This article is written by Carole C. Foos, CPA, and David B. Mandell, JD, MBA, OJM Group.
As we approach the 4th quarter of the year, most managers and owners of ASCs now have a fairly good idea of what their taxable income will be for 2013. If you do, you may be wondering "is there anything I can do NOW to save taxes on April 15?" The answer is very likely "yes."
This short article will lay out a few ideas – that could save you tens of thousands of dollars on the 2013 income tax bill for ASC owners, depending on your facts and circumstances, as well as some capital gains concepts as well. This is especially important in 2013 as federal income and capital gains taxes are higher this year because of the Fiscal Cliff deal signed in January of this year and Medicare taxes are higher because of the Affordable Care Act.
Techniques to reduce 2013 income taxes
1. Maximize the tax benefits of your Qualified Retirement Plan (QRP)
Most ASC owners have some type of QRP in place – either at the ASC itself or through an affiliated entity. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, or even Simplified Employee Pension (or "SEP") or Individual Retirement Accounts (or "IRAs"), for these purposes.
However, most of these plans are NOT maximized for deductions for the ASC or ancillary practice owner(s). The Pension Protection Act of 2006 improved the QRP options for employees who are also 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 In other words, many owners may be using an "outdated" plan and forgoing further contributions and deductions permitted under the most recent rule changes.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 15th 2014.
2. Implement a fringe benefit or "hybrid" plan
Unfortunately, the vast majority of ASC owners 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, non-qualified plans or "hybrid plans" in the last two years? The unfortunate truth for many is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, we highly encourage you to do so. A number of these plans can help you reduce your taxable income in 2013 significantly…and they can be put into place in a few weeks, so it's not too late for 2013.
3. Consider a Captive Insurance Company (CIC)
CICs are used by many of the Fortune 1000 for a host of strategic reasons. For an ASC, a CIC can be equally beneficial, especially for the owners. Here, you actually create your own properly licensed insurance company to insure all types of risks of the practice – often those that have little coverage today. These can be economic risks (that revenues drop), business risks (that electronic records are destroyed), litigation risks (coverage for defense of harassment claims or wrongful termination), and even coverage for ancillary entities and real estate. If it is created and maintained properly, the CIC can enjoy tremendous income tax benefits that can translate into hundreds of thousands of dollars of tax savings annually.
4. Pre-Pay 2014 expenses in 2013
As the year winds down, we typically counsel clients to prepay for some of the following year's expenses in the present year. As long as the economic benefit from the prepayment lasts 12 months or less, this can be done. Since 2014 highest marginal tax rates will likely be the same those in 2013, this makes sense because of the benefit of the early deduction.
Techniques to reduce taxes on investments
1. Planning for the 3.8 percent Medicare Surtax
Beginning in 2013, the tax law imposes 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (or "NII") or (2) the excess of a taxpayer's modified adjusted gross income (or "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 you report on the last line of page 1, Form 1040.
The applicable threshold amounts are shown below.
Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000
A simple example will illustrate how the tax is calculated.
Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII 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 (.038 x $100,000).
Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) oil and gas investments, (6) timing estate and trust distributions, (7) charitable remainder trusts, (8) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.
2. Use Charitable Giving for Capital Gains Tax Planning
There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. Charitable Remainder Trusts (or "CRTs"), Charitable Lead Trusts (or "CLTs"), Private Foundations – these all can be used, within the Internal Revenue Service (or "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 gives you 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, you need to be as financially efficient as possible.
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David B. Mandell, JD, MBA, is an author of five national books for doctors, including FOR DOCTORS Only, as well a number of state books. He 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.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.