Take advantage of 2019 year-end tax planning tips
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Although it seems that many orthopedists just filed their 2018 tax returns, if they filed on extension, it is already time for them to take steps to reduce their 2019 tax bill. In fact, in terms of planning, many tactics for a given tax year cannot be implemented after Dec. 31 of that year, which is why year-end planning is important. Orthopedists may recall that 2018 was the first year that most provisions of the Tax Cuts and Jobs Act went into effect. Therefore, much of what is discussed in this article should not be brand new to readers, since these tax planning concepts should have also been considered during 2018 planning.
Tax deductions: Standard vs itemized
One of the biggest changes for 2018 individual filers was the reduced state and local income tax deduction that is now capped at $10,000. This change, along with the increased standard deduction, led to many filers not itemizing deductions in 2018. If there is a chance that an orthopedic surgeon will not itemize deductions in 2019 and will instead claim the standard deduction of $24,400 for married taxpayers filing jointly or $12,200 for single filers, he or she should consider the impact of this decision on other possible deductions.
For example, charitable contributions are only deductible to taxpayers who itemize. As a result, orthopedic surgeons who want to take significant charitable deductions, but who otherwise would benefit from the standard deduction, may want to consider “bunching” charitable contributions to take full advantage in years when they will itemize deductions. Donor-advised funds may be a consideration for taxpayers who want to make larger contributions in a given year, but still have the charities benefit over multiple years.
Possible double deduction
Many orthopedic practice owners found out the hard way that their pass-through practice entity did not qualify for the new Section 199A Qualified Business Income (QBI) deduction. Owners of medical practices whose individual taxable income exceeded certain threshold amounts were ineligible for the QBI deduction because their business is a specified service trade or business (SSTB).
Depending on how close an orthopedist’s income was to those threshold amounts in 2018, he or she may be able to reduce his or her income below the threshold by implementing a qualified retirement plan (QRP) or enhancing their current QRP. This can not only provide a deduction for the contribution to the QRP, but also allow the physician to qualify for the 20% QBI deduction. The combination of the two deductions often pays for much of the QRP cost.
The final regulations for Section 199A did contain an example in which an outpatient surgery center was not considered a SSTB. In the example, no physicians, nurses or medical assistants were employed by the surgery center, and patients were only billed a facility fee by the surgery center. Orthopedic surgeons who think their surgery centers might fit this example should have a discussion with their CPA that might center around whether their surgery center facts allow them to take the QBI deduction in 2019 or what possible steps they can take to position the surgery center so it will qualify for the deduction in 2020 and beyond.
Portfolio designed for tax savings
An orthopedic surgeon’s investment portfolio provides ample opportunities for tax planning, as a tax efficient portfolio can save thousands of dollars in taxes during the years. Tactics here include the following:
l Considering the timing of sales. A holding period of greater than 12 months allows a physician to pay long-term capital gains rates on the realized gain from a sale with a maximum rate of 20% vs. a maximum rate of 37% on an investment which was held for less than 1 year;
l Being proactive in realizing losses to offset capital gains and vice versa. A temporary dip in the stock market may be the time to realize some losses that can be used to offset capital gains. If an orthopedist has net realized losses this year, he or she may choose to sell some of the investments that have had tremendous gains during the past few years and re-purchase them at their higher price to both offset losses and increase tax basis in the stocks they currently hold; and
l Evaluating asset location, meaning evaluating which stocks are held in which accounts. Brokerage accounts, Roth individual retirements accounts and qualified plans are all subject to different forms of taxation. It is important to utilize the tax advantages of each of these tools to ensure they work in the most productive manner possible. Investment vehicles paying qualified dividends are preferred in a brokerage account, however it is generally preferable for qualified accounts to own high-yield bonds and corporate debt taxed at ordinary income rates. A year-end discussion with one’s investment advisor is recommended to make sure a portfolio is properly positioned for tax efficiency.
Estate planning considerations
For older rather than millennial orthopedic surgeons, the year-end is also a good time to think about estate planning. The Tax Cuts and Jobs Act made the federal estate tax exemption $22.8 million for a married couple in 2019, but that exemption amount is due to sunset at the end of 2025. Before then, it might make sense for many orthopedists to transfer some of their wealth to a trust to benefit their heirs. Thus, assets that will not be needed in retirement can be protected against future estate tax increases and exemption reductions, and often against litigation, liability and divorce, as well.
As Benjamin Franklin said, “Failing to plan is planning to fail.” It may be wise to spend time at the end of the calendar year to protect wealth and utilize tax savings opportunities for the current tax year before they expire.
- Reference:
- Wealth Protection Planning for Orthopaedic Surgeons or Wealth Management Made Simple are available free in print or by e-book download by texting OT19 to 555-888 or at www.ojmbookstore.com. Enter code OT19 at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois. He can be reached at email: sanjeevbhatia1@gmail.com.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at mandell@ojmgroup.com or 877-656-4362.
Disclosures: Bhatia and Mandell report no relevant financial disclosures.