Experts Offer Tips for Making the Most of Deductions
With the end of the year looming, taking a few minutes now to think about your taxes could help relieve some of the pain next spring when it's time to file your return.
"Everybody's tax return is different. There are a lot of things we can look at," said Denise Smith, director of human resources and education for Jackson Hewitt Tax Service in Hattiesburg. "Doctors should keep receipts for anything they purchase for their practices," including items such as lab coats, stethoscopes, etc. "Those are all expenses they can use on their tax return."
If you rent your office, the rent is deductible. If you own your office space, your mortgage interest is deductible.
You can also deduct repairs on equipment, computers and your building, as well as use of outside services, such as accounting, electronic billing, legal and payroll services, postage and delivery or professional consultants. Malpractice premiums and property and liability insurance are also deductible.
It's not too late to make contributions to retirement accounts. You can open an Individual Retirement Account by April 15 and make a deductible payment for the prior year. And if you have a 401(k) plan through an employer, you can put in as much as you're allowed to.
"If they are not contributing to an IRA, they may want to consider starting a Roth IRA," Smith said. "You pay the taxes on it now. You never have to pull it out, you can leave it as an inheritance. You can't do that with a traditional IRA. You have to start pulling it out when you are 70 1/2. If you don't, you face penalties. I've seen it as high as 55 percent."
Smith said some business travel might be deductible.
"It needs to be written down (to be used as a deduction)," she said. "It takes approximately three months to become a habit. We know it requires a lot of writing, but most doctors carry some sort of recording device with them, so they could record it and write it down later."
The New York State Society of Certified Public Accountants recommends taking these steps before Dec. 31 to get your filings in the best possible condition:
- Figure out your income and deductions. If you expect your income to be high, you can delay some of it until the next calendar year to save taxes for 2008.
- If you know you're going to get a year-end bonus, ask your employer about postponing the big check until January. You can't defer the bonus being taxed just by not depositing the check until 2009.
- You can accelerate your federal deductions by paying your state taxes or property taxes early, or make an extra mortgage payment (the interest is deductible) or have dental work or surgery before the end of the year.
- Make a charitable deduction. If you give property, you can usually deduct the full market value. Be sure to save the receipts.
- If you give a gift to your children or other relatives before the year is out, make sure they cash the check and it clears by Dec. 31. Gifts up to $12,000 per person do not need to be reported.
- Offset capital gains. Examine your portfolio to decide whether you should sell some dogs before the end of the year. Capital losses are put together with capital gains, but they are also deductible against up to $3,000 in income a year.
- Get married. You can say "I do" just before the stroke of midnight on Dec. 31, and the government will consider you married for the entire year. Many of the calculations the IRS makes are based on the taxpayer's marital status. Just be sure to update your withholding if you've gotten married or divorced in 2008, had a child, or can no longer claim a child as a dependent.
Those are some general end-of-the-year tax tips. Here, from CPA firm Case, Foster-Potter, Kunitzer, PLLC, of Battle Creek, Mich., which specializes in tax planning for doctors, are some specialized tips:
- Choose your form of business wisely. You can conduct your medical practice as a sole proprietorship, a partnership, a regular corporation (personal service corporation), an S corporation, a limited liability company (LLC) or a limited liability partnership (LLP). The form that you choose will have a direct bearing on the amount of tax you pay. Get professional assistance so that you make the right choice for your practice.
- Review your situation if you operate as a personal service corporation. Using a fiscal year rather than a calendar year to defer income is generally not allowed. PSCs pay a flat 35 percent on taxable income, so you may want to consider other options.
- Keep good minutes if you operate as a corporation. The IRS is less likely to question excess compensation, deferred compensation, pension contributions and other tax issues if minutes are accurate, detailed and up to date.
- Don't aggravate your tax bill with penalty charges. If you are required to make estimated tax payments, be certain that you are paying the minimum required.
- Travel related to the operation of your practice is fully deductible. Keep adequate records for travel, meal and entertainment expenses. Commuting expenses, that is, travel to and from your work, are generally not deductible. Most business meal and entertainment expenses are only partially deductible.
- Keep track of continuing education costs, which are deductible.
- Membership dues in professional and community service organizations are deductible, but country club dues are not.
- Maximize tax benefits by conducting a second occupation as a business and take the steps necessary to prove it is a source of income. If you engage in a second "occupation", such as farming, breeding horses, conducting seminars, or writing, the activity will be considered a hobby (and the deductibility of expenses connected with it very limited) if you cannot show that you are engaged in the activity to produce a profit.
Still need some help?
"If they want to look at other deductions, they should sit down with a really good financial advisor," Smith said.
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