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10 Ways for Physicians to Lower Future Tax Bills

Although the 2010 tax season is now a distant memory and 2011 seems far off, the fall is the best time to start planning to save future tax dollars. Many physicians are concerned about potential tax increases and are convinced that nothing can be done to keep their hard earned money. However, opportunities to lower taxes are still available if proper planning is done.

1. Plan capital gains
The recent healthcare reform will impose a new 3.8% surtax on certain passive investment income, including capital gains. This new tax, combined with the expected 2011 expiration of the Bush tax cuts for high-income taxpayers, could produce a 2013 federal income tax rate of 23.8% on long-term capital gains, up from the current 15%. Therefore it may be beneficial to sell appreciated assets in 2010 to benefit from the current low rate.

2. Wealth transfer opportunities
The very low current interest rates create rare opportunities to shift wealth at reduced transfer tax burdens. For example, Grantor Retained Annuity Trusts (GRATS) become particularly attractive because low interest rates result in the assumption that greater amounts of trust principal will be required to support the annuity payment obligation. Lower rates result in a higher value being assigned to the retained interest; therefore resulting in a reduction in the remainder interest that is subject to the federal gift tax. GRATs work especially well for assets that are expected to appreciate in value, for instance, with a closely held business, because the appreciation occurs outside of the taxable estate.

3. Consider a Roth IRA conversion
Roth IRAs have been an advantage for many taxpayers in the "middle" income tax bracket but until 2010 most physicians have been unable to access this option. Now, high income individuals can make a conversion in 2010. Some benefits are:

• Qualified distributions will be completely tax-free and in most situations the beneficiaries will not have to pay any federal tax on post-death distributions.
• Taxpayers are not forced to take required minimum distributions out of a Roth IRA after the age of 70 1/2, allowing the funds to remain in the Roth longer than in a traditional IRA.
• Unlike with traditional IRAs, contributions can be made to Roth IRAs after the age of 70 1/2.
• However the amount of the traditional IRA that is converted is subject to income tax.  The taxpayer has the option to include the income from the conversion in either 2010 or split between 2011 and 2012 (which may not be beneficial if tax rates increase).

4. Retirement planning
Defined benefit plans (DB) can be a great option for high-earning physicians who are looking to invest significant amounts of their annual income toward retirement.

Provisions of recent tax laws let business owners make significantly larger tax-deductible contributions to DB plans than they could a few years ago.

5. Cost segregation study
If your practice owns (or is planning to buy, build or remodel) a medical facility, a cost segregation study can offer numerous benefits including substantially reduced taxable income, increased cash flow and lower property tax bills. Basically, the cost segregation study analyzes total building costs and breaks them down into structural and nonstructural assets (real property and personal property). In the case of medical buildings, many assets can be properly reclassified as personal property, and are therefore eligible for depreciation over a much shorter period of time.  The result is larger tax deductions sooner and the best part is, if you did not take advantage of a cost segregation study in the past, the IRS allows you to deduct in the current year all of the depreciation deductions that a practice was legally entitled to, but did not previously claim.

6. Planned charitable giving
Wealthy taxpayers with charitable intent may be interested in a charitable lead annuity trust (CLAT) to help meet their charitable goals. With the interest rate as low as it is, now is a great time for this strategy.  Generally, the qualified charity serves as the current beneficiary and the remainder beneficiary (usually a family member) receives all remaining assets in the trust after it terminates. The low interest rate results in a smaller taxable gift, again, with the added benefit of future asset appreciation occurring outside of the estate.

7. Donate stock to charity
Donating highly appreciated stock instead of cash to a charity can greatly benefit both parties. The taxpayer can receive a charitable deduction for the fair market value of the security and avoid paying capital gains tax on the appreciation.

8. Planning for S Corporation losses
Since losses allowed to S Corporation shareholders are limited to the shareholder's basis in the corporation, planning may be required to free up the loss in the current year. If losses would be beneficial in the current year, owners should consider borrowing money personally and loaning it to the corporation prior to the end of the year, rather than having the bank directly loan the funds to the corporation.

9. AMT planning
AMT is the excess of a taxpayer's "tentative minimum tax" over his regular income tax. It's basically a secondary tax system designed to prevent high-income taxpayers from taking too many tax deductions. The allowable deductions are
different for AMT than for regular tax and if a taxpayer plans for these deductions it can help to substantially reduce AMT. Maximum advantage can be taken of the AMT exemption amount by spreading these "preference items" evenly among tax years rather than bunching them in one or a few years. In some certain situations, an individual may be able to save taxes by shifting income into and/or deductions out of a tax year in which he expects to be subject to the AMT. Some AMT adjustments are:

• Interest income on some otherwise tax-exempt private activity bonds
• Miscellaneous itemized deductions
• State and local income taxes
• Fast depreciation

10. Take advantage of the energy tax credit
Taxpayers may be eligible for a federal income tax credit for the purchase of eligible energy efficient products for an existing principal residence. Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes can receive a tax credit for 30% of the cost, up to $1,500 for all purchases made in 2009 and 2010.

These are just a few of many tax planning strategies that should be considered prior to year end. Physicians should make plans soon to discuss options with their tax advisor.