As we head into the final quarter of the calendar year, it’s a good time to sharpen your pencil, review a few tax savings opportunities, and give careful consideration to making investments in yourself and your practice.
Here are the top four items on our radar:
- Annual investments in Individual Retirement Accounts (IRAs) can grow into a tidy sum by the time you transition into retirement. Contributions to traditional IRAs may reduce your current tax obligations as a function of your adjusted gross income. Taxes apply to future withdrawals when you are likely to have a lower marginal tax rate. Roth IRA contributions are not eligible for tax deductions; however, these assets will not be taxed as they generate earnings or otherwise increase in value. Your tax advisor can help select an investment vehicle suitable for your circumstances.
- In 2016, a 50-year-old practice owner with the right 401(k) profit-sharing plan can set aside $59,000 for retirement. If your spouse works for the practice and is 50 years old, another $24,000 can be contributed into a 401(k). If paying a combined federal and state marginal tax rate of 40 percent, the after-tax cost of these savings amounts to $49,800. While the eventual withdrawals from these accounts will have tax implications, you may be in a lower tax bracket when they’re realized.
- If you own the real estate in which you house your practice, you may have an opportunity to accelerate deductions on your income taxes. As a rule, the building and the associated capital improvements are subject to a 39-year depreciation schedule based on the date placed in service. Section 168 of the tax code empowers a building engineer to perform a cost segregation study that breaks the building into IRS-sanctioned asset classes. Selected components may be deemed to have shorter useful lives (i.e., 5-, 7-, or 15-year), thereby opening the door to accelerated depreciation. For “ground up” buildings, we have seen 24 percent to 65 percent of the total building cost reallocated from 39-year property to much shorter lives. That adjustment can have a significant impact on your current tax liability.
- If you need to upgrade your equipment or add an operatory but worry it’s beyond your financial reach, Section 179 of the IRS tax code may tip the decision in a favorable direction. For equipment purchased in 2016, your business may claim a Section 179 deduction up to $500,000, subject to a phase-out threshold of $2,000,000 on total purchases. You may also claim 50 percent bonus depreciation on qualified property placed in service this year. Contact your tax professional to review your planned expenditure and calculate the tax benefits associated with the acquisition.
Although the aforementioned benefits may capture your imagination, you should only pursue them if they make sense for your specific circumstances. The high-level goal is to institute tax strategies that consistently keep you in the lowest marginal tax brackets year after year. Clearly, it does not make sense to create a windfall of tax savings in 2016 if your liabilities soar in subsequent years as a result. Likewise, if this year proved to be one with relatively low income, then you may not get much benefit out of accelerating deductions.
Why talk about tax savings now?
We have just a few short months until we cross the border from 2016 to 2017. If you cannot institute a strategy fully in this calendar year – e.g., purchasing equipment and placing it in service – then any tax benefits that you might accrue will apply to your 2017 returns. And quite frankly, that benefit may not be as valuable one year out.
No matter your individual circumstance, it’s always best to consult with your tax advisor to get the most benefit from effective planning.