Top tax strategies for dentists for the end of the year 2019 and 2020.
By Fazel Mostashari, DentalCPA and Cecilia Chen, Esq. , Dental Attorney ( www.practiceatty.com).
After completing one of the most challenging and exciting tax seasons due to all the new changes of Tax Cuts and Jobs Act (TCJA), that took effect for tax years after 2018, we continue our assignment of education of our clients in the dental industry with steps to take between now and end of 2019 to improve their position to maximize their tax benefits and minimize the liability under the new law.
This article intents to assist guiding dental professionals take proper steps timely during year to avoid any surprise and develop a systemic plan to enhance their financial position.
Please note, this is just for general information purposes only. Please consult your own CPA before taking any steps based on this article.
Proper and timely tax planning will assist you be on top of compliance and take advantage of legal opportunities that are provided by the tax code for dental professionals to elevate business and financial position. Some of the tax planning goals include:
- Reduce the present year’s tax liability.
- Defer the present year’s tax liability to future years
- Reduce any potential future years’ tax liabilities.
- Maximize the tax savings from allowable deductions.
- Minimize the effect of the AMT on this year’s tax liability.
- Maximize tax savings by taking advantage of available tax credits.
- Maximize the amount of wealth that stays in your family.
- Minimize capital gains tax.
- Minimize the Medicare Contribution Tax on net investment income.
- Avoid penalties for underpayment of estimated taxes.
- Manage your cash flow by projecting when tax payments will be required.
- Minimize potential future estate taxes to maximize the amount left to your beneficiaries and/or charities (rather than the government).
- Maximize the amount of money you will have available to fund your children’s education as well as your retirement.
New tax code provides for some areas to specifically look for potential improvements include:
- Pass-through status of your business: If a small-business client is eligible for the 20 percent deduction for pass-through entities, timely planning and review can determine whether there are any changes in the compensation structure they can make that will maximize the deduction.
The deduction will be claimed on individual owners’ tax return Form 1040 and is commonly being referred to as the Section 199A deduction (referencing the Internal Revenue Code), or the 20% qualified business income deduction (QBID).
Business income is eligible if the company is structured as a Sole Proprietorship, a Partnership, or an S-corporation. C corporations are not eligible to take this deduction. Personal taxable income must be less than $315,000 for a married filer or $157,500 for a single filer to avoid the deduction being phased out. The deduction is fully phased out at taxable income of $415,000 for a married filer and $207,500 for a single filer.
The QBI deduction can also be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from publicly-traded partnerships (PTPs). So the deduction can potentially be a big tax saver.
Some top strategies for dental practice owners to consider to qualify for this exclusion are:
- Increased retirement plan contributions to reduce taxable income.
- Employing children in your practice and pay them highest reasonable rate for their services
- Review personal & business expenses and determine if you are correctly deducting all applicable business expenses such as meals, travel, CE, phone, health insurance and auto.
- Use new limits of Section 179 and Bonus depreciation and review all depreciation schedules and opportunities to keep income under the deduction thresholds.
- establish and fund a Health Savings Account (HSA). Coverage under an HSA can provide tax-deductible contributions
- Recapturing AMT : With the new higher income limits for individuals exposed to the Alternative Minimum Tax, more taxpayers will have the opportunity to recapture the AMT paid in prior years. Tax professionals can calculate prior years’ AMT credit now and the taxpayers affected can reduce their withholding and enjoy the benefit early.
- Review your investments and utilize loss harvesting: Sell stocks that may produce a loss if it’s consistent with your financial plan.
- Check out ‘reasonable comp’ rules: Make sure an S corporation owner’s salary meets the “reasonable compensation” standard.
- Get some big wheels: Buy an SUV or truck that is heavier than 6,000 pounds for a business to take bonus depreciation up to 100 percent of the cost of the vehicle.
Get A Second Opinion On Your Taxes
Having a second set of eyes take a look at your tax situation can often uncover tax deductions your regular CPA or tax preparer missed, especially if the person helping you is not a dental specific CPA or not a CPA at all. Unfortunately, we see many times that financial statements and tax returns done by so called “low-priced accountant services” lead to much financial damages that keep their effects for many years.
Estate Planning for Maximum Income Tax Benefit
Although the lifetime unified credit has doubled ($11.18 million in 2018), there are still many reasons to consider estate planning under the new tax reform. The larger exemption is set to sunset in 2025. There is optimism that the credit would not be reduced, but there is always concern of the potential for claw back or other changes in the estate tax rules.
1. Use Either the Lifetime Gift and Estate or the GST Tax Exemption to Your Advantage
- Under federal law, gifts made during an individual’s lifetime which exceed the “lifetime gift and estate tax exemption” amount are currently taxed at the rate of 40%.
- Similar to the lifetime exemption, a tax of 40% is assessed on transfers (whether made directly or through a trust) to grandchildren, other family members, or non-related individuals no younger than 37.5 years from the gift-transferor, which are in excess of the generation-skipping transfer tax exemption (“GST”) amount.
- The GST is independent from the lifetime gift and estate tax exemption –i.e. it is an additional tax.
- Per the TCJA, both the lifetime gift and estate tax and the GST exemption amounts doubled from $5 million to $10 million, and are adjusted annually for inflation.
- Beginning 1/1/2019, each of the exemptions will increase even further from last year’s $11.18 million to $11.4 million for individuals and from $22.4 million to $22.8 million for married persons, again, based on the inflation adjustment.
- These increases mean that persons who have already expended the lifetime gift and estate tax exemption amount are now able to gift up to an extra $220,000 without triggering the federal gift tax.
- Note also that certain transfers or donations –such as qualified medical or tuition expenses or donations to charitable organizations –also are excluded from taxation and are not counted for purposes of either exemption.
- Nevertheless, assuming that Congress takes no action to make this legislation permanent, the benefits associated with the exemption increases are only temporarily available, as both exemption amounts are currently slated to expire on 1/1/2026.
- Once the exemption increases expire, the exemption amounts will return back to the $5 million limit (which will still be adjusted for inflation).
- Though there was valid concern that the benefits of the exemption increase would be limited to those taxable gifts made by an individual who died prior to the 1/1/2026 expiration date, the IRS recently clarified that there would be no “clawback” of taxpayer gifts made before the end of 2025, whether or not the taxpayer later dies at a time when the lifetime exemption amount is decreased.
- Through careful planning, you can make use of this temporary increase while it is still in effect.
- Consulting with your advisor is recommended to not only determine which assets you should gift in order to maximize the benefit to your estate, but to also assess how state law and state estate tax exemptions impact your estate.
2. Use the Increased Gift Tax Exemption
- Starting in 2018, the annual gift tax exemption increased from $14,000 to $15,000 per recipient
- For married couples who are eligible to give “split gifts” –i.e. a gift given by the taxpayer with the consent of their spouse –the exemption has doubled to $30,000 per recipient.
- Note also that while spouses are able to transfer an unlimited amount of money or property to each other either during their lifetime or at one spouse’s death through the “unlimited marital deduction,” this unlimited deduction is only applicable to spouses who are both U.S. citizens.
- However, the amount that one U.S. citizen spouse may gift to their non-U.S. citizen spouse has increased from $152,000 in 2018 to $155,000 for 2019.
- The annual gift tax exemption works in tandem with the lifetime gift tax exemption because gifts made at or below the annual gift tax exemption amount are not counted against an individual’s lifetime estate tax exemption.
- For example, if a married couple gifts $30,000 to each of their three children, the couple could effectively transfer those funds to their children without either (a) triggering a tax on the $90,000 gifts or (b) having the $90,000 reduce their lifetime estate tax exemption.
- Over time, by making annual tax-exempt gifts, the taxpayer is effectively able to reduce the size of his or her “taxable” estate while also avoiding the amount of the gift from being credited towards the taxpayer’s total lifetime gift exemption.
3. Consider Modifying an Existing California Trust through “Decanting”
- Though one of the advantages of establishing an irrevocable trust is that the assets it holds are not included in the grantor’s estate for tax purposes, a disadvantage was that the irrevocable trust could not be modified once established.
- Thus, if a more beneficial rule or regulation affecting the assets of an irrevocable trust went into effect after the trust’s creation, that trust could not be modified –at least not without considerable difficulty –to properly address the impact of the new legal changes on its assets.
- To illustrate, prior to this legislation, irrevocable trusts could only be modified through (a) the consent of both the settlor and all the trust’s beneficiaries or (b) a court proceeding.
- Now, as of as of 1/1/2019, CA’s Uniform Trust Decanting Act is in effect, which allows for the modification of certain existing irrevocable trusts and revocable trusts which require either the consent of the trustee or a person with an adverse interest to the trustor’s interest is needed to modify the trust.
- “Decanting” refers to the process of “pouring” the assets from an existing trust into a new trust or trusts, which typically features more favorable terms than the original trust.
- Note however, that neither charitable trusts nor trusts which specifically forbid decanting can be “decanted” under this Act.
- While certain rules and restrictions apply –such as the requirement to give notice to the beneficiaries –the trustee’s newly permitted ability to “decant” an existing trust provides an opportunity for those with existing trusts to modify their trusts using this method.
- Given that there are limitations as to how the trustee can employ decanting, its essential to seek the advice of an attorney to determine how to do so advantageously.
Even if you think estate planning isn’t for you, if you have younger children, own real property, or have any assets, a properly drafted estate plan could not only help you avoid probate but also ensure that your assets are protected to be enjoyed by future generations.
Moreover, these recent changes could affect your existing estate plan, which should be reviewed by your advisor to either confirm that your estate plan will continue to achieve your desired goals or modify your estate plan to address and account for the newly enacted tax and estate laws.
Dental CPA in California
Our mission as Dental CPAs in California is to help dentists to establish a clear set of areas for excellence in the dental business and personal life.
We have been providing dental professionals with the tax and management consulting services they need to grow and maintain their practices. Because we specialize in the Dental field, we understand the questions, concerns, and business decisions that you are faced with every day.
Our Services Include:
• Accounting for Dentists
• Bookkeeping for Dentists
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• Income Taxes for Dentists – Business & Personal
• IRS Tax Resolution for Dentists
• Online Bill Pay for Dentists
• Payroll for Dentists
• Tax Planning for Dentists
• Financial Planning For Dentists
• Dental Office Purchase Due Diligence
• Dental CPA specializes in tax and accounting services for dental practices.
FAZEL MOSTASHARI, MBT, CPA/CFP
• Master of Business Taxation, MBT
• Certified Public Accountant, CPA
• Personal Financial Specialist, CPA/PFS
Is a DentalCPA assisting dental professional in all areas of tax, accounting, consulting, financial and business matters. He also specializes in startups, acquisitions, financial due diligence, valuation and transitions of dental practices.
We offer a FREE initial consultation for dental Professionals. Call 1 (818) 884-2549 today for a free, confidential consultation and ask for Fazel Mostashari.
DENTAL ACCOUNTING AND TAX SERVICES In LOS ANGELES
Our Dental CPA firm is located in Los Angeles, CA specializing in dental accounting, consulting, tax and financial planning services for the professionals in the dental industry. We’ll take tedious accounting and bookkeeping tasks off your hands, saving your time and resources, so you can concentrate on the clinical side of dentistry business. Our highly effective tax planning strategies will ensure that your practice is taking advantage of all available deductions so you certainly not overpay your taxes.
We work with everyone from general dentists and independent dental contractors to orthodontists, oral surgeons and all kinds of dental professionals. Our goal is to effectively manage your finances so you can focus on caring for patients. Call us today at (818) 884-2549 to schedule a free initial consultation with Los Angeles Dental CPA so we can learn more about the accounting and tax needs of your practice.
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• Dental CPA specializes in tax and accounting services for dental practices. In Los Angeles
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• IRS Tax Resolution for Dentists In California
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