As we approach the end of 2009, here are some things to consider as it relates to your personal and business tax returns:
Healthcare Reform Bills
Many observers are convinced that we’ll have a healthcare reform bill enacted this year. On Saturday, November 7, the House of Representatives by a vote of 220-215 approved H.R. 3962, the Affordable Health Care for American Act.
Having read some of the approximate 2,000 pages of this bill, it seems to me that the bill is not clear on how they plan to implement the various aspects of the plan nor do they address completely how we will pay for the costs associated with this “Affordable” bill.
Keep in mind that the House bill faces tough opposition in the Senate, which is considering its own version of healthcare reform. But no matter what is ultimately decided upon, it’s clear that if the passage of healthcare reform as stated in H.R. 3962 should occur, we will see tax rates go up possibly as early as next year.
Pay Your Taxes Now
Previous tax planning wisdom was – accelerate year-end deductions and defer income into the following year.
Given the possibility of rates moving upwards, it just might make more sense this year to accelerate your income where possible and defer deductions into next year.
So, don’t pay your real estate taxes before the end of the year. Rather, pay them when they are due, typically in February.
Also, make any estimated tax payments after the first of the year rather than attempting to get a deduction this year.
Consider Your Stock Portfolio
If you have a stock portfolio that contains long-term capital gains, consider selling them before the end of the year taking advantage of the capital gain tax rates, which may go away in the coming years.
If the stock that you are selling is something that you would like to hold over a longer period of time, then buy it back after the sale and you will have stepped-up your basis for any future sales.
Remember, that the “wash-sale” rule only applies when you sell at a loss and not at a gain.
Contribute to Your IRA
You can contribute up to $5,000 ($6,000 if you are age 50 or older by year-end) to your IRA for 2009.
Most likely, if you are participating in your employer-sponsored retirement plan, you will not be able to deduct your IRA contribution.
However, doctors should still consider funding a traditional IRA even though the deduction may not be allowed.
Funding a non-deductible IRA will allow you to keep a portion of your money in a “tax-deferred vehicle” for future years.
Depending upon the long-term tax outlook, you might also consider converting this IRA to a Roth IRA.
See my previous month’s comments on this strategy. You may want to wait to see what happens with tax rates next year before making this move.
Contribute to Your Employer-Sponsored Retirement Plan
The 2009 annual 401(k) deferral limit for qualified retirement plans is $16,500. If you are age 50 or older by year-end, you can contribute an additional $5,500.
Funding the maximum retirement plan amount is one area that I would not suggest waiting until tomorrow to do.
Be sure to check your paycheck stubs now to be certain that you are deferring the maximum to decrease your taxable income.
If your Practice doesn’t currently have a qualified plan, you may still establish a plan for 2009, but the deadline is December 31st for establishing a plan for the current year.
Review Your Retirement Plan Design
Looking at the possibility of funding more dollars into a qualified retirement plan by the use of a defined benefit component may make sense.
Consider the option of establishing a Cash Balance Plan next year as a way of deferring salaries next year and in the coming years when rates are projected to increase.
Maximize Your Deductible Interest
Deductible interest for itemized deduction purposes includes mortgage interest on a principal or second residence on up to $1,000,000 of debt, which is used to acquire or improve your home, as long as the debt is secured by the home.
Also, you may deduct the interest on up to $100,000 of home equity indebtedness, which is secured by your home.
Interest may be deductible on margin loans as long as you have adequate investment interest and dividend income. Interest borrowed for rental properties may be limited due to the passive loss rules.
Boost Your Personal Interest Deductions
If you’re paying interest on credit cards, auto loans, student loans, and other non-business debt, consider a home equity loan so long as the interest rates are lower.
You will be able to deduct this interest as home mortgage interest on loans of up to $100,000 as opposed to receiving no deduction for personal interest.
Note, however, if you are subject to AMT, you may not want to follow this strategy as this interest (home equity loans for personal items other than for improving or buying a home) is not deductible for AMT purposes.
Section 179 Expensing Option
The maximum section 179 expense deduction remains at $250,000 for tax years beginning in 2009.
However, careful consideration to electing this option versus taking the regular allowable depreciation deduction in future years bears some thought this year.
Don’t Lose on Leasehold Improvements
Leasehold improvements made to your office space must be depreciated over 39.5 years.
Be sure to clarify what you are paying for when negotiating with your landlord.
Attempt to pay for things that might fall into a lower asset life and be sure these items are separately identified on the invoices you pay.
Items such as carpeting, flooring, lighting in patient areas, removable cabinetry, and wiring and plumbing for medical or dental equipment can be depreciated over shorter periods.
Also, consider working into your written lease agreement that if you pay for limited leasehold improvements that your landlord will apply for those payments as rent paid. Your landlord should see the benefits of this strategy as well.
Make Charitable Contributions to 501(c) 3 Non-Profit Organizations
In most situations, charitable contributions to qualified organizations are deductible up to 50% of your income.
If you are looking for a way to reduce your taxable income, making charitable contributions is a great way to reduce your taxable income in any tax year.
Keep in mind that retaining a receipt for your deduction is of utmost importance now, so don’t overlook obtaining a receipt for contributions over $250.
Also remember, a contribution made with cash without a receipt is not allowed as a deduction.
Donating appreciated stock or mutual funds is also an effective way for making contributions. Using this approach you can avoid the capital gains on the asset being transferred in addition to obtaining a charitable deduction.
Put Your Children on the Payroll
If your children are able to provide some form of service to your Practice, consider paying them a reasonable salary for the work done.
Typically, the first $5,700 of earned income they receive will not be subject to federal taxes. Consider using the money they earn to fund a Roth IRA, which can be used later for college, a first home purchase, or providing a great start towards retirement.
Conclusion
This is not meant to be an all-inclusive listing of tax planning strategies.
A number of tax deductions or credits are available to taxpayers in lower tax brackets.
Given that most doctors do not qualify for these programs they have been omitted from this listing.
Keep in mind also that the above listing is based upon general rules and should be carefully considered for your individual situation.
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