Part 2: New Tax Rules – Strategies to Minimize your Tax Bill

In my previous post, I wrote about new tax rules for 2013.  In today’s Part 2, I’ll cover various strategies you can use to minimize your tax bill in light of these new tax rules.

Plan Your Revenue & Expenditures

Most healthcare professionals are on the “Cash Basis” of accounting, which means that:

• Income is reported when fees are collected
• Deductions are claimed when bills are paid

By planning your billing and your expenditures, especially as the year winds down, you might be able to flatten out profit fluctuations from year to year, which could help minimize the portion of your income that will be taxed at higher rates.

PurchaseEquipment & Instruments

Remember, you must“depreciate” the cost of equipment purchased each year. However, the rules allow you to claim in the Section 179 Deduction, which means you get to deduct the full cost of the equipment all in the first year instead of taking a deduction ratably over its useful life. Even if you borrow money to purchase the equipment, you’re still allowed to claim the Section 179 deduction, subject to certain restrictions.

For 2013, the maximum Section 179 deduction is a whopping $500k.

Employ Your Child

For 2013, the first $6,100 of wages paid to child isn’t subject to federal income taxes, assuming the child has less than $300 of investment income. To make this tax break even better, sole proprietors owe no Social Security, Medicare, or Unemployment Taxes on wages paid to child under 18. Even so, wages paid to a child are deductible as a business expense. Plus, the child can fund a Roth IRA, up to $5,500 this year, based on the wages you pay.

Employing a child is also a strategy to make college tuition tax-deductible for your family. For this strategy, you’ll want to pay your child more than $6,100, so they would owe some federal income taxes. You then don’t claim your child as a dependent. And the child doesn’t claim himself or herself as a dependent. However, by no one claiming the child as a dependent, the child can claim the American Opportunity tax credit and offset the first $2,500 of federal taxes owed.

Cost/Benefit of paying $6k of Wages to Child

Cost:: None if sole proprietor, otherwise $933

Benefit: Tax savings of up to $2,604, plus opportunity for child to contribute $5.5k to a Roth IRA.

Employ Your Spouse

By employing your spouse, he or she can contribute up to $17.5k into your practice’s 401(k) plan or $12k into your practice’s SIMPLE IRA. Anyone 50 or older can contribute an extra $5.5k into 401(k) or an extra $2.5k into a SIMPLE. You just need to pay your spouse enough to fund the retirement account and pay Social Security and Medicare taxes on the wages paid.

Cost/Benefit of paying $19k of Wages to Spouse

Cost: $3,078 in additional FICA taxes

Benefit: Tax savings of up to $7,595, plus $17,500 growing in tax-advantaged, creditor-protected account

Contribute to an HSA

H.S.A.s keep getting more popular. If you have a qualifying high-deductible plan, you have the option to contribute up to $6,450 into a Health Savings Account if married ($3,250 if single). Remember, with an H.S.A., contributions are pre-tax, growth is tax-deferred, and withdrawals used for your family’s healthcare expenses are tax-free.

Cost/Benefit of Max Contribution to HSA

Cost: Higher out of pocket expenses due to high deductible insurance plan

Benefit: Tax savings of up to $2,800, plus $6,450 growing tax-deferred for medical expenses or retirement.

Incorporate Your Practice

With an S-Corporation, you take out the profits by paying yourself a salary like you pay your other employees, or by taking S-Corp distributions. Under the current tax rules, you’ll avoid the 3.8% Medicare tax on income taken as S-Corp Distributions.

Cost/Benefit of Incorporating Practice With $360k of Income

Cost: $1,000 or more in additional fees and taxes

Benefit: $3,800 tax savings on $100k of S-Corp distributions

Upgrade Your Retirement Plan

There are a variety of retirement plans available to practice owners. By setting up a plan more sophisticated than a safe-harbor 401(k) or SIMPLE IRA, you can probably make higher contributions on your behalf without increasing the contributions you’ll make for your staff. You’ll want to meet with a retirement plan specialist to learn about the best options in plan design that are available to you.

Cost/Benefit of More Sophisticated Plan

Cost: Potentially higher contributions for your staff and higher administration fees to maintain the plan.

Benefit: Opportunity to contribute more money on your behalf, plus a larger tax break, potentially without increasing contributions made on behalf of your staff.

Reposition Your Portfolio

With marginal tax rates over 50% once you figure in state taxes, consider repositioning your portfolio, putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.