Effective Tax Planning for Physicians: A Glimpse At Important Opportunities
Introductionof the recent tax reforms has encouraged physicians into considering techniques and ideas regarding tax planning. Despite the fact that several tax benefits are not offered anymore, significant tax savings can be achieved through proper planning.
Thefollowing aims to shed some light on tax planning opportunities that can help make the task as effortless for physicians as possible.
Intereston municipal bonds is exempted from federal income even in the presenceof tax reforms. Usually, interest on such bonds is not taxed by the state where they are issued. In U.S., there is no income tax and multiple bond interest is tax-free.
Tworisks are involved with municipal bonds: fluctuation of interest rate and default by issuer. The value of bond is inversely proportional to interest rate and bond’s face value is received only if it is held by the investor till maturity. Risk of default by the issuer is significantly small as compared to other options.
Qualified Retirement Plans
Reductions in income tax and tax-free income can be secured by funding qualified retirement plans.
Health and Long-Term Care Insurance
Proprietorsand partners make deduction from an individual’s gross income to pay the insurance premium provided that the amount deducted doesn’t surpass the individual’s income from business. Also, the individual should not be registered with some other health maintenance plan from his employer or spouse.
Itis to understand that long-term health care insurance premiums are treated as medical insurance premiums. This implies that long-term insurance premiums are eligible for deductions in case of self- employedhealth insurance. Maximum premiums for long-term health insurance are age-based and the rates fluctuate to adjust inflation.
Medical Savings Account
Accordingto the Health Insurance Portability and Accountability Act 1996, a medical saving account is meant for tax-deductible contributions similarto IRA. However, penalties will be imposed in case of early withdrawals.
Health Savings Account
HSAallows for deductions from an account earning tax-free income. These deductions can then be used to pay any qualified medical expenses that are incurred. Employer or qualified individuals can make contributions and the owner receives distributions that are tax-free.
In case of an agreement that will be funded by life insurance,it will go in the physician’s favor to earn the policies and pay premiums. However, doing so won’t render any income tax benefit to the physician one way or the other.
Whenit comes to disability insurance, either the employee or the employer pays premium. If the employer pays premium, they are deductible by the corporation but are not taxable to employee. On the other hand, if the employee pays premiums, they are not deductible and the benefits securedare not taxable.
Compensation of Shareholder/Employees
IRShas the authority to determine whether or not compensation paid to an employee or shareholder is reasonable. Usually a corporation is advised to find out compensation that has been paid in similar instances while taking into account the shareholder’s experience level. Since a physician’s skill cannot be measured against an industry standard, the compensation paid is reasonable.
Maximizing Deductions for Automobiles Used In Business
Ataxpayer can make deductions based on a vehicle’s depreciation and operating expenses that have been used in a business or travel.
Travel and Entertainment Expenses
IRAestablishes that expenses incurred in travel or entertainment can be deducted, provided proper documentation is supplied and substantiated rules are satisfied.
Home Office Deduction
Evenif a taxpayer is not self-employed, he/she is entitled to home office deduction but the office space must be used regularly as a place for business, used to conduct meetings and should be a separate structure from residence.
Unlikeother organizations, tax compliance and administration are more complexfor a non-profit one. The foundation is required to make an annual distribution of 5% of its assets. However, there is flexibility in the charitable given by the foundation.
Alternative Minimum Tax Consideration
Createdto penalize taxpayers using wrong practices to reduce their income through the benefits and advantages in tax laws, the minimum tax consideration can play a significant role for physicians to reduce theirtax results by timing gains and deductions.
Thereare two accounting methods that are used: cash method and accrual method. Cash method implies that income will be recorded when received and deductions will be listed when paid. On the other hand, accrual method means that income will be recorded when earned and deductions will be reported when incurred.
Keepingthe issues listed above into consideration, physicians can accomplish their goal of competent tax planning more efficiently.