As a healthcare professional, you know that a routine annual visit with a doctor is an important part of maintaining a patient’s physical health. Similarly, scheduling an annual review of your tax planning strategies will help keep you in good financial health. With the end of 2017 approaching, here are a few tax planning ideas to consider for 2017 and 2018. Keep in mind that tax planning is very dependent on your specific situation, so we recommend that you consult with your tax advisor before implementing any tax saving ideas.
Individual & Healthcare
Because of the time value of money, generally, it is better to accelerate tax deductions and defer taxable income. With tax reform discussions currently in progress, this is even more important. The current proposed reform includes tax rate decreases coupled with the removal of certain tax deductions. Both items would amplify the importance of pushing income down the road and pulling deductions into the current period.
One of the primary ways to defer taxable income is to participate in some type of employer sponsored retirement plan or contribute to an IRA. In general, these plans enable you to take current year income and treat it as non-taxable for the current year while setting it aside for retirement. The growth of the funds is also tax-deferred. These amounts then become taxable when funds are withdrawn from the accounts. The 2017 maximum amount of your wages that can be set aside for 401(k) plans is $24,000 for those age 50 and older and $18,000 per year for others. The 2018 amounts are $24,500 and $18,500, respectively.
Healthcare is another area where you can save on taxes. Taking advantage of pre-tax health insurance options from an employer allows you to avoid taxation on the portion of your paycheck that goes towards health insurance premiums. Also, the portion of your premium paid by your employer is tax-free to you. While it is true that medical expenses may be a tax deduction, the vast majority of taxpayers cannot use this tax benefit each year due to the rules and limitations regarding the deduction. One alternative is to utilize a Health Savings Account (HSA) to pay for medical expenses. An HSA must be paired with a high-deductible health plan that meets certain criteria. For 2017, you may fund $3,400 into the account for single coverage or $6,750 for family coverage. These amounts are deducted from your taxable income. If you only use the funds to pay for qualified medical expenses, the distributions are tax-free. For a taxpayer in the 35% federal and 6% KY income tax brackets, converting $5,000 of medical expenses from being paid with post-tax dollars to pre-tax dollars is worth $2,050.
Business
Business owners have additional tax saving opportunities related to their business activities. There are a wide variety of options when it comes to retirement plans. Depending on the structure and financial activity of the business and the type of retirement plan, up to $54,000 (and $60,000 for those 50 and older) could be contributed (and deducted from taxable income) for the 2017 plan year for the business owner.
The IRS has continued to allow the Section 179 deduction and 50% bonus depreciation as a tax benefit related to certain acquisitions of depreciable property for eligible businesses. Historically, when a business acquires a fixed asset, such as a Magnetic Resonance Imaging (MRI) magnet, that cost is deducted over the life of the asset, such as 5 years. In general, for 2017 the Section 179 deduction allows for the immediate expensing of up to $510,000 of these equipment purchases in the year the items are placed in service. The 50% bonus depreciation deduction allows for the immediate expensing of 50% of any new equipment purchases. The bonus depreciation percentage is scheduled to drop to 40% for the 2018 tax year.
Investments
If you have taxable investments, there are numerous considerations. Holding securities for over a year allows the gains to be taxed at long-term capital gains rates, which are significantly less than ordinary income tax rates. If you have short-term capital gains, which will be taxed at ordinary tax rates, consider selling securities that have a loss since even long-term capital losses will offset the short-term gain amounts. Lastly, if you are charitably inclined, consider gifting long-term appreciated stock. Your charitable contribution deduction will be the market value of the securities, and you will not have to pay any capital gains tax on the appreciation.
Matthew Smith is a CPA, CFE, and the Associate Director of Tax Services with Dean Dorton. He can be reached at msmith@deandorton.com.