Tax Saving Tips for 2017
What to do now to save $10,000 or more on your 2017 taxes.
Each year, as we approach year end, most of our physician clients have a fairly good idea of what their taxable income will be for the year. If you are like these clients, you may be wondering, “Is there anything I can do now to put myself in a position to save on my 2017 taxes?” The answer is very likely yes. In fact, the fourth quarter of the year ending and the first quarter of the new year are the best times to focus on tax reduction.
This article lays out a few ideas that could save you tens of thousands of dollars on your 2017 income tax bill, depending on your circumstances. We also explain some capital gains and planning concepts.
TIPS FOR REDUCING 2017 INCOME TAXES
Maximize the tax benefits of your qualified retirement plan.
Nearly 95% of physicians have some type of qualified retirement plan (QRP) in place. These plans include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, and, for these purposes, even SEP IRAs and SIMPLE IRAs.
However, most of these plans are not maximized for deductions for the business or practice owner or owners. The Pension Protection Act of 2006 improved the QRP options for practice owners. If plans were initiated before that law took effect, owners may be using an outdated plan and forgoing further contributions and deductions permitted under these rule changes. By maximizing your QRP under the current rules, you could increase your deductions significantly for 2017 and reduce your taxes on April 15.
Implement a nonqualified plan.
Unfortunately, the vast majority of physicians begin and end their retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored nonqualified plans in the past 2 years? The unfortunate truth for many physicians is that they are unaware of these plans, which enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, we highly encourage you to do so. A number of these plans can help you reduce your taxable income for years as part of a tax diversification plan.
Defer income to 2017.
President-elect Trump campaigned on a platform of tax reduction. His proposal for tax law changes includes a reduction of the top individual tax rates, a potential repeal of the Net Investment Income tax and a reduction in corporate tax rates. As such, it likely makes sense to defer income from 2016 into 2017 where possible. By doing so, you may well be paying a lower rate of tax on this income next year if proposed tax changes become law.
Prepay 2017 expenses in 2016.
As the year winds down, we typically counsel cash basis clients to prepay for some of the following year’s expenses in the present year. As long as the economic benefit from the prepayment lasts 12 months or less, this can be done. Because 2017 highest marginal tax rates may be lower than those in 2016, this makes sense because of the benefit of the early deduction.
TIPS FOR REDUCING TAXES ON INVESTMENTS
Plan for the 3.8% Medicare surtax.
Beginning in 2013, tax law imposed a 3.8% surtax on certain passive investment income of individuals, trusts, and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) over an applicable threshold amount. While there have been discussions of repealing this tax, at press time, it is still in effect.
NII includes dividends, rents, interest, passive activity income, capital gains, annuities, and royalties. Specifically excluded from the definition of NII are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or QRP distributions, and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1 of Form 1040, adjusted by the nonincludible items just listed.
REDUCING YOUR MEDICARE SURTAX BASE
There are a number of effective strategies that can be used to reduce MAGI and/or NII—and thus reduce the base on which the Medicare surtax is paid. These strategies include:
- Roth IRA conversions
- tax-exempt bonds
- tax-deferred annuities
- life insurance
- oil and gas investments
- timing estate and trust distributions
- charitable remainder trusts
- installment sales
- maximizing above-the-line deductions
The applicable threshold amounts are shown below.
Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000
This simple example illustrates how the tax is calculated:
Al and Barb, married taxpayers filing jointly, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 – $250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000, and the surtax payable is $3,800 (0.038 x $100,000).
For interested readers, we would be happy to explain how these strategies might save you large amounts of surtax. Contact us via the information at the end of this article.
Use charitable giving for capital gains tax planning.
There are many ways you can make tax-beneficial charitable gifts while benefiting your family as well. Charitable remainder trusts (CRTs), charitable lead trusts (CLTs), and private foundations can all be used, within Internal Revenue Service rules, to benefit charitable causes, reduce taxes, and retain benefits for families. If you have considered any of these tools in the past, implementing them in a year of high income might be a good idea.
This article provides a few ideas for potential tax savings for 2016 and 2017 income and beyond. The key is to take the time to evaluate which of these concepts—and others not mentioned in this short article—may work for you. In the challenging economic environment of 2016 and 2017, all physicians must be as financially efficient as possible.
For a free hard copy of For Doctors Only: A Guide to Working Less and Building More, call 1-877-656-4362. Or visit ojmbookstore.com and enter promotional code NEWRET01 for a free e-book download of For Doctors Only or the shorter For Doctors Only Highlights for your Kindle or iPad.
Carole C. Foos, CPA
• principal and lead tax consultant, OJM Group
• 1-877-656-4362; email@example.com
David B. Mandell, JD, MBA
• principal, OJM Group; author, For Doctors Only: A Guide to Working Less & Building More
• 1-877-656-4362; firstname.lastname@example.org