As the end of the year approaches, healthcare providers should undertake tax planning designed to reduce their income tax liabilities for year 2009 and future years. Certain tax-saving tactics are suggested below. Most of these strategies are premised upon the time-honored principle of deferral of income into future years, and acceleration of deductions into the current year.
High income earners should, however, take into account that many observers expect the top federal tax rates will increase in future years, thus making the deferral of taxable income less appealing. Even long-term capital gains rates may jump. Accordingly, it may be beneficial to recognize profits or gains this year at the comparatively lesser rates.
A non-exhaustive checklist of tax-saving moves that may be available to healthcare professionals for year 2009 follows:
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 31 days later.
- Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income ("AGI"). These include IRA and Roth IRS contributions, conversions of regular IRA's to Roth IRA's, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year, or if the tax rates for next year are increased.
- If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into Roth IRAs if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009. On a related note, effective January 1, 2010, even taxpayers with higher income are eligible for establishing of, or conversion to, Roth IRA's. This may be a significant tax planning opportunity for those who have IRAs or qualified plan assets with significantly depressed values.
- If you own an interest in a limited partnership, a limited liability company, or an S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year. Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option (under IRC §179) for assets bought and placed in service this year; the maximum expensing amount will drop to $25,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets), and the expensing option is phased out if property placed in service during the year exceeds a ceiling which is $800,000 for 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus write-off generally will not be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- If you have not done so yet, set up a retirement plan.
- Depending upon your particular situation, you may also want to consider triggering a debt-cancellation event in 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
- If you have losses from a business that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions.
- You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you cannot carry over unused exclusions from one year to the next.
- Consider using a credit card to prepay expenses that can generate deductions for this year.
- If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to increase the deduction for those taxes in 2009.
- Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
- You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
- Estimate the effect of any year-end planning moves on alternate minimum tax for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
- Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.