It’s time for your last minute tax check-up. Don’t put it off and you could save thousands of dollars.
Many doctors have accountants who are “bean counters” and not tax planners. Therefore, little tax planning is done on behalf of their clients, and at tax time – April 15 – they simply tell you to write out a big check for what is owed.
You should always demand an October or November tax planning review with your tax professional. This step will assist you in maximizing the reduction in your tax obligations to Uncle Sam.
When it comes to paying taxes, I always remember the philosophy proposed by a late family friend, Judge Learned Hand, in Helvering v. Gregory, 69F2d 810 (1934):
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. Over and over again courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible; everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are an enforceable exaction, and not a voluntary contribution.”
With this philosophy in mind, the first step to reducing taxes is to hire a competent tax professional who does annual tax planning prior to the year’s end. Good tax planning should be conducted one to three months before the end of the year. Your tax professional, based on your financial summary or condition to date, should offer several personalized suggestions or strategies to reduce your potential tax burden for the year.
The second step to reducing your taxes is to keep good records and be organized. This practice will also help reduce your accountant’s bill. If your records are detailed and organized, the accountant will require less time to do your taxes, and he or she will have a firm support and basis for your deductions and credits.
Some year-end considerations to help reduce your tax obligations include:
- Maximize your pension plan vehicle (invest in yourself), i.e., Keogh, SEP, 401K, IRA, etc.; this helps to reduce your adjusted gross income. The most effective way to reduce taxes is to reduce your income or adjusted gross income.
- Purchase new equipment, taking advantage of the Americans With Disabilities Act (ADA) 50% tax credit (up to $10,250 in expenditures, with a maximum credit of $5,000), and the IRS Sec. 179 deduction/depreciation.
- Remodel or upgrade your practice physical plant/office, which will not only improve your office image but will reduce income and taxes.
- Purchase additional supplies or inventories, to reduce income while increasing practice equity.
- Pre-pay lab bills, rent, fixed expenses, etc. You can even pay three months to one year ahead in your rent to reduce your profits for the year, which will reduce your tax liability considerably.
- Be charitable. Give to your favorite not-for-profit organization; i.e., church, school, United Way, Boy Scouts, etc.
- Incorporate your business and take less salary but add income as a dividend or executive bonus; this reduces FICA and FUTA payments for you.
- Double incorporate your business/ practice – one corporation for your professional practice and another corporation for your lab, your rental business (if you own your own building or other properties), or for your vitamin or accessory business. This second corporation will allow you to purchase a lot of items or property with pre-tax dollars, all in the name of advertising. Penzoil, Exxon, Coors, Motorola, etc., have racing cars, speed boats, hot-air balloons, cycling teams, golf teams, etc. – all in the name of advertising? So can you. You, too, can expense these purchases with pre-tax dollars using a tax professional.
- Hire your spouse as a consultant or bookkeeper to the practice or hire your children as cleaners, filers, maintenance or premise care takers to reduce your income and taxes. Your spouse can now have a $2,000 IRA. Also, you can have your health insurance in your spouse’s name, if he or she is an employee and you offer health insurance to your other employees, and the premiums can be reimbursable to you tax-free.
- Plan a holiday vacation. Do research or get education credits during this vacation, and part (proportional) of your vacation will be deductible. Your spouse’s and children’s portion will also be deductible if they are employees of your practice/business.
- Give business gifts for special occasions or holidays, maximum gift value $25 per person and/or $25 per household annually.
- If incorporated (you should have an employee contract with your corporation), don’t take a salary for December; use the money instead to invest in one or more of the first four tax strategies listed here.
- If you receive checks for services in December, stall the deposit until after Jan. 1 of the following year; this will reduce gross income for the year ending.
- Shift income to next year. Delay your December billing statements and insurance claim forms so that you don’t receive payment until after Jan. 1 after the year ending.
- Pre-pay your accountant, attorney or business consultant if cash flow allows; once again, this will aid in reducing income and taxes owed.
These are just some of the many ways a true tax professional can help you reduce your tax obligation. The time to act is now, before the year ends, if you wish to reduce your income and taxes owed. Because tax laws change frequently, consult your financial advisor or tax professional before implementing any tax strategies. Best wishes for the 1999 tax season!