The Tax Man Cometh

 As has been oft quoted and misquoted, life’s two certainties are death and taxes. While we certainly wouldn’t presume to predict the former … for most of us, it’s a pretty sure bet that it is once again time to prepare for the latter. (See related story below.)

Ironically, there is currently an air of uncertainty about the future direction of the U.S. tax code with politicians debating the merits of the Bush-era tax cuts, the possibility of a flat tax and changes ranging from tweaks to a full-scale overhaul. Although individuals and businesses will have to take a ‘wait and see’ attitude about any significant changes to the nation’s primary revenue source, there is little question that steps can and should be taken now to minimize your 2011 tax burden and to ensure you are in compliance with new regulations.

“I find more times than not, people don’t take the time to plan,” noted Kathy Watts, CPA, CHC, partner in charge of Health Care Services for HORNE LLP, which has offices in five southern states. “Planning has never been more important than now because there have been so many tax act changes in the past few years; and given the political landscape, that will likely continue for some time to come,” concurred colleague Marsha Dieckman, CPA, partner and director of Health Care Financial and Tax Services for HORNE.

Boyle J. Henderson, Jr., CPA, who is a shareholder in Louisiana-based Daenen Henderson & Company and the immediate past president of the National CPA Health Care Advisors Association, said with a bit of planning, preparation and assistance from a qualified financial consultant, individuals can minimize their tax burden or at least hold onto their cash a bit longer. “The two tried and true methods we’ve always used is — number one, you shift income from your highest bracket to a lower bracket; and number two, you defer taxation to a later date. Why pay a tax dollar today when you can pay it next year?”

Shifting Income

Boyle noted that everyone starts with a zero tax bracket so it makes sense to shift income within the parameters of the law to a child who is at a much lower taxation rate. “When a baby is born, they can earn $1900 in investment income without having to pay taxes,” he pointed out. For a physician living in an area with a state income tax, 40 percent or more of every dollar could be going to taxes so moving $1900 to a child could potentially save more than $700.

“Once they get old enough to work for you, a child can make $5,800 in earned income and not pay any tax,” he continued, noting that even middle school-age children could help sort papers or do other odd jobs. However, he cautioned, you must provide a W-2 and pay a fair wage so you couldn’t pay a child the annual maximum for two hours worth of work over summer break. “If you want to do something really good for them, take some of that money and put it in an Individual Retirement Account (IRA), and then that IRA grows tax deferred,” he continued.

Deferring Taxes

“There are some things you can move from one year to the next just with planning,” said Watts. Interestingly, what is typically a ‘no brainer’ … defer those taxes … could potentially require a little more thought in some cases because of the current climate.

Boyle said in times of more certainty, clients would almost always push taxes to another year whenever that was an option. However, he added tax rates in 2011 could well be as low as we’re likely to see anytime in the near future.

“I have had a number of questions this year from people who have a choice of taking money out of retirement plans or deferring it to January 2012,” noted Boyle. “Their first inclination is to defer it to another year and pay the taxes then. I am telling them, we really don’t know what the rules are for 2012. Because of the uncertainty swirling around in Washington, D.C. and the possibility that rates may go up for 2012, clients have generally concluded to take the retirement distribution in 2011 and pay the tax now.”

Watts noted the Dec. 17, 2010 Tax Relief Act did extend the Bush tax cuts through 2012. However, a change of heart by a deeply divided Congress is certainly not outside the realm of possibility.

There was no ambiguity among the tax advisors, however, about the benefit of contributing to retirement plans for those still in the workforce. Watts said it is essential to fully fund your retirement option. “Everybody has different plans,” she noted, “but maximize them because that is a great shelter against taxes.”

Boyle agreed, saying, “You are putting (money) from one pocket into the other, and you just got a tax deduction for doing that.” As for how much money can be shifted to a retirement plan, Boyle said it depends on the plan design so it’s crucial to speak with a tax advisor for information pertinent to your situation.

He added, “In addition to fully funding your retirement account, if you have a health savings account established, you should certainly fully fund your HSA. And,” he continued, “you have until April 15, 2012 to make your contribution for 2011.”

While the money in that account must be used for qualified medical expenses (which have a broad definition ranging from prescribed medications to prescription eyeglasses), he noted the money doesn’t have to be used up each year. “You can just let it accumulate akin to a retirement plan. It’s never taxed as long as you use it for qualified medical expenses,” he pointed out. Boyle noted that once you turn Medicare age, you can no longer contribute to the HSA, but you can continue to use the dollars that have been set aside in the plan.

Charitable Giving & Other Gifting

Another way to save on tax dollars according to Boyle is to rethink the way you give to your favorite charities. “We recommend that you use appreciated securities to give to the charity … not cash.” Boyle explained by transferring stock in the amount you wish to donate to the charity, you not only get the charitable deduction but also avoid paying taxes on any capital gains. As a non-profit, the charity sells the stock without any tax liability … a classic win/win for both the giver and recipient.

Retirees have another charitable giving option that sunsets after this year. “In 2011, you can still give directly to a charity out of your IRA and it not be taxable to you,” Watts said.

As for giving money to children or grandchildren, Dieckman and Watts said that while there is no deduction for such gifts, they do have benefits. In 2011, an individual can give up to $13,000 per person without having to pay a gift tax. The amount given also reduces your overall estate. Therefore, if you gave the maximum to two children and four grandchildren, you could reduce your overall estate by $78,000.

Additionally, the tax advisors noted grandparents could write a check directly to a school for tuition (both lower schools and universities) on behalf of their grandchildren without that amount counting toward their annual gift tax exemption. This is true for medical expenses, as well, as long as the money is paid directly to the healthcare provider.

Specific to 2011

Watts and Dieckman said a few other tax benefits that are currently set to expire at the end of this year are regulations impacting the alternative minimum tax (AMT), 2 percent payroll tax cut, sales tax deduction and bonus depreciation on capital equipment.

“There was a 2 percent payroll tax cut that takes the Social Security tax of 12.4 (percent) down to 10.4,” said Dieckman in regards to the employee portion. The tax reverts back to the higher rate in 2012. Similarly, the AMT patch that increased the exemption was only extended through 2011, Dieckman continued. Watts pointed out the sales tax deduction is also set to expire at the end of the year, which is bad news for those who live in states without an income tax.

Of particular interest to physicians and facilities are rules surrounding the depreciation on capital equipment investments. “Bonus depreciation at 100 percent is allowed through ’11,” said Dieckman. “That means you can completely write off the expense under certain parameters through Dec. 31, 2011.” However, she added, you cannot simply purchase a new piece of equipment by year’s end to qualify for the extra tax benefit. “The key is you have to have it placed in service … set up and ready to use.”

Watts added the caveat, “You do want to go through the analysis to make sure it makes good business sense.” Buying just to take advantage of the tax rule is counterproductive if the investment doesn’t fit your business plan.

Dieckman added the 50 percent bonus depreciation is allowed through 2012 before the extra write-off completely expires, and everyone goes back to the normal depreciation deduction in 2013.

Preparation for that Other Certainty: Estate Planning

You can’t take it with you, but you can try to ensure those to whom you give your money get to keep as much as possible. Watts said it’s always wise to invest the time to do appropriate estate planning. “You can make sure you maximize the wealth transfer to your heirs and pay the least amount of estate tax,” she said, adding, “You want to consult with an attorney who specializes in estate planning, as well as your CPA, to make those plans.”

However, both Watts and Dieckman said current estate tax law is very much a moving target. “There is a short window where we know what’s going to happen,” said Dieckman. She explained that in 2011 and 2012, the estate tax exemption is a total of $5 million. “It reverts to $1 million in 2013 unless something is done about it.”

A Final Word of Advice

As with many high-wealth individuals, physicians and healthcare executives often have a number of options to limit tax liabilities but must also be sure to fully comply with regulations that typically become more complex in the higher brackets. Because each case is unique, Boyle, Dieckman and Watts were unanimous in their call for every individual to seek the advice of a qualified tax professional in their community before filing a return.

Related Story

 A Word to the Wise on the Hospital Side

Tax exempt hospitals face new requirements

Under healthcare reform, PPACA, there is a whole new code section called IRC 501(r) with new reporting requirements for tax exempt hospitals,” said Marsha Dieckman, partner and director of Health Care Financial and Tax Services for HORNE LLP.

“Reporting on the following three requirements will be required on the 2011 Schedule H in Form 990 — financial assistance policy, limitations on charges and billing and collection requirements,” said Dieckman, adding that the broad categories also have specific requirements attached to each of them.

A fourth requirement coming down the pike is a community health needs assessment. It must be completed by Dec. 31, 2013 for calendar year filers. “There is a $50,000 excise tax penalty for failure to comply with that requirement,” noted Dieckman. She added that because such an assessment takes time to conduct and craft into a report, hospitals should begin to prepare for the new requirement as soon as possible.

Dieckman pointed out the deadlines above are for hospitals reporting on a calendar year. Those on a differing fiscal year should consult with a tax advisor for deadlines specific to their facility.