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Reduce your 2019 tax bill before year's end

 

Sanjeev Bhatia

 

David B. Mandell

by Sanjeev Bhatia, MD, and David Mandell, JD, MBA

Many physicians have just filed their 2018 tax returns – if they filed on extension – but it is already time to take steps to reduce the 2019 tax bill. In fact, year-end planning is important because many tax tactics cannot be implemented for the current tax year after Dec. 31.

Most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, so you probably have some understanding of how the new tax law impacted you and will continue to affect you for the 2019 tax year and beyond.

Standard vs. itemized deductions

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 you will not itemize deductions for 2019 and will instead claim the standard deduction of $24,400 for married taxpayers filing jointly or $12,200 for single filers, you must consider the impact of this decision on other deductions.

For example, charitable contributions are only deductible to taxpayers who itemize. As a result, physicians 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 several years.

Possible double deduction for practice owners

Many medical 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 was above certain threshold amounts were ineligible for the deduction because their business is a “specified service trade or business” (SSTB).

Depending on how close your income was to the threshold amounts, you may be able to reduce your income below the threshold by implementing a qualified retirement plan (QRP) or enhancing a current QRP. This can not only provide the physician with a deduction for the QRP contribution but can also allow him or her 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 featured an example in which an outpatient surgery center was not considered to be an SSTB. In the example, no physicians, nurses or medical assistants were employed by the surgery center, and patients were billed only a facility fee by the surgery center. If you feel that your surgery center might fit this example, discuss with your CPA whether you can take the QBI deduction this year or whether there are steps your surgery center can take to become eligible for the deduction.

Design investment portfolio for tax savings

A tax-efficient investment portfolio can save you thousands of dollars in taxes over the years, providing ample opportunities for tax planning. Tactics include:

• Consider 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 that was held for less than a year.
• Be 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 you have not realized losses this year, you may choose to sell some of the investments that have had tremendous gains over the past few years and re-purchase them at their higher price in order to both offset losses and increase tax basis in the stocks you currently hold.
• Evaluate which stocks are held in which accounts. Brokerage accounts, Roth IRAs 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, while 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 your investment advisor is recommended to make sure a portfolio is properly positioned for tax efficiency.

Estate planning considerations

Physicians may also want to think about estate planning as the year draws to a close. The TCJA 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 physicians to transfer some of their wealth to a trust for the benefit of their heirs. Assets that will not be needed in retirement can thus 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.” The end of the calendar year is often a wise time to protect wealth and utilize tax savings opportunities for the current tax year before they expire. The authors welcome your questions.

• Reference:
• For Doctors Only or Wealth Management Made Simple are available free in print or by e-book download by texting HEALIO to 555-888 or at www.ojmbookstore.com. Enter code HEALIO at checkout.

• For more information:
• Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Ill. He can be reached at: 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.