We've read through the tax legislation passed by our lawmakers and
signed by the president. We've highlighted the areas that we think will
impact the majority of our dental clients. We focused on the issues our clients
have some control over in terms of planning and minimizing the additional tax
burden. The items below include laws that were just passed, laws that were
previously passed and become effective January 1, 2013 and laws that have been
in place that were set to expire yet extended or have been made permanent under
the new tax law.
Congress passes 2012
Taxpayer Relief Act
On January 1, 2013, the
Senate and House of Representatives passed the “American Taxpayer Relief Act.”
This act avoids the many tax increases that were originally planned as well as
maintains many tax breaks that were scheduled to terminate. Nevertheless, the
changes that were made include increases in income taxes for high-income
individuals and reinstates some tax breaks that were
set to expire.
The following are the
focal points of the 2012 Taxpayer Relief Act:
Tax Rates: The income tax rates for most individuals will stay
at the current rates of 10%, 15%, 25%, 28%, 33% and 35% respectively. However,
a 39.6% rate will apply to income for joint filers
and surviving spouses with taxable income above $450,000; heads of household
above $425,000; single filers above $400,000; and married taxpayers filing
separately above $225,000.
Commentary:
For those that will be impacted by the higher tax rate, you should continue to
look for ways to reduce your taxable income, whether it’s making sure your
practice is paying for every legitimate business expense possible to lower your
taxable income or re-visiting your retirement plans. Some taxpayers had lost
interest in tax deferred retirement plans and instead, were looking for ways to
beef up their long-term-capital gain income. However, as discussed below, with
the long-term-capital gains rates going from 15% to 20% for some taxpayers and
others adding another 3.8% on top of that for a total of 23.8%, we suspect tax
deferred retirement plans will once again gain the attention they deserve.
Capital Gain and
Dividend Rates Rise for Higher-Income Taxpayers:
The top tax
rate for capital gains and dividends will permanently rise to 20% for taxpayers
with taxable income exceeding $400,000 ($450,000 for married taxpayers); the
overall rate for higher-income tax payers will be 23.8% when accounting for
3.8% surtax on net investment-type income like interest and certain dividend
income, capital gains and net rental income for tax years beginning after 2012.
For taxpayers
in the income tax brackets below 25%, capital gains and certain dividends will
permanently be subject to a 0% rate.
Taxpayers in
the income tax brackets from 25% to 35% will continue to be subject to a 15%
rate on capital gains and certain dividends. For those subject to the 3.8%
surtax, the rate will be 18.8%.
Commentary:
Taxpayers impacted by the higher Long-Term capital gains tax and/or the new
Medicare tax on investment income described below should review their capital
gains & losses each year along with the projected taxable income to
determine the best timing for cashing in on their Long-Term capital gains.
There may be a year where your income is depressed, perhaps you purchased a
practice, started a new practice, expanded your existing practice or invested
in new furniture and equipment which would drive down your taxable income. You
might have the opportunity to save 8.8% on those Long-Term capital gains by
realizing them in those years. Or, maybe you have other appreciated property
that you want to gift to other family members who may be on a much lower tax
bracket. If planned properly, one could potentially save 23.8% on their
Long-Term capital gain if an asset is gifted and sold to someone in the lower
tax brackets where the capital gains rate is 0%.
New
Taxes
Medicare
tax on investment income. Starting January 1, married individuals and surviving
spouses filing a joint return with Adjusted Gross Income (AGI) above $250,000,
married taxpayers filing separately with AGI above $125,000; and individuals
with AGI above $200,000, they will pay an additional 3.8% tax on the lesser of
the individual’s net investment income for the year or the amount the
individual’s modified adjusted gross income (AGI) exceeds the threshold amount.
Net
investment income means investment income reduced by deductions properly
allocable to that income. Investment income includes income from interest,
dividends, annuities, royalties, and rents, and net gain from disposition of
property, other than such income derived in the ordinary course of a trade or
business.
Commentary:
Some practices owners have had their practices pay rent for various assets or
activities that were owned by the individual doctor or an entity that passed
the rental income or loss to their individual returns. There was certainly no
harm in paying a fair rent that was on the higher end of the range, however,
these activities need to be reviewed since you might be generating an
unnecessary tax of 3.8% if those assets or activities were generating net
rental income. So those doctors who might own their practice real estate, or
leasing their personal cars to the business or own their equipment in another
entity, if your AGI exceeds the thresholds mentioned you should be discussing
strategies with your Dental CPA. All doctors subjected to this new tax should
also review their investments to determine if there are other types of
investments that might not be subject to this tax, like tax-free municipals
bonds or if there’s an opportunity to shift those assets generating the
investment income to family members who may not be subject to this new tax.
Additional
hospital insurance tax on high-income taxpayers. The employee
portion of the hospital insurance tax part of FICA, normally 1.45% of covered
wages, is increased by 0.9% on wages that exceed a threshold amount. The
additional tax is imposed on the combined wages of both the taxpayer and the
taxpayer’s spouse, in the case of a joint return. The threshold amount is
$250,000 in the case of a joint return or surviving spouse, $125,000 in the
case of a married individual filing a separate return, and $200,000 in any
other case.
For
self-employed taxpayers, the same additional hospital insurance tax applies to
the hospital insurance portion of SECA tax on self-employment income in excess
of the threshold amount.
Commentary:
For those dentists that have an S-corporation you need to review the amount of
wages you’re taking from the practice and make sure it’s reasonable while
keeping it as low as possible. This is not a new strategy, however, once wages
exceeded the social wage base and the 6.2% social security tax ended, some
dentists weren't too concerned about the 1.45% they continued to pay on wages
above the social threshold. Now, that tax will be 2.35% on wages that exceed
the thresholds above and we suspect this will make some of those taxpayers pay
a little more attention to the wages they’re taking through their S-corps.
Permanent
and Temporary Individual Extensions
Various
temporary tax provisions enacted as part of prior legislation were made
permanent. The ones that will likely impact the majority of our clients which
they may be able to control the benefit from include:
- The liberalized child and
dependent care credit rules (allowing the credit to be calculated based on
up to $3,000 of expenses for one dependent or up to $6,000 for more than
one) (Sec. 21);
- The exclusion for
employer-provided educational assistance (Sec. 127);
- The higher contribution amount
and other EGTRRA changes to Coverdell education savings accounts (Sec.
530);
- The employer-provided child
care credit (Sec. 45F)
- The American opportunity tax
credit for qualified tuition and other expenses of higher education was
extended through 2017
- Deduction for certain expenses
of elementary and secondary school teachers extended through 2013 (Sec. 62);
- Mortgage insurance premiums
treated as qualified residence interest extended through 2013 (Sec. 163(h));
- Above-the-line deduction for
qualified tuition and related expenses extended through 2013 (Sec. 222); and
- Tax-free distributions from
individual retirement plans for charitable purposes extended through 2013
(Sec. 408(d)).
Business
tax extenders
Here are some other changes that will
take effect or were extended beyond 2011 that may impact some of our clients.
Again, we will be discussing these issues separately with those clients that
are specifically impacted by these issues.
Commentary:
There are many more extended laws, however, we believe these are the ones that
the majority of our clients MAY have benefited from in the past and continue to
benefit from after 2012. We will be addressing these issues separately with our
clients that have benefited from some of these provisions or may be able to
benefit from them after 2012.
The
act also extended many business tax credits and other provisions. Other
business provisions were extended through 2013, and in some cases modified.
·
Fifteen-year straight-line cost recovery for qualified leasehold
improvements, qualified restaurant buildings and improvements, and qualified
retail improvements (Sec. 168(e));
·
Extension of subpart F exception for active financing income (Sec.
953(e));
·
Temporary exclusion of 100% of gain on certain small business
stock (Sec. 1202);
·
Basis adjustment to stock of S corporations making charitable
contributions of property (Sec. 1367);
·
Reduction in S corporation recognition period for built-in gains
tax (Sec. 1374(d));
·
Increased expensing amounts under Sec. 179 to $500,000 and
extended through 2013;
·
50% first-year bonus depreciation (Sec. 168(k)) was through 2013
Commentary:
There are many more extended laws, however, we believe these are the ones that
the majority of our clients MAY have benefited from in the past and continue to
benefit from after 2012. We will be addressing these issues separately with our
clients that have benefited from some of these provisions or may be able to
benefit from them after 2012. For those practices that held off on purchasing
larger pieces of equipment until 2013 expecting higher income tax brackets you
now have the option of accelerating more than the expected $25,000 of sec. 179
deduction. This may be useful in keeping your AGI and/or taxable income below
the various thresholds mentioned above. If you recently converted a C-corp to
an S-corp and have a Built-In-Gains tax issue, speak with your Dental CPA about
this to see if the recognition period has been reduced for you.
Permanent AMT relief: The 2012 Taxpayer Relief Act permanently increases
the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint
filers and $39,375 for married persons filing separately and indexes these
amounts for inflation. In addition, the act permanently allows an individual to
offset his/her entire regular tax liability and AMT liability by the nonrefundable
personal credits which had originally not been instated.
Energy
tax extenders - The
act also extends through 2013, and in some cases modifies, a number of energy
credits and provisions that expired at the end of 2011.
Transfer tax provisions
kept intact with slight rate increase:
the act prevents steep increases in estate, gift and generation-skipping
transfer tax by permanently keeping the exemption level at $5,000,000. In
addition, the act permanently increases the top estate, gift and rate from 35%
to 40%.
For a review of your specific situation, please contact one of our Dental CPAs at (800) 772-1065 or email us at info@dentalcpas.com
