpayer’s possession on the date of filing his or her tax return.

4. Timing – A contribution is deductible in the year when it is given. Credit card contributions may be made through December 31st, 2011. Similarly, checks that are sent through U.S. mail by December 31 are deductible if they clear in the normal course.

5. Charities – Deductions are only permitted for gifts to qualified charities. IRS Publication 78 is available on http://www.irs.gov and lists the qualified charitable organizations.

6. Itemized Deductions – Individuals who wish to claim their charitable gifts will need to itemize deductions on Schedule A of Form 1040. Normally, a taxpayer will itemize only if his or her charitable gifts, state and local taxes, mortgage interest and other deductions are larger than the standard deduction.

7. Clothing and Household Item Receipts – The taxpayer should obtain a receipt from the charity. It must list the name of the charity, the date of the gift and a reasonably-detailed description of the gift items.

8. Boat, RV or Car – The gift is usually limited to the gross proceeds from sale if the vehicle is valued at over $500. The charity will send IRS Form 1098-C to the taxpayer and this should be attached to Form 1040.

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Why PACs Won’t Jeopardize a Hospital’s Tax Exempt Status?

According to IRS Private Letter Ruling

By http://www.garfunkelwild.com/

Recently, the Internal Revenue Service (“IRS”) issued a private letter ruling (the “Ruling”) that will allow the requesting tax-exempt hospital to establish and operate a social welfare organization as a means of engaging in political activities and establishing a larger presence in the political arena. The Ruling concluded that these actions will not jeopardize the hospital’s tax-exempt status under the Internal Revenue Code of 1986, as amended, (“IRC”) § 501(c)(3). Pursuant to IRC § 501(c)(3), a corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes is exempt from federal income taxes, provided that its net earnings do not inure to the benefit of a private individual and a substantial part of its activities do not involve lobbying or related political conduct.

The Requesting Hospital

The requesting hospital is a comprehensive regional, integrated health care system that has qualified as a tax-exempt, charitable organization (the “Hospital”).  Currently, the Hospital conducts an insubstantial amount of lobbying through its government affairs department (the “Department”), in an effort to improve the cost efficiency of health care services. The Ruling serves to permit the Hospital to take a more active role in the political arena, through the formation of a separate, non-profit social welfare organization (the “Organization”) that will, in turn, establish two independent political action committees (collectively “PACs”).

Social welfare organizations are tax-exempt entities that are designed to promote the general welfare of the community. See IRC § 501(c)(4).  Social welfare organizations may conduct political campaign activities and establish political organizations, as long as political campaigning is not the primary activity. Reg. § 1.501(c)(4)-1(a)(2)(ii).  Accordingly, in order for the Hospital to create the Organization, the IRS requires that the Organization (a) remain independent from the Hospital and (b) apply for tax-exempt status as a social welfare organization.  Notwithstanding the preceding sentence, the Hospital proposed that it would remain the sole voting member of the Organization, and that the majority of the Organization’s Board of Directors would be officers, directors or employees of the Hospital.  The IRS permitted the Hospital to act accordingly, provided the Hospital complied with the IRS requirements set forth in this Legal Alert, and expanded upon in the Ruling.

More on the Private Ruling

The Ruling permitted the Organization to establish two PACs for the purpose of accepting contributions from, or making expenditures to, a political candidate or party.  See IRC § 527(e). As part of its analysis, the IRS concluded that the PACs, Organization and Hospital must operate independently, in order to ensure that the political activities of the Organization and the PACs would not be attributed to the Hospital and would not impact the Hospital’s tax-exempt status.  To comply with the Ruling, the PACs must maintain separate bank accounts and records, as well as separate addresses and phone numbers.  In addition, any leasing or sharing of employees, goods or services among the Hospital, Organization and PACs must be conducted at arms-length.

Assessment

Furthermore, the Ruling concluded that the Hospital may establish and operate a voluntary payroll deduction plan permitting Hospital employees to make political contributions through the PACs.  The Ruling provided that political contributions by employees of the Hospital will not impact the tax-exempt status of the Hospital, as long as the Hospital does not influence the employees’ choices regarding contribution.

Editor’s Note

Please note that this Private Letter Ruling is limited to the facts at issue, and should not be relied upon by anyone other than the Hospital.

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IRS and the Affordable Care Act

Proud of Track Record

By Children’s Home Society of Florida Foundation

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IRS Commissioner Douglas Shulman testified before the Senate Appropriations Subcommittee on Financial Services and General Government on June 8 2011. He stated, “Mr. Chairman, the IRS is also proud of its implementation track record over the past few years.”

IRS Successes

There are multiple areas the IRS views as significant successes:

1. Collecting Taxes on International Funds – The IRS created a “landmark deal” with the government of Switzerland and has recovered substantial amounts of income tax. Over 15,000 taxpayers participated in the Voluntary Disclosure Program (VDP). In addition, 4,000 other taxpayers have voluntarily disclosed bank accounts throughout the world. The bank accounts have produced substantial taxes and penalties for the IRS. In addition, the overseas funds will be subject to U.S. taxes in the future.

2. Preparer Tax Identification Numbers (PTIN) – The PTIN now is required for all tax return preparers. Over 700,000 preparers have registered. This enables the IRS to monitor preparers’ qualificatons and to identify preparers who are committing tax fraud.

3. Telephone Support – The IRS has a goal of 93% toll-free tax law accuracy. The toll-free customer satisfaction rating for the IRS the past year was 92%.

4. Website – http://www.irs.gov has been very popular with taxpayers. There were 305 million webpage visits to the site in the past year. This is up 14% over the prior year. The “Where’s My Refund?” electronic tracking tool also increased in popularity.

5. Smart Phone – The IRS unveiled its first application for smart phones called “IRS2Go.” This application allows taxpayers with smart phones to check the status of tax refunds and obtain additional information.

6. eFiling – Each year, over 100 million taxpayers use the eFile Program. The IRS has been able to close five of 10 sites that previously were processing paper returns because of the efficiency of the eFile System.

IRS Changes

The IRS is also preparing for major increased responsibility that will be required under the Affordable Care Act (ACA). Under the wide-ranging healthcare law, there will be major changes for most Americans. The majority of these changes will affect individuals in 2014:

1. Premium Assistance Tax Credit – Individuals with lower and moderate incomes may qualify for a healthcare tax credit.

2. Advanced Premium Payments – Individuals who qualify for the healthcare tax credit may receive advance monthly payments to their healthcare insurance provider.

3. Reconciling Tax Credits – For those individuals who receive advance healthcare payments to providers, their tax return will necessarily require a reconciliation of the tax credits with the advance payments. It appears that the first date for this return will be April 15, 2015. IRS forms will include a reconciliation for the 2014 tax credits.

4. Individual Coverage Requirement – For individuals in 2014, there will be a mandatory coverage requirement. Those without coverage will be required to make a payment to the IRS.

5. Employer Payments – For employers who are required to participate in the healthcare programs for employees, they will need to report that participation or make an employer payment to the IRS.

ACA

Editor’s Note: Your editor and this organization take no position with respect to IRS practices and the comments of IRS Commissioner Shulman. This information is offered as a service to our readers.

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On the US Tax Code Complexity

Recent Ways and Means Committee Meeting

By Children’s Home Society of Florida Foundation

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At an April 13th 2011 hearing on the tax code before the Ways and Means Committee, witnesses noted that there is a general consensus on the complexity of the tax code.

Enter Albert Einstein

One witness quoted Albert Einstein, recipient of 1921 Nobel Prize in Physics. While he was the world expert on the Theory of Relativity, Dr. Einstein also commented that “the hardest thing in the world is to understand the income tax.”

At the hearing, Chairman Dave Camp (R-MI) noted there are “nearly 4,500 changes in the last decade – 579 of them in 2010 alone – the code is too complex.” Other representatives and witnesses agreed that the sheer size and complexity of the Internal Revenue Code make compliance very challenging.

Enter the AICPA

Annette Nellen represented the American Institute of Certified Public Accountants in the hearing. She indicated that there are five specific steps that could be taken to substantially reduce the complexity and cost of complying with the code. These include the following actions.

1. Higher Education Deductions and Credits – Reduce the Hope Credit, American Opportunity Credit, Lifetime Learning Credit, the tuition and fees deduction and other benefits into one simple credit.

2. Education Phase Out – Create one definition for qualified education expenses and eliminate the multiple phase outs under the current system.

3. Kiddie Tax – For children with unearned income under age 18 or students under age 24, simplify the current method where they pay tax at their parents’ rate.

4. Mileage Rates – Create the same mileage rate for business purposes, medical purposes and qualified charitable travel.

5. Alternative Minimum Tax – Repeal the tax because it is too complicated to modify.

Enter the Financial Planner

Financial Planner Mark Johannessen is a CFP™ and Managing Director of a McLean, Virginia financial firm. He was President of the Financial Planning Association in 2008 and suggested that there are a number of Internal Revenue Code issues that make financial planning difficult.

First, there are temporary provisions. For example, the 2011 tax rate on dividends is 15%, but the scheduled tax rate on dividends in 2013 is 43.4%. While it’s possible that Congress could change the law between now and 2013, it makes investment planning very difficult.

Second, many changes are temporary and Congress tends to act very late in the year. Congress passed the IRA Charitable Rollover for 2010 on December 17. By that date, most individuals had already taken their required minimum distribution. Johannessen indicated that the late date “negatively impacted both the individuals’ planned charitable giving” and also the charities who received fewer gifts.

Third, the uncertainty in estate tax law continues to make planning quite difficult. While the current exemption is $5 million and there now is portability for couples, the current law only applies for 2011 and 2012. To do good planning, it is essential to know what the law will be in future years.

Assessment

http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1276795609&sr=1-1

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The Truth about Frivolous Tax Arguments

An IRS Warning Report for Doctors and All Citizens

[No Lame Excuses]

By Staff Reporters

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This IRS report responds to some of the more common frivolous “legal” arguments made by individuals and groups who oppose compliance with the federal tax laws.

Three Parts

The first section groups these arguments under six general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention.

The second section responds to some of the more common frivolous arguments made in collection due process cases brought pursuant to sections 6320 or 6330. These arguments are grouped under ten general categories and contain a brief description of each contention followed by a discussion of the correct legal authority.

A final section explains the penalties that the courts may impose on those who pursue tax cases on frivolous grounds. It should be noted that the cases cited as relevant legal authority are illustrative and are not intended to provide an all-inclusive list relating to frivolous tax arguments.

Link: http://www.irs.gov/taxpros/article/0,,id=159853,00.html

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Remember Tax Deadline Day is April 18th 2011

Tax Emancipation Day is April 15th 2011

By Dr. Gary L. Bode MSA, CPA, PC

In the 2011 tax filing season, taxpayers have until Monday, April 18 to file their 2010 tax returns and pay any tax due. Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until October 17 to file their 2010 tax returns.

Who Must Wait to File

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid to late February to file their tax returns in order to give the IRS time to reprogram its processing systems. The IRS recently announced February 14, 2011 as the start date for processing these delayed tax returns.

Some taxpayers, including those who itemize deductions on Form 1040 Schedule A, will need to wait until February 14, 2011 to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted December 17, 2010. Those who need to wait to file include:

  • Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, and medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and that primarily benefits people living in areas without state and local income taxes.
  • Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students, covering up to $4,000 of tuition and fees paid to a post-secondary institution, is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
  • Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

Assessment

In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012, such as the American Opportunity Tax Credit and the modified Child Tax Credit. The Act also provides various job creation and investment incentives, including 100% expensing and a 2% payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.

http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1276795609&sr=1-1

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Legal Strategies for Doctors Sheltering Employment Income

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Strategies for Medical Professionals to Consider in 2011

[By Sean G. Todd Esq, CPA, CFP®]

Thomas Stanley, author of “The Millionaire Next Door” (1996), revealed according to his findings at the time, two-thirds of millionaires in the U.S. were self-employed or small-business owners.  Also noted was the fact that even more people work for external companies and run small home-based businesses on the side. You need to spot the correlation – the tax code is written for the small business owner as there are massive tax-planning opportunities that are not subject to the standard income limitations.

Tax Reduction Opportunities

Perhaps one of the greatest tax-reduction opportunities is the use of small business retirement plans! Under current laws, the IRS typically does not include money contributed to these plans in the profits of a business owner or self-employed individual. If an affluent taxpayer can delay excessive spending until retirement, current taxation on those funds can be avoided.

In applying the right planning, additional income can be sheltered by maximizing the use of small business healthcare plans and employee benefits plans is another option. When our clients utilize health savings accounts, health reimbursement arrangements and Section 125 plans, expenses that would have been above the deduction thresholds for individual taxpayers can be paid on a pretax basis through the business.

Putting the Kids to Work

Another legal income sheltering strategy that we counsel our investment advisory clients on is to put offspring on the payroll of a business. We require them to work – which is not a bad thing in the least. Doing so provides two major benefits: FICA and federal unemployment taxes may not need to be paid if the child is a minor, and the child may be able to contribute to a Roth IRA out of earned income. Employing a spouse garners similar results. As an aside, we always try to be clear on “Who is the boss” in these situations. When utilizing the employment strategy, one must account for the annual cap on the amount of FICA an individual must pay, one spouse can be compensated substantially higher than the limit. Doing so may mean that one spouse pays less into the Social Security system, but it also gives a couple the opportunity to invest privately instead of putting it in the hands of the Social Security system. We and our clients prefer this strategy.

Legal Strategies for Sheltering Investment Income

We are a big user of technology in our advisory practice with allows our clients to utilize another underutilized tax reduction technique commonly missed by stockbrokers which is “tax lot matching”. This technique allows our clients to specify which shares of a stock or mutual fund he or she is selling, as opposed to the default IRS method of first in, first out (FIFO). Tax lot matching can provide huge savings when shares of a stock that show little gain, or even a loss, are sold instead of shares from long-term investments that show substantial gains.

Our affluent investors like doctors, with children, have utilized additional opportunities to shelter investment income and gains from the IRS. We utilize an account which provides a unique tax savings opportunity. When our client parent owns highly appreciated shares of stock, we “gift” the stock to a child and have the child sell it and then report a portion of the profits on the child’s substantially lower tax bracket. This type of planning requires knowledge of income taxes, estate tax laws and legal issues — all of which we confidently provide to our clients.

Section 529 Plans

We have counseled our affluent parents and grandparents of a unique opportunity to use Section 529 plans to shift money out of their estates and shield the growth of substantial amounts from future income taxes, if used for the college expenses of any family member. Under the Internal Revenue Code, any donor can gift up to five times their annual gift exclusion limit into a Section 529 account for a child, as long as multiple gifts to the same person aren’t given in the five years following. With the top estate tax bracket exceeding 50%, this can equal an estate tax savings of more than $25,000 for every $50,000 gift.

Charitable Works

Last but not least, we advise our affluent investors who have a charitable streak to avoid donating cash as much as possible. The IRS allows investors to donate substantially appreciated securities to nonprofit organizations and take a charitable deduction for the full amount. This saves investors the trouble of having to sell the assets themselves, pay tax on the gain and give smaller donations to the charity. In short, donate the stock and keep the cash.

“Grey Area” Strategies to Avoid

As mentioned before, the IRS has no problem with affluent investors avoiding as much taxation as legally allowable. Still, no article about affluent tax-planning strategies would be complete without a warning about the practices that can land you in hot water and wearing the orange jumpsuit. Even though you may overhear people bragging about these strategies at cocktails parties, be forewarned – they can lead to fines and even jail time.

Offshore Trusts

The most popular of the abusive tax strategies that receives heavy IRS prosecution is offshore asset trusts. While it may sound very tax savvy and sophisticated to have a Swiss or Cayman Islands bank account, these accounts are illegal when used to avoid U.S. income taxes. Additionally, the various post-9/11 regulations put strict limits on how much money can be transferred offshore and for what purposes. If someone recommends that you use one of these trusts, you’ll want to get second and third opinions from independent tax professionals.

Non-Arm’s-Length Transactions

The IRS also frowns on affluent investors conducting “non-arm’s-length” transactions to avoid taxation. These are tax planning strategies often done by “do-it-yourself” individuals. In short, all transactions among related parties should be conducted as if they were made between complete strangers. For example, parents who sell appreciated real estate to their children for half of the market value (to avoid paying tax on the gain) would not likely do this with a complete stranger. Affluent tax strategies that are not done in an arm’s-length fashion are subject to IRS action.

FLPs

Family Limited Partnerships (FLP) have become a popular way of attempting to transfer assets to the next generation, with the parents both retaining control of the assets and avoiding gift tax rules. While there are instances where such partnerships can be properly structured, they are abused enough to garner heavy scrutiny from the IRS. Utilizing a FLP can provide many income and estate tax advantages. Properly implementing and using a FLP requires proper professional counsel and advice. We strongly discourage anyone from trying to “do-it-yourself” with this level of tax planning.

Financial Planning

Developing and implementing an effective tax strategy is a key component to a successful financial plan. An effective tax strategy does not put out of the realm of possibility the fact that someone making hundreds of thousands of dollars to pay close to the same amount of taxes, as someone earning just a fraction of that. The key is to be deliberate and strategic about employing legal affluent tax planning strategies well in advance of your tax-filing deadline. Doing so will ensure that you and your family members, not the IRS, are the ultimate beneficiaries of your hard work.

Assessment 

What is one of the greatest tax-planning opportunities to come along in decades? We utilize this strategy everyday with our clients. Sadly, many affluent investors are not permitted to use them because their adjusted gross incomes are too high. What is the opportunity? In the alternative, our clients fund a non-deductible traditional IRA. While these IRAs don’t provide upfront deductions or tax-free withdrawals, the earnings can still accumulate on a tax-deferred basis over the long-term. How can all this help you financially?  You are seeing exactly why a solid investment plan needs to take into account tax planning.  Implementing tax strategies are guaranteed wins for our clients.  What is your tax strategy?

Here is the level of confidence we have in our ability to develop a beneficial strategy for you.  Take advantage of our offer to meet with you confidentially without cost or obligation.  Based on our meeting and a review of your strategy, we will put in writing the opportunities available to you.  After receiving this written strategy, you get to decide how best to implement the same.  Our strategy relies on competence in trusts and estates, income taxes and financial instruments and capitalizes on the ability to integrate each of these disciplines.

Conclusion

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e-Filing Tax Season is Now Open

About IR-20 11-5

By Children’s Home Society of Florida Foundation

In a flurry of information letters, the IRS just announced that e-Filing is now open. According to IR-2011-5, the benefit of e-filing is that any taxpayer may receive faster refunds and ensure that their tax return is accurately reported.

The Commissioner Speaks

IRS Commissioner Doug Shulman stated, “IRS e-File is the best option for everyone, especially for people impacted by recent tax law changes. e-File ensures people can file accurately and get refunds quickly. With a new legislative e-File mandate for tax preparers, we anticipate that more tax return preparers will be using e-File this year and we urge people who prepare their own taxes to give it a try.”

Methods of Filing

The e-Filing may be accomplished through three different methods. Tax return preparers may e-File, commercial software may offer the option or there is IRS Free File. The Free File program is available on www.irs.gov. Taxpayers should click on “Free File” and will be permitted to access tax software to prepare their returns. Free File is available for taxpayers with 2010 adjusted gross income of $58,000 or less.

In the view of the IRS, Free File is “perfect for first-time filers, families looking to save money or older Americans adept at using the Internet.”

e-Signature Needed

Those who file electronically will also need an electronic signature. The electronic signature requires a five-digit personal identification number (PIN). There are three ways to obtain your PIN.

1. Self Select – You may use your tax software and select your own five-digit PIN. If you used a PIN in 2009, you may use that number. Alternatively, you may enter your adjusted gross income from your 2009 return to obtain your PIN. The PIN can be a five-digit number, but may not be all zeros.

2. Practitioner PIN – If you are using a paid tax preparer, you may sign IRS Form 8879 and authorize your paid preparer to generate your five-digit PIN. The paid preparer will retain Form 8879, but will not mail it to the IRS.

3. IRS Issue of PIN – If you do not know your 2009 adjusted gross income or your 2009 PIN, the IRS will request a temporary Form 8879(EFP). The Electronic Filing PIN may be obtained using your tax preparation software or through http://www.irs.gov. With the Electronic Filing PIN you may complete your electronic signature.

Military

If your spouse is a military person serving in a combat zone, you are permitted to use the self-select PIN. You will need to obtain IRS Form 8453, attach a Power of Attorney and mail it to the IRS.

Assessment

This program may also be ideal for FAs, medical students, interns, residents, fellows, nurses, new practitioners and all allied medical professionals who qualify.

Conclusion

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Chairman Bernanke Advocates Tax Reform

Reform Coming in 2011?

By The Children’s Home Society of Florida Foundation

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Chairman of the Federal Reserve [the FED], Ben Bernanke met January 7th 2011 with the Senate Budget Committee. He spoke on the topic of tax reform during 2011. According to sources, Mr. Bernanke noted, “Greater clarity and certainty is obviously beneficial, and to the extent you can create more certainty about where the tax code is going to be over the next couple years, that would be helpful.”

Budget Committee Seems to Agree

Chairman Bernanke and the Senate members of the Budget Committee all noted that with the current weak economy and high level of unemployment, it is a very key year for potentially reforming the tax code. Sen. Ron Wyden (D-OR) joined with Sen. Judd Gregg (R-NH) to introduce the bipartisan Tax Fairness and Simplification Act of 2010. Sen. Wyden noted, “The big idea for economic growth in our country is fundamental tax reform, where you go in there and clean out this job-killing, thoroughly discredited mess.” Senate Budget Chair Kent Conrad (D-ND) agreed that the tax code “is just completely out of date.” He responded, “It does not take account of the world that we live in today.”

Assessment

In the House, the new Chairman of the Ways and Means Committee, Dave Camp (R-MI), also showed interest in tax reform during 2011. He suggested that it will be necessary to “streamline the tax code that today is too costly, too complex and too burdensome for families and employers.”

Editor’s Note: Both House and Senate Finance Leaders will be holding hearings this year on tax reform. Because 2011 is not an election year, it is a potentially good year for major tax reform. As was evident from the tax bill that was signed in December 2010, tax reform will require compromise between the Senate, the House and the White House. However, with the unemployment rate currently at 9.4%, there is now a growing consensus on the need for continued improvements in the tax system in order to reduce unemployment.

Conclusion

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Tim Geithner and Harry Reid Support Top Tax Rate Increases

Obama Plans to Increase Top Two Tax Brackets

By Children’s Home Society of Florida Foundation

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On a national media program on July 25, 2010, Treasury Secretary Timothy Geithner emphasized that the Obama administration plans to increase the tax rates for the top two brackets. When asked whether the 2001/2003 tax reductions should be extended for all brackets, Secretary Geithner stated, “I don’t believe they should and I don’t believe they will.”

New Top Rates

In the view of Secretary Geithner, the increase of the top two rates to 36% and 39.6% affects only “2% to 3% of Americans, the highest-earning Americans in the country.” He suggested that the increased rates on top earners will not have a “negative effect on growth.”

[picapp align=”none” wrap=”false” link=”term=income+tax&iid=76590″ src=”http://view.picapp.com/pictures.photo/image/76590/drawer-full-receipts/drawer-full-receipts.jpg?size=500&imageId=76590″ width=”337″ height=”506″ /]

Steny Speaks

House Majority Leader Steny Hoyer (D-MD) agreed with Secretary Geithner. He advocated extending the tax cuts for middle-income taxpayers and remarked that their taxes are “lower than they were in any single year” when compared to prior administrations. However, in his view, the increase in the top two brackets is necessary to keep America from going “deeper into debt.”

So Does Orrin

Sen. Orrin Hatch (R-UT) is a member of the Senate Finance Committee. He spoke on the floor of the Senate and expressed frustration over the decision by Majority Leader Harry Reid (D-NV) to refuse to allow a vote on the Hatch proposal to extend all of the tax cuts. Sen. Hatch offered a motion to commit the pending small business bill back to the Finance Committee in order to amend it and extend all of the tax cuts.

Sen. Hatch indicated that this “largest tax increase in history” will dramatically impact small businesses. These businesses, with between 20 to 500 workers, are owned by individuals who face substantial tax increases.

In the view of Sen. Hatch, the top bracket tax increases will reduce the ability of small business to perform its normal function during an economic recovery of generating 70% of new jobs. Sen. Hatch noted that new jobs typically have three components.

Assessment

First, there must be entrepreneurs who are willing to take risks. Second, there must be adequate access to capital. He indicated that the banks and large companies currently hold record amounts of cash reserves, so there certainly is cash available. Third, there must be “reasonable economic certainly” so that the businesses are willing to expand. With the prospect of higher taxes and greater regulations, Sen. Hatch indicates that there is a high level of uncertainly that is directly reducing job growth in America.

Conclusion

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Understanding the 2010 Estate Tax Basis Problems

AICPA Tax Basis Issues

By Children’s Home Society of Florida Foundation

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At a July 27, 2010 conference sponsored by the American Institute of Certified Public Accountants, Treasury Representative Catherine Hughes discussed the basis issues that are arising concerning 2010 decedents.

2010 Estate Tax Repeal

While the estate tax is repealed during 2010, under Internal Revenue Code Sec. 1022 there are new and complex rules on basis adjustments. For large estates, a majority of the assets will be transferred with a “flow through” of the basis. That is, the heirs will be able to use the basis of the decedent in any future sales for the purpose of reporting capital gain. Because many decedents have few or no records of the basis, it is quite possible that these heirs will pay capital gains tax on the full value of future sales.

Allowances for Basis “Step-Up”

However, there are allowances for a basis “step-up” of $1.3 million. In addition, for a surviving spouse, the basis step-up can be $3 million. The step-up in basis cannot be greater than the fair market value of the applicable property. Determining how to allocate the adjusted basis step-up in an estate has caused great concern among estate planning attorneys and CPAs. Treasurer Representative Hughes stated, “I anticipate there will be a lot of mistakes where there isn’t an affirmative allocation” of basis. Treasury is studying the situation and may issue guidance with recommended default allocation rules.

Assessment

While Congress continues to debate estate tax law and, therefore, has not made any decision on a potential retroactive estate tax, the nonpartisan Tax Policy Center this week released an estimate of the potential number of 2011 taxable estates. If a $1 million exemption is applicable in 2011, there will be an estimated 43,500 estates subject to tax. If the 2009 exemption amount of $3.5 million per decedent is applicable next year, the number of taxable estates is reduced to $650,000.

Editor’s Note: The discussion in Washington on the practical aspects of allocating the basis step-up now suggests that there may not be a mandatory retroactive estate tax law. With the pending election, it now seems very likely that Congress will not act on the estate tax before December. The Senate continues to have great difficulty developing a plan acceptable to 60 Senators and to the House of Representatives. However, Senators now recognize that a $1 million exemption and tax on 43,500 estates will impact a large number of middle-class children and other beneficiaries. Therefore, it seems quite likely that a compromise should be passed in December. However, as the AICPA basis adjustment discussion suggests, this compromise is now less likely to mandate an extension of the 2009 exemption for 2010. As a result, attorneys and CPAs will need to address the very complex and uncertain basis adjustment problems for 2010 estates.

Conclusion

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Ten Questions on Section 127 Plans for College Funding

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Physician-Parents and the Cost of Education

[By Staff Reporters]

IRS Section 127 plans are used to pay and deduct college costs. These plans allow your practice to pay up to $5,250 of college expenses per year, but do not require your child to recognize the tuition payment as income. The following questions and answers relate to the IRS Section 127 Educational Assistance Plan which became effective on July 1, 2002

1. What benefits are provided under the Section 127 Plan?

The Section 127 Plan is intended to provide favorable tax benefits only. The Plan will exclude from taxation graduate-level courses provided to eligibles up to a maximum of $5,250 per calendar year. Section 127 plans provide relief from taxation for those eligibles whose graduate-level educational benefits are not covered under other Code provisions.

2. Who will benefit under the Plan?

Employees enrolled in graduate-level courses under the Reduced Fee Enrollment Policy that are not job-related will benefit from the Plan.  The value of such courses will not be taxed, up to the $5,250 annual limit.  Employees enrolled in non-job-related graduate courses taken for professional development at another educational institution are also covered by the Plan and will not be taxed on the value of those courses, subject to the annual limit.

3. What kinds of graduate courses are covered under the Plan?

The Plan covers graduate-level courses of a kind normally taken by an individual leading to a law, business, medical, or other advanced academic or professional degree. Covered courses do not include courses or other education involving sports, games, or hobbies. Courses covered by the Plan may be taken at another educational institution.

4. Are any undergraduate courses covered under the Plan?

No.  Undergraduate courses are excluded from taxation under IRC section 117.

5. Why are job-related courses not covered under the Plan?

Job-related courses are already exempt from taxation under IRC section 162. Thus, only courses taken for professional development that are not directly related to an employee’s current position are covered by the Plan.

6. What is the definition of a job-related course?

A job-related course is a course taken by an employee either to maintain or improve skills required in the employee’s current job; or to meet the express requirements of the employer; or the requirements of law or regulations, imposed as a condition to retaining the employee’s salary, status, or employment.

7. Are Section 127 educational benefits reportable on the Form W-2?

No. The instructions for Form W-2 provide that payments qualifying under a Section 127 educational assistance program are not reportable in box 1 as wages.  Only waivers or reimbursements (for non-job-related graduate courses) in excess of the $5,250 annual exclusion limit would be reported on the Form W-2 as taxable compensation, subject to withholding. Accordingly, such excess amounts should be paid through a payroll system.

8. What are the requirements for a Section 127 Plan?

Section 127 requires that an employer prepare a separate written plan for the exclusive benefit of its employees to provide such employees with educational assistance. In addition, eligible employees must be provided reasonable notification of the availability and terms of the plan; and the plan must not discriminate in favor of highly compensated employees.  Section 127 does not require the educational assistance program to be funded.

9. May benefits be provided on a retroactive basis?

No. Section 127 requires that employees be provided with reasonable notice about the benefits available under the plan.  If benefits are provided before the plan is in effect, employees have not been provided with the requisite notice.

10. Are there any IRS information reporting requirements related to 127 Plans?

No. The IRS has indefinitely suspended the reporting of data related to the administration of a Section 127 Plan (IRS Notice 2002-24).

Assessment

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To properly use a Section 127 plan, physicians must adhere to several rules: the student must be 21 years old; the student cannot be a tax dependent of the physician; the student must be an employee of the medical practice; and the plan cannot discriminate against employees not related to the physician.

Conclusion

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Hospital Non-Profit Care and Community Benefits

The IRS Sounds-Off 

Staff Reportersstk212064rke

According to the Internal Revenue Service [IRS], a survey of nearly 500 not-for-profit hospitals in 2006 revealed that 9 percent total revenues were dedicated to community benefit. The just finalized 2006 report warned that attempts to set a percentage threshold for determining compliance may have a

“disproportionate impact on hospitals, depending upon their size, where they are located their community benefit mix, and other hospital and community demographics.”

Link: http://greisguide.com/?p=1059

Definition

The current “community benefit” standard was established by the IRS in 1969 in Revenue Ruling 69-545.  The standard sets out factors to be considered in measuring community benefit, including: (i) a board made up of a broad base of community members; (ii) an open medical staff; (iii) participation in Medicare and Medicaid; (iv) application of surplus funds toward improving facilities, equipment, patient care, medical training, research, and education; and (v) a full-time emergency room open to all regardless of ability to pay (the emergency room standard applies differently to tax-exempt Long Term and Acute Care Hospitals [LTACH] that do not maintain a full array of emergency department services).  Under the current community benefit standard, individual hospitals are given flexibility to determine what services will-best serve their communities.

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dhimc-book2

Assessment

Some pundits suggest that if Congress doesn’t establish new charity care requirements, the IRS should revert to its community benefit standard last in force in 1969.

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Integrating Financial and Medical Practice Succession Planning

Some Steps to Consider

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]dr-david-marcinko8

Medical practice succession planning is a dynamic process requiring current physician ownership and management to plan for the future and implement the resulting plan. Many doctors approach succession planning initially through retirement planning. Once they understand the issues and realities of the tax laws, they are much more amenable to working out a viable succession plan. At the Institute of Medical Business Advisors Inc, we find that some physician-clients have not clearly articulated their goals, but have many pieces of the plan that need to be organized and analyzed to meet their objectives; including both personal and financial issues.

Link: www.MedicalBusinessAdvisors.com

A Step Wise Process

The steps necessary for successful succession planning are as follows: 

  • Gathering and analyzing data and personal information
  • Contacting the doctor’s other advisors
  • Valuing the practice according to USPAP and IRS guidelines
  • Indentifying the right qualified physician purchaser
  • Projecting estate and transfer taxes
  • Presenting liquidity needs
  • Gathering additional corporate information
  • Identifying dispositive and financial goals
  • Analyzing the needs and desires of non-key employees

An Integrated Approach 

Succession planning can help address financial and nonfinancial issues in a timely manner. Proper planning can also help the doctor accomplish goals with effective, appropriate strategies that satisfy family needs as well as tax issues. Here is a triad approach:

1. First: Address financial and nonfinancial issues in a timely manner

As with other estate planning engagements, there is no due date for succession planning. The owner of a medical practice is busy growing and managing the office. S/he is often not focused on the desirable outcomes in an orderly practice succession. For example, if family members are involved in the practice, there is a good chance that personal issues will need to be addressed. These nonfinancial issues can be just as important as financial concerns when building a comprehensive, workable succession plan.

2. Next: Focus on taxes

Taxes are important because the medical practice probably represents the largest concentration of wealth in the doctor’s estate. When planning for estates with large amounts of wealth, doctors frequently ignore personal issues. It’s important not to make the critical error of maximizing tax savings but destroying the practice through a poor succession plan.

3. Finally: Identify and reach goals

When the physician-owner has addressed succession planning issues in a timely manner, s/he has the opportunity to develop the most effective objectives to accomplish goals. Given enough time, the doctor can even modify goals to reflect changes in the economic environments, as well changes in his or her personal life.

Assessment 

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Medical practices exhibit particular strengths and weaknesses not typically found in publicly owned companies or non-professional family businesses. For example, many times the doctor doesn’t realize the type and amount of planning that needs to be done to transfer the business to a new doctor for maximum value. That is why doctors often need the advice of professionals to define goals and formulate medical practice succession strategies.

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.

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Tax Tips for Under or Unemployed Medical Professionals

Status Still Possible for Physicians and Nurses

By Sean G. Todd, Esq., M. Tax, CFP©, CPA

Tax Attorney

Certified Public Accountant
Certified Financial Planner™ practitioner

Terminated, reduced-in-force, or out of work in 2009? As the April 15th tax deadline approaches, medical professionals and all other under/unemployed folks might have questions regarding their tax returns – unchartered waters for many. More people than ever before may be experiencing the effects of losing their jobs for the first time, or receiving unemployment benefits, and are uncertain about the tax consequences that relate to all this. So, in these difficult times, give some consideration to working with a professional to help you make the right decisions.   

Labor Department Reports

The US Labor Department report issued on February 6, 2009 showed that nearly 2.6 million jobs were lost over the course of 2008, the highest yearly job loss total since 1945. The official unemployment rate is at 7.2%, a 16 year high, according to the labor department. For your assistance, I’ve prepared some of the most common questions along with the answers. Here are several questions and answers to help you through this stressful time.

1. Do I have to still pay my taxes if I was out of work in 2008?

More likely than not! The IRS requires anyone who received a W-2 from their employer and made at least $8,950 (if you’re single and under 65 years old), or made at least $400 if you’re self employed, to file a tax return. These are the baseline cutoff numbers. If you’re anticipating a tax refund, you must file – even if you didn’t work at all. The IRS will not just send you a refund – you must file and claim your refund. Despite being unemployed, you still are required to file your taxes – often times a new level of frustration begins during this already confusing and frustrating time.    

2. Will I have a tax liability? 

It depends. It depends on a variety of factors since every taxpayer’s tax situation is unique, based on the facts and circumstances of the taxpayer. Some factors may impact a person’s filing requirement such as: if you only had unemployment compensation throughout the year, you may owe some tax on the checks you received. A severance package could also give you a tax bill, as could dividends and interest from investment income. Other factors which also need to be considered would include tax deductions and other life changes as a result of being unemployed: out-of-pocket medical expenses; sale of your home as a result of downsizing or even independent contractor income you might have received.

3. Do I have to include my unemployment checks in taxable income?

In a word, yes. Unemployment compensation is included as taxable income for federal purposes and most state tax returns. When applying for unemployment, we recommend that you elect tax withholding. You can choose whether you want federal and/or state income taxes automatically taken out of your unemployment benefits. If you choose to withhold, federal income taxes are withheld at a 10% rate, while the state rate varies. But since many cash-strapped Americans opt not to withhold – come April they may have to pay up during an already stressful time when extra cash is often times not available. So if you are not electing any tax withholding, a tax bill may be an unwelcome surprise when you file your 2008 return.

4. What if I “took” money from my 401(k)?

The answer depends on the definition of “took”. If you took a loan from your 401(k), exclude this from taxable income. You may owe taxes if you took money out of a retirement plan or 401(k) to supplement your unemployment checks. That counts as income and is taxable too. The taxes are in addition to a 10% penalty on early withdrawals if you’re below the age of 59-1/2. A special election is available to many taxpayers to avoid this 10% penalty on early withdrawals which many do not know about – costing even more in taxes. 

5. What if I did some supplemental work as an independent contractor?

In the attempt to continue to earn an income after being unemployed, you might have done some freelance or project work. Being unemployed allowed you the flexibility to become self-employed. That is the positive side of things – you earned income. Here is the negative side: if you earned some income doing odd jobs or consulting services while unemployed, you’re subject to income tax AND self-employment tax on that income. To report that supplemental work, taxpayers must include a Schedule C with their income tax return, which details the income and expenses for the year. This is where we see a lot of errors – individuals do not prepare schedule C for this type of earnings. If you earned over $30,000 and are now unemployed – you may go to www.lostmyjobtaxprep.com for an exclusive offer.  If you earned more than $600 during one of the projects, expect to receive tax form 1099 and you must include that as taxable income on your income tax return. Also note that if you made less than $600, then you will not be issued a 1099 but are still required to report this income as well on your tax return.

6. Relocated for the new job?

If the new job required you to relocate for the position, you may be able to deduct the moving expenses not reimbursed by your new employer. But there’s a distance test you must meet to qualify for the deduction. The new job site has to be 50 miles further than the distance from your old residence was from the old job, according to Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants [AICPA]. This basically prevents you from trying to deduct a move within the same metropolitan area.

7. Are my job search expenses deductible?

Those who were on the job hunt last year can utilize the tax code to their benefit and qualify for a larger refund. There are a slew of tax deductions available. In fact, many of the expenses incurred while looking for a job can be deducted, which can result in some serious tax savings.

Tax Checklists

As readers and subscribers to the Medical Executive-Post are aware, there is a quality initiative in clinical medicine that promotes the use of checklists. So, here is a good, but partial list of those things you need to keep track of:

  • Anything you spend on creating, printing and mailing your resume is deductible.
  • Anything you spend on a career coach or headhunter.
    Any long distance, cell or fax charges directly associated with your job search.
  • Transportation costs such as a bus, taxi, train or plane to an interview is deductible.
  • Mileage costs accrued when you drive to interviews and even to the unemployment office. [Between Jan. 1, 2008, and June 30, 2008, taxpayers can claim 50.5 cents per mile, between July 1, 2008 and Dec. 31 2008 taxpayers can claim 58.5 cents per mile].
  • All job related parking fees and tolls; and,
  • All meals and lodging if the interview was out of town.

Link: https://healthcarefinancials.wordpress.com/2009/01/20/a-homer-simpson-moment-of-clarity-on-medical-quality

Further Explanations

You cannot deduct the cost of the “new interview suit” as it does not qualify as a uniform. Also forget about deducting the value of your time as the IRS deems it to be worthless for tax deduction purposes. So too, forget about deducting your new Coach “briefcase” and matching “interview” shoes – they too are disallowed.  It’s the responsibility of each taxpayer to keep receipts related to any of these expenses in order to substantiate them when filing. In a self-serving interest, we always recommend consulting a professional tax preparer for help.  

Two New Websites

There are two websites especially beneficial for individuals who have lost their jobs and are concerned about protecting their 401(k) account. Individuals who are still employed can benefit from the information provided on the site as well.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

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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Managed Care IBNR Claims

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Tax Savings Strategies

[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.

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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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