Taking action now can save $10K or more on 2010 taxes

November 23, 2010

As we continue through the fourth quarter of the year, most of our clients now have a fairly good idea of what their taxable income will be for 2010. If you are like these clients, you may be wondering, “Is there anything I can do now to save taxes on April 15?” The answer is very likely “Yes.”

As we continue through the fourth quarter of the year, most of our clients now have a fairly good idea of what their taxable income will be for 2010. If you are like these clients, you may be wondering, “Is there anything I can do now to save taxes on April 15?” The answer is very likely “Yes.”

This article will lay out a few ideas, each of which could save you tens of thousands of dollars on your 2010 income tax bill, depending on your facts and circumstances.

1. Maximize the tax benefits of your qualified retirement plan (QRP)
Nearly 95 percent of the physicians and business owners who have contacted us over the years have some type of QRP in place. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s or even SEP or SIMPLE IRAs.

Most of these plans, however, are not maximized for deductions for the business/practice owner(s). The Pension Protection Act of 2006 improved the QRP options for many business owners, including physicians. In other words, many owners may be using an outdated plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions significantly for 2010 and reduce your taxes on April 15, 2011.

2. Implement a non-qualified or “hybrid” benefit plan
Unfortunately, the vast majority of physicians and business owners begin and end their retirement planning with QRPs. Most have not analyzed - let alone implemented - any other type of benefit plan. Have you explored fringe benefit plans, non-qualified plans or “hybrid plans” in the last two years?

The unfortunate truth for many doctors and business owners is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. If you have not yet analyzed all options, we highly encourage you to do so. A number of these plans can help you reduce your taxable income significantly in 2010, and they can be put into place in a few weeks, so it’s not too late for 2010.

3. Make investments that create tax benefits
There are a number of investments that in and of themselves create present tax benefits. These typically are asset classes in which the government encourages investment, from oil and gas partnerships to conservation easements to certain types of racehorses. Tax deductions, tax credits and other potential benefits can be immediate and significant.

4. Use charitable giving
There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. Charitable remainder trusts (CRTs), charitable lead trusts (CLTs), private foundations - all of these can be used, within the IRS rules, to benefit charitable causes, reduce taxes and retain some benefits for families. If you have considered any of these tools in the past, implementing them in a year of high income might be a good idea.

5. Do not pre-pay 2011 expenses
As the year winds down, we typically counsel clients to prepay for some of the following year’s expenses in the present year. As long as the economic benefit from the prepayment lasts 12 months or less, this can be done. However, unless your 2010 income will not put you into the top marginal income tax bracket, this strategy may not make sense for 2010.

Since 2011 highest marginal tax rates will be higher than 2010 rates, the time value of the earlier deduction may not be worth taking the deduction against a lower marginal rate.

This article gives you a few ideas for potential tax savings. For larger businesses and practices with $3 million to $5 million or more of revenue, there are additional techniques which could offer significantly greater deductions.