Showing posts with label Taxes. Show all posts
Showing posts with label Taxes. Show all posts

Thursday, November 18, 2021

2021 year-end financial planning checklist for physicians

The end of the year is a good time to check in on your financial plan to see if everything is on track or if some things need adjusting. You will be in a better position for 2022 the sooner these items are addressed and adjusted if they are off-track.


Check Emergency Fund


If you utilized your emergency fund at some point this year, it is important to make sure the account is replenished to appropriate levels. The general rule of thumb for appropriate emergency fund amounts is:
3 months for a dual income family
6 months if in a single income household.



A 6-month emergency fund is also recommended if one person earns significantly more than the other and their income is relied upon to maintain the family’s standard of living.


Max Out Retirement Accounts


The contribution limit for 401(k)s and 403(b)s in 2021 is $19,500. The catchup contribution amount for those over age 50 is an additional $6,500. The deadline for making 401(k) and 403(b) contributions is 12/31/2021. The contribution limit for individual retirement accounts (IRAs) is $6,000 and an additional $1,000 for those over age 50. IRA contributions can be made up to the April 2022 tax filing deadline.


Use Money Saved in Flexible Spending Accounts (FSAs)


Utilizing a healthcare, dependent care, or limited purpose FSA is a great way to pay for certain services on a pre-tax basis. Be aware, most FSAs are use-it-or-lose-it accounts, meaning any money remaining at the end of the year gets forfeited back to the plan, not back to you. Some employers allow a $500 carryover to the following year or a grace period into the spring, but most do not.


Contribute to 529 Accounts


The cost of college continues to rise. 529s provide tax-advantaged investment growth to assist with saving for post-high school educational opportunities like university, community college, trade schools, and apprenticeships. Many states offer considerable state income tax deductions for contributing to a 529. To receive a 2021 tax deduction, contributions must be made before 12/31/2021.


Make Gifts


You can give up to $15,000 as an individual and $30,000 as a married couple to an unlimited number of people per year without having to pay gift tax. Making gifts can be an effective way of removing assets from an estate to avoid future estate taxes. To count for 2021, gifts must be made before year-end.


Donate to Charity


If you are hoping to get a tax deduction for donating to charity, those donations must be made by 12/31/2021 to count toward your 2021 taxes. However, to get a tax deduction, you may need to gift a significant amount to get above the standard deduction. Look to see if you have appreciated assets you could donate instead of cash. Donating appreciated assets from your taxable accounts allows you to avoid paying capital gains taxes when the investments are sold. The charity can sell the investments and avoid paying the taxes, and you get to claim a deduction for the full value of the donated investments.


Harvest Tax Losses


Tax loss harvesting can be an effective tool to reduce taxes. If any investments in your taxable accounts have lost money, those investments can be sold, and the loss captured. This loss can then be used offset gains in other investments or potentially lower your 2021 tax bill. Up to $3,000 ($1,500 if you are married filing separately) of net capital losses can be deducted against ordinary income, self-employment income, and interest income. If you have captured losses above these amounts, the excess can be carried over to future years to offset gains or deduct against income. Tax loss harvesting must occur before 12/31/2021 to count towards 2021.


Update Beneficiaries


Major life events can result in a need to update your beneficiaries. If you got married, divorced, had a birth or death in the family, you may need to update the beneficiaries on your retirement accounts and life insurance policies. These events may also necessitate updating your Will and Power of Attorney documents. There is no deadline for these changes, but the sooner the better.

This list should give you a nice head start, but there are likely to be other items to check up on. Speak with your financial advisor and/or accountant to see if they recommend any additional strategies for the year. Doing so should put you on strong financial footing heading into 2022.


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Friday, September 10, 2021

Taxes Could Be Rising: What can physicians do about it?

This past spring, President Biden unveiled the American Jobs Plan—a $2.7 trillion infrastructure proposal designed to reinforce the post-pandemic economy. The scale of this bill is so expansive that it will take roughly fifteen years of increased corporate and individual taxes to pay for the eight years of proposed spending.


Of course, which tenets of the proposed legislation will actually pass into law (and when) are anyone’s best guess, but the signs appear to be irrefutable: tax hikes are coming in some form or another, and they coulddisproportionately affect high earners, like physicians, more than others.



How can physicians prepare for these potential tax hikes?


Below we outline some of the major changes proposed by the Biden administration and explain how high-income earners can begin protecting against a higher tax liability today.



IF: The top ordinary income tax rate for income over $400,000 is increased to 39.6%.

THEN: For those on the cusp of this $400,000 threshold, finding ways to reduce income will be essential. Strategies could include funding retirement plans, bunching deductions, opening defined benefit or profit-sharing plans, and of course, charitable giving. Some physicians may even want to consider decreasing dividend or other income-producing investments by diverting them to retirement accounts.



IF: Deductions for contributions to IRAs, 401(k)s, and similar retirement accounts are replaced with a flat 26% credit.

THEN: Lower income Americans will be incentivized to contribute to retirement accounts, but high-earners will lose the their full deduction. High-earning individuals, then, may want to heavily consider the benefits of Roth conversions.



IF: Long-term capital gains rates for those with income $1,000,000 and over are increased from 20% to 39.6%.

THEN: Find ways to reduce the size of the capital gains budget, limiting it to 23.8% versus the potential 43.4% top rate. This can be accomplished by:
  • Accelerating gains into this year
  • Tax-loss harvesting
  • Gifting highly appreciated assets to charity
  • Increasing business expenses
  • Increasing retirement contributions

The goal will be to level income to avoid falling into the highest tax bracket the following year and avoid exceeding the $1 million capital gains threshold.



IF: The step-up in basis at death is eliminated.

THEN: Consider “basis management” as an ongoing strategy to reduce portfolio gains that might be transferred at death. This can be done with annual re-balancing that keeps a keen eye on moving stocks that you predict will appreciate into retirement accounts, gifting and giving, or transferring low-basis stocks to family members while you are still alive.



IF: Tax-deferred exchanges for real estate performed under IRC 1031 are eliminated.

THEN: Consider performing like-kind exchanges in the current year in order to defer gains. This is similar to exchanging one annuity for another without triggering the recognition of gain (via an IRC 1035 exchange) and is allowed when property is exchanged for a business or investment.




No Such Thing As “Too Soon”


Where there is a slim chance that all the provisions of this bill will pass in their entirety, it’s best to begin strategizing for a higher liability now. Doing too little too late from a tax standpoint will do no more than erode the income you’ve worked hard to be able to earn. Remember, tax planning is wealth planning at its core, and should always be considered when making retirement and/or investment decisions.


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Friday, July 9, 2021

How physicians can tackle potential tax hikes

Today’s tax rates are among the lowest we have seen in many years, but President Biden made it clear in March of this year that he intends to change all of that. In order to fund his large-scale fiscal stimulus, infrastructure initiative, and economic reforms, President Biden is pushing to increase taxes that are targeted to disproportionately affect the wealthy. While some of the tenets of this proposal may be difficult to pass and the details may change as the legislation makes its way through Congress, physicians may want to consider the following tax planning strategies as they look ahead to their 2021 return.


Let’s take a look at the proposed changes on the table and explore some of the financial planning tips that could help alleviate a higher tax bill for high-earning physicians.




1) Income Taxes


Biden has proposed a return to the top individual tax rate for individuals earning over $400,000 from 37% to 39.6%. This is essentially a reversion to the pre-2017 Tax Cuts and Jobs Act (TCJA) rates for this bracket, which we were expecting to see in 2025 when the bill was set to expire. There are still questions, though, as to whether the 400K threshold will be for a single taxpayer or for married filing jointly (MFJ).

Planning Tips: Lowering taxable income will be fundamental in offsetting this potential change. Consider escalating contributions to retirement plans, opening a profit sharing or defined benefit plan, or bunching deductions to counterweigh the liability in the year this provision is passed into law. You may want to speak with your advisor about decreasing income-producing investments or placing them in retirement accounts.



Charitable contributions, of course, are always a tried-and-true way to lower taxable income through the use of Donor Advised Funds (DAFs), Qualified Charitable Distributions (QCDs), or even donating appreciated stock to charity.

Some physicians may also want to consider increasing municipal bond holdings as they become more valuable when taxes and the tax-equivalent yield increase.


2) Capital Gains and Qualified Dividends


High-earning physicians may be the most challenged by Biden’s proposal to increase the capital gains rate on income over $1 million from 20% to 39.6%. Combined with the 3.8% Medicare surtax, you could potentially face a 43.4% federal tax rate on long-term capital gains. This is almost double the current top rate. In effect, high income earners would completely lose the tax benefits of holding capital assets for more than one year as short-term and long-term gains would be taxed at the same rate.

Planning Tips: You’ll need to keep a keen eye on managing capital gains. This could mean accelerating gains into the current year or gifting highly appreciated assets.


3) Social Security Taxes


Biden is also proposing to assess Social Security taxes on wages above $400K. Currently, employees pay 6.2% toward Social Security and employers pay another 6.2% on the first $142, 800 of wages for each employee. Biden’s proposal would assess these two 6.2% tax rates again once wages exceeded $400K. This, of course, is in addition to the 2.9% and 3.8% Medicare taxes already paid on unlimited wages.

Planning Tips: Consider taking a close look at how your practice is structured tax-wise. If your practice is an S-Corp, you’ll want to minimize the amount of compensation you receive as wages while still remaining “reasonable” per IRS standards.

C-Corps may have a more difficult time, though, since C-Corp practices typically try and eliminate their net taxable income at the corporate level via bonus pay to the owners in the form of W-2 wages. C-Corps may consider a shift in business structure going forward to account for this new tax law.



4) Itemized Deductions


The maximum amount of itemized deductions would be capped at 28% for those earning over $400K. It is unclear if this provision will be for individuals or those filing jointly. But essentially, these deductions will be worth less to the high-income physician in terms of reducing taxable income.

Planning Tips: It may be worthwhile to bunch deductions on property taxes, charitable contributions, and health expenses in order to increase your deduction.


Timing and Your Strategy


The possibility for significant tax law changes on the horizon make forward-looking tax planning especially critical. Of course, this is complicated by the fact that we do not know with certainty when, if, or how these provisions will become effective. Could any of the laws be retroactive? Or could we be in the clear until later in 2022 or 2023? Only time will tell.

Although these tax laws are not a foregone conclusion, physicians would do well to fortify their tax planning strategies ahead of time to guard against some or all of these possibilities. By making small adjustments now, you can protect against being caught off guard as any new legislation moves into law.


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