What to do now to save on 2013 taxes
Carole C. Foos, CPA, and David B. Mandell, JD, MBA
As the 4th quarter of the year approaches, most orthopaedic surgeons have a fairly good idea of what their taxable income will be for 2013. If you are wondering whether you can do anything now to save taxes on April 15, the answer is very likely “yes.”
The following ideas could help reduce your 2013 income tax bill, depending on your facts and circumstances.
Maximize QRP tax benefits
Nearly 95 percent of orthopaedic surgeons have some type of qualified retirement plan (QRP) in place. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, or even SEP or SIMPLE IRAs established as QRPs.
However, most of these plans are not maximized for deductions for the business/practice owner(s). The Pension Protection Act of 2006 improved the QRP options for practice owners. In other words, many owners may be using an “outdated” plan and forgoing further contributions and deductions permitted under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions significantly for 2013 and reduce your taxes on April 15, 2014.
Implement a fringe benefit or “hybrid” plan
Unfortunately, most orthopaedic surgeons begin and end their retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe benefit plans, nonqualified plans, or “hybrid plans” in the last 2 years?
The unfortunate truth is that many surgeons are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, doing so may have beneficial consequences. A number of these plans can help you reduce your 2013 taxable income significantly—and they can be put into place within a few weeks, so it’s not too late to start.
Consider a captive
Captive insurance companies (CICs) are used by many of the Fortune 1000 companies for a host of strategic reasons. A CIC can be equally beneficial for an orthopaedic practice, especially for the practice owners.
With a CIC, the practice owners actually create a properly licensed insurance company to insure all types of practice risks—including economic risks (dropping revenues), business risks (destruction of electronic records), litigation risks (coverage for defense of harassment claims or wrongful termination), and even coverage for surgery centers and real estate. If it is created and maintained properly, the CIC can enjoy tremendous income tax benefits that can translate into annual tax savings.
As the year winds down, many accountants typically counsel clients to prepay for some of the next year’s expenses in the current year. This can be done as long as the economic benefit from the prepayment lasts 12 months or less. Because the highest marginal tax rates in 2014 will likely be the same as those in 2013, taking the early deduction makes sense.
Another issue of interest to many orthopaedic surgeons is how to handle capital gains and investment planning. This year, higher federal income, capital gains, and Medicare taxes are in effect, so the following techniques to reduce taxes on investments may be helpful.
The Medicare surtax
The Medicare surtax is a new 3.8 percent surtax imposed on certain passive investment income of individuals, trusts, and estates, beginning this year. For individuals, the amount subject to the tax is the lesser of net investment income or the excess of a taxpayer’s modified adjusted gross income (MAGI) over an applicable threshold amount.
Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities, and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions, and income from charitable remainder trusts. MAGI is generally the amount reported on the last line of page 1, Form 1040. Table 1 shows the applicable threshold amounts.
A simple example will illustrate how the tax is calculated. A couple—married taxpayers filing separately—has $300,000 of salary income and $100,000 of net investment income. The amount subject to the surtax is the lesser of their net investment income ($100,000) or the excess of their MAGI ($400,000) over the threshold amount ($400,000 – $250,000 = $150,000). Because the net investment income is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (0.038 × $100,000).
Fortunately, the following financial vehicles can be used to reduce the MAGI and/or net investment income and reduce the base on which the surtax is paid:
- Roth IRA conversions
- Tax-exempt bonds
- Tax-deferred annuities
- Life insurance
- Oil and gas investments
- Timing estate and trust
- Charitable remainder trusts
- Installment sales
- Maximizing above-the-line deductions
Individuals interested in these strategies should discuss them with their financial advisors.
There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. Charitable remainder trusts, charitable lead trusts, and private foundations can be used, within IRS rules, to benefit charitable causes, reduce taxes, and retain some benefits for families. If you have considered any of these tools in the past, implementing them in a year of high income might be a good idea.
This article provides a few ideas for potential tax savings for 2013 income and beyond. The key is to take the time to evaluate which of these concepts, or others not mentioned in this short article, may work for you. In 2013, all AAOS members need to be as financially efficient as possible.
David B. Mandell, JD, MBA, is a principal of the financial consulting firm OJM Group (www.ojmgroup.com), where Carole C. Foos, CPA, works as a tax consultant. They can be reached at 877-656-4362 or firstname.lastname@example.org
© Guardian Publishing
Editor’s Note: This article contains general information and should not be construed as personalized legal or tax advice. Interested individuals should seek professional tax and legal advice before implementing any of the strategies discussed.
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