As a successful
healthcare professional, chances are pretty good that you're on track to be hit
with a one-two punch to your pocketbook. Higher taxes coupled with lower reimbursements may
be what's in store for you and your colleagues in the very near future.
For starters, expect
your taxes to go up. Even if Obama and Congress do nothing to enact a tax
increase, many of the tax cuts initiated as part of the
2001 Tax Act
will sunset at the end of 2010. That means that high income
taxpayers will see the top tax rate increase by a whopping 12.9% - from today's high of 35%
back to the pre-2001 high of 39.6%.
In addition to higher
taxes, many healthcare professionals might also see their income fall.
Depending on the ultimate health care reform package passed by Congress, you and
your colleagues could soon be hit with decreasing reimbursements paid through the next
generation of government programs, including Medicare and
Medicaid.
What can you do to manage this Financial Squeeze Play? Taking full advantage of the
tax-advantaged opportunities available to you will become even more important as
a hedge against higher taxes and lower reimbursements.
Pre-Tax
Opportunities
When is $100 worth
$155? If you're in the 28 percent tax bracket, that's the value of paying
for personal expenses with pre-tax dollars. Whenever post-tax dollars are
involved, you need to earn $155 to have $100 left over after paying your federal
income taxes, social security taxes, and Medicare taxes. Here are some
pre-tax opportunities that might be available to you:
Medical expenses
paid through a Flexible Spending Account: Most employers, as part of
their benefits package, allow their employees to elect to have certain
expenses paid with pre-tax dollars through a "flexible spending account (FSA)",
including as much as $5,000 per year to be used for medical and dental
expenses. Please beware that this benefit comes with a big caveat, you
either use it or lose it. In other words, if you don't spend the money that
is set aside, the excess won't be refunded to you. You should note
that under the current rules, your
employer can give you to as late as March 15, 2010 to spend any money that you set aside
for this pre-tax benefit in 2009.
Childcare
expenses paid through a Flexible Spending Account: If you're
paying child care expenses, and both you and your spouse work, you
can set aside $5,000 per household through your employer's FSA to pay for your dependent's care
expenses. The catch is that you need to report the name, address, and
taxpayer identification number of the care provider on your tax return, or
the $5,000 becomes taxable to you again. If you only have one child,
paying for the child's care through the FSA saves you a lot in taxes.
Health Savings Accounts:
With health insurance premiums
on the rise, more people are looking into high-deductible products. Did you know that you can couple a high-deductible
plan with a special type of savings account known as a
Health Savings
Account (HSA)? While either you or your employer contributes pre-tax dollars
into an HSA in your name, money withdrawn from the HSA for health care expenses is
completely tax-free. Plus, any money remaining in your HSA grows
tax-deferred, and upon your
turning age 65, is available to help fund your retirement.
Business expenses
paid through employer's "slush fund": If you have the option of
having your employer pay for some of your out-of-pocket expenses in exchange
for a reduced bonus or salary, those expenses are paid with pre-tax
dollars.
Tax-Free Opportunities:
Tax-free opportunities
are a relatively recent phenomenon. Prior to some of the tax law changes
enacted during the late 1990's, there were very few tax-free options available to taxpayers.
Even though you don't get a current tax deduction in most cases, the potential for decades of compounded growth coupled by
the promise of tax-free withdrawals down the road makes them worth a close look.
Roth IRAs:
For 2009, you can contribute up to $5,000 to a Roth IRA, as long as you have
earned income, and your adjusted gross income
doesn't exceed $120,000 if single or $176,000
if married. Anyone 50 or older can contribute an extra
$1,000 annually. Amounts contributed to a Roth grow tax-free as long
as you don't withdraw any of the earnings until you turn 59 1/2, use $10,000
for first-time homebuyer costs, or
meet certain other exceptions. Starting in 2010, the income limitation
preventing high-income taxpayers from
converting their IRAs and other qualified retirement accounts to a Roth IRA
disappears, so make sure to consider if this strategy makes sense for you for next year.
529 Plans:College savings plans allow you to put away a sizeable amount of money
for a child's education. Currently, you can contribute up to $13,000 per
child per year into a 529 Account. You can even frontload five years worth
of contributions, up to $65,000 (or $130k if married), all at one time, but then you can't add to
that child's account for the next four years and will need to file a
Form 709,
US Gift Tax Return. Amounts withdrawn from your
529 plan are not taxed as long as the money is used to pay for tuition and
other qualified college expenses.
Principal
residence: When you sell
your principal residence, you aren't
taxed on the first $500,000 of gain if married or the first
$250,000 of gain if single, as long as the home was your principal
residence for two out of the previous five tax years. If you sell the house
in connection with a job related move or meet certain other conditions of
hardship, and lived in the house for less than
two years, you can exclude a prorated amount.
Other
Tax-Free Opportunities: Gifts received from parents and relatives are
generally not taxable to you. Instead, the donor might be subject to a
"gift tax" if the value of the gift to another person exceeds $13,000
per year.
Life insurance proceeds aren't subject to income taxes either.
Depending on who owned the policy, however, the proceeds might be subject to
estate (inheritance) taxes. Make sure to talk with an estate planning
attorney about these two items.
Tax-Deferred
Opportunities:
With a tax-deferred
savings opportunity, you save taxes today, and then generally owe taxes when you
withdraw the money later on. Even so, these opportunities make sense for a
variety of reasons. For starters, a dollar today is more valuable than a dollar
tomorrow, due to inflation and the time value of money. Plus,
the government lets you
invest the taxes you save and keep the compounded earnings on that
money. For both these reasons, tax-deferred savings opportunities make a
lot of sense.
401(k) & 403(b)
plans: These salary deferral retirement savings plans are only available through your
employer's benefit package. Amounts contributed during the year reduce your
taxable earnings and grow tax-deferred. For 2009, the maximum contribution
into either of these plans through salary deferrals is $16,500. Anyone
50 or older by December 31st can contribute an additional $5,500 this year.
If you go with the Roth version of these plans, you forego a tax savings
today in exchange for a promise from the government of tax-free withdrawals
down the road.
SEPs, SIMPLEs,
and Solo 401(k) Plans: If you have some self-employment earnings,
or own a small business, you're entitled to set up
your own retirement plan.
You can contribute up to 20% of your net earnings into a SEP or up to
$11,500 ($14k if 50 or older) plus 3% of your income into a SIMPLE. If you don't have
access to a 401(k) or 403(b) plan through another employer, you can
contribute $16,500 ($22k if 50 or older) plus 20% of your net earnings
into a Solo 401(k). Amounts contributed to these plans reduce your
taxable income and grow tax-deferred.
Take Control Of
Your Taxes
Don't worry about what
you can't control. How often have you heard this advice from your parents,
coaches, and managers? The best way to counteract the costly combination
of higher taxes and lower reimbursements is to take advantage of every
opportunity to minimize your tax burden and, therefore, maximize your post tax
earnings and wealth.
ENERGY STAR RATING
MAY NOT MEET THRESHOLD FOR TAX CREDIT
Back in our June newsletter,
we wrote that The
American Recovery and Reinvestment Act of 2009 reinstated and improved the tax
credit for energy efficient home improvements beginning on January 1, 2009.
We also warned our readers, "Please note that the new rules did increase the
standards for an energy efficient purchase to qualify for this tax credit.
Expect the IRS to issue guidance for manufacturers to certify that their
products meet these new standards."
Well, as
promised, the federal government issued guidelines for what purchases qualify
for this $1,500 tax credit. Check out
energystar.gov/taxcredits for a detailed list of qualifying expenditures, as
well as a summary of the current rules for this lucrative tax credit.
According to our friends at the
IRS, "Starting in 2009, the new law allows the alternative motor vehicle
credit, including the tax credit for purchasing hybrid vehicles, to be
applied against the alternative minimum tax. Prior to the new law, the
alternative motor vehicle credit could not be used to offset the AMT."
While this is welcome news to people in the market for a hybrid, I think
many will agree it's Too Little Too Late for the majority of individuals who purchased
a hybrid between 2006 and 2008.
Since first being introduced back
in 2006 to replace the $2,000 "clean fuel" deduction, the hybrid vehicle tax
credit has been more of a tease than anything else. Due to the
increasing prevalence of the AMT, the majority of my clients who purchased a
hybrid never saw a dime of this tax credit.
The Hybrid Car Tax Credit also included a provision to even the playing field for some of the
US car manufacturers who weren't keeping up with their Japanese competitors
in the race to develop a hybrid. Starting on January 1, 2006, the tax
credit would begin to phase-out for a manufacturer upon selling 60,000
hybrids. Toyota and Lexus hit that threshold during 2006, and
Honda
followed suit the next year. So if you are in the market for a hybrid produced by
these three manufacturers, no tax credit is currently available.
There are still about
a dozen 2009 hybrid models that qualify for a tax credit ranging from
$1,550 to $3,000. Please note that Ford and Mercury hit the 60,000
unit threshold last year, so the credit for their hybrids has begun to be
phased-out as of the second quarter of 2009.
This hybrid car tax credit is
scheduled to expire on December 31, 2010. Fortunately, now that the
Alternative Motor Vehicle Tax Credit is no longer capped by the Alternative
Minimum Tax, you can finally be certain that you will save the full amount of taxes
for the hybrid model you decide to buy.
For 2008, the standard deduction for a single individual is $5,450 and
for a married couple is $10,900 and increasing to $5,700 and $11,400
respectively in 2009. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
business expenses.
For 2008, the personal exemption is $3,500
increasing to $3,650 in 2009.
Individuals will claim a personal deduction for themselves, their spouse, and
their dependents.
The maximum earnings subject tosocial security taxes is $106,800
for 2009, up from $102,000 for 2008.
The standard mileage rateis $.55 per business mile as of
January 1, 2009, down from $.585 per mile as of December 31, 2008.
The maximum annual contribution into a 401(k) plan or a
403(b) plan is $16,500 in 2009. And if you'll be 50 or older by
December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b)
account this year.
The maximum annual contribution to your IRA is $5,000 for 2009. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2010 to make your 2009 IRA
contributions.
I've been following this issue for 5-10 years, even submitted paperwork to
the IRS many years ago to no effect. Finally, just got a notice that UPenn
has hired PriceWaterhouse to try and get the FICA back for its house staff,
I'll definitely be signing up.
Check out this recent post on
the
FICA Forum:
I've been
following this issue for 5-10 years, even submitted paperwork to the IRS
many years ago to no effect. Finally, just got a notice that UPenn has hired
PriceWaterhouse to try and get the FICA back for its housestaff, I'll
definitely be signing up.
Let's work together to keep current on this hugely valuable tax
break. Please post whatever you read or hear regarding this FICA
issue on our new
Message Board we set up just for this topic.
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Email us at info@cpaniche.com
