Tuesday, January 8, 2013

How the 2012 Taxpayer Relief Act Impacts Dental Practices

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 

For more information, please contact info@dentalcpas.com

No comments: