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

by | Jun 20, 2013 | Planning, Savings, Taxes

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.

Summer Job Alert for your Working Kids: Claim Exempt

by | May 30, 2013 | Planning, Savings, Taxes

I graduated from Wharton in 1987. For those of you keeping score at home, that means I’ve been working at my practice for a score and a quarter plus one.? Now that I’ve been practicing for twenty-six years, many of the clients I picked up earlier in my career have children in high school or college who have part-time jobs.

One thing I continually notice is that most of these kids who work are incorrectly having federal and state income taxes withheld from their wages.? Please note that a working child will generally owe no income taxes unless wages earned exceed $5,950 (in 2012) and/or investment income exceeds $300.? Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.

The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won’t earn enough to be taxed.? All you need to do is have your child write the word “Exempt” in Box 7 of the Form W-4 that is generally completed the first day of employment.? If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.

Here is what the IRS says in their instructions to the Form W-4:

Exemption from withholding: If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2013 expires February 17, 2014. See Pub. 505, Tax Withholding and Estimated Tax.

And here are the instructions on the W-4 for line 7:

I claim exemption from withholding for 2013, and I certify that I meet both of the following conditions for exemption.

? Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

? This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you meet both conditions, write ?Exempt? here .

Do yourself and your kids a favor by having him or her write the word “Exempt” on Line 7 of the W-4 form. Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages.? And you won’t get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund.

NEW YEAR’S RESOLUTIONS – PT 1

by | Jan 17, 2013 | Commentary, Miscellaneous, Savings

There might be a lot of uncertainty surrounding the tax rules these days. Don’t use that uncertainty as an excuse to avoid trying to improve your personal finances. What better time to make some resolutions for 2013 than New Year’s Day?

Last January 1st, did you make any resolutions concerning your personal finances? If so, how’d you do? Did you attain your financial goals, or was 2012 a total financial washout?

The good news about New Year’s resolutions is that you get to make new ones each year. Below are some New Year’s resolutions to improve your finances.

Pay Some Extra Principal With Your Mortgage Payment Each Month

Looking for a risk-free return on your money? By paying extra toward your mortgage each month, you’ll get a risk-free return on that money equal to your mortgage interest rate. Plus, you’ll cut down on the number of years it will take to pay off your mortgage. As a rule of thumb, try to pay extra principal each month equal to at least 10% of your total mortgage payment.

If You Don’t Own A Home, Try to Qualify For the Home Office Deduction

If you’re a renter, the rent you pay generally isn’t deductible on your federal tax return. By claiming the home office deduction, you make a portion of your rent tax deductible. To qualify, you need to use a portion of your home regularly and exclusively in connection with your trade or business. Using your office for managerial and administrative tasks qualifies. You’ll claim the home office either directly against your self-employment income on the Schedule C or as a miscellaneous itemized deduction on the Schedule A.

Save A Set Amount Of Money Each Month

Did you know that if you deposit $81.50 into your savings account each month, the account would be worth $1,000 at the end of the year? To help you reach your goal, make sure to transfer the money out of your checking account into a separate savings or investment account. By doing so, it’s more difficult to spend the money that you have managed to save.

Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to set aside each month to reach a certain savings goal.

We’ll post more Resolutions in Part 2 of this series – stay tuned!

TEACH YOUR TEENS FINANCIAL RESPONSIBILITY WITH PASS CARD

by | Jan 10, 2013 | Commentary, Planning, Savings

I’m a CPA and my wife is a CFP (Certified Financial Planner). Even so, I think together we’ve done a lousy job teaching our two kids – Jonathan (age 14) and Lizzie (age 13) – much about personal finances. We have also done little to help them learn anything about exercising fiscal discipline.

Over the years, we’ve toyed with monthly allowances and paying our kids for doing their household chores. The problem is that we have never been consistent with doling out the promised $20 per month or with enforcing the rules they need to follow to even be eligible to receive their allowance. So my family’s allowance system has evolved to something like this:

Child: “Dad and/or Mom, I’m getting together with friends. Can I have some money?”

Parent: “Sure thing, Jonathan and/or Lizzie. Will $20 be sufficient?”

Well, as my kids continue to grow up, we have reached the point where this conversation happens pretty regularly. Our kids have no incentive not to ask us for money, since we have a track record of giving them money whenever they ask. And they also don’t have an incentive to try to earn any money on their own, since we have gladly been supporting 100% of their spending.

That’s all about to change. Financial responsibility for the Schwartz Clan, here we come. As a parent of a teenager, you might be asking, “How will you pull this off Andrew?”

For Christmas/Chanukah, we gave each child a Pass Card issued by American Express These cards are only available to kids 13 or older.

According to American Express, “Pass is a prepaid reloadable Card parents give to teens. It’s safer than cash, and unlike a debit or credit card, teens can only spend what’s preloaded on the Card.” For my two kids, we loaded each card with $100, and then will reload the card on the tenth of each month with their $25 allowance.

Pass cardholders can spend money on the prepaid card pretty much anywhere that takes credit cards. And while parents do have the right to deny their kids access to cash from ATMs, we decided to set up the cards to allow ATM withdrawals. We can change this setting at any time, however. The first ATM transaction each month is free for each kid, and then there is a charge of $2 per withdrawal.

In theory, when either kid spends all the money on the card, they are out of money until they next receive the $25 on the tenth of the month. Here is where my wife and I will need to exercise some parental discipline and not just dole out more spending money. Instead, we need to try to use this opportunity to remind Jonathan or Lizzie that if they want to spend more than $25 per month, they can always babysit, shovel snow or rake leaves for our neighbors, work at my office during tax season, or try to find another job that hires 14 year-old kids (Lizzie will be 14 in the summer) to earn extra money .

Other Advantages

For parents, the Pass Card has a nifty web interface that allows parents the opportunity to view balance and purchase history online at any time, transfer additional funds into the card, or tweak the amount or frequency of the automatic reloads. Teens will also be able to logon to the Pass website under a separate login to monitor balances and activity.

According to the site, the Pass Card also provides your child some additional benefits similar to the benefits that come with the AMEX card, including:

  • Purchase Protection if an item purchased with the Pass Card breaks within 90 days
  • Roadside Assistance if your child’s car won’t start
  • Global Assist Services to provide your child with emergency services while traveling

I hope the Pass Card works out well for my family and helps my wife and I teach my kids a little about personal finances and fiscal discipline. Check back next fall or winter, and I’ll definitely give you an update on whether the Pass Card helped my family make progress towards these two goals.