John K. McGill, CPA, MBA, JD
As year-end approaches, now’s the time to implement changes to cut your taxes for 2020 and 2021. Here are my top 25 year-end tax planning strategies.
- Claim the refundable payroll tax credit for any sick leave or family leave required to be paid due to COVID-19 under the Families First Coronavirus Response Act (FFCRA).
- Need a new business car? You can claim up to $18,100 in depreciation deductions if you purchase the typical passenger (“luxury”) automobile. Even better, you can write-off up to 100% of the cost of a new or used pickup or sport utility vehicle (SUV) with a Gross Vehicle Weight Rating (GVWR) of 6,000 pounds or more, assuming 100% business use.
- Going electric? Take advantage of tax credits of up to $7,500 if you buy a new qualifying electric vehicle. This credit is phased out once a manufacturer sells its 200,000th vehicle.
- If you purchase new or used dental or office equipment, furniture, computers, or software, you can elect to expense (write-off) up to 100% of the cost as a 2020 deduction for immediate savings.
- Did you upfit new office space or make leasehold improvements to your existing space? If so, alert your CPA to claim 100% bonus depreciation so you can immediately deduct the entire cost of these improvements.
- Did you use your personal residence and/or vacation home to hold business meetings; staff retreats; training or parties; board of director or shareholder meetings; or retirement plan meetings which totaled 14 days or less at each property during 2020? If so, make sure your practice pays you the highest reasonable rent for the use of each property, and claims a deduction for the rental paid, while the income you receive is tax-free under Section 280A(g).
- Contact your tax advisor to determine if you can save taxes by electing Subchapter S corporation status for your practice effective January 1, 2021. In most states, doctors will be able to significantly reduce payroll taxes (including the 3.8% payroll tax on personal investment income) by taking a lower salary, with the remaining profit distributed as a dividend (not subject to payroll taxes). Subchapter S status can also reduce income and payroll taxes on the practice sale, and lower IRS audit risk and exposure. However, if you’re unincorporated with taxable income less than $163,300 (single) or $326,600 (married), you’ll likely find the Section 199A income tax savings from remaining unincorporated will outweigh the payroll tax savings from operating as an S corporation.
- Have your practice pay and deduct all travel, meals, business car expenses, tax return fees, safety deposit box rentals, dues and subscriptions, continuing education, and investment expenses. If you paid these personally, have your practice reimburse you before December 31, 2020. Otherwise, these expenses are no longer deductible on your individual income tax return.
- Increase tax-free income by having your practice pay all medical insurance premiums for you and your family. Medical insurance (including Medicare for doctors 65 or older) premiums remain 100% deductible for all doctors (C corporation, S corporation, unincorporated, etc.), even if no staff coverage is provided, since the Affordable Care Act’s non-discrimination rules have not yet gone into effect.
- Make sure your practice takes advantage of the Disabled Access Tax Credit of up to $5,000 annually for building improvement costs incurred to make your practice facility more accessible (e.g., expanding hallways, repaving parking area, installing wheelchair accessible ramps, new ADA-compliant bathrooms, adding new carpet or floor coverings), or for equipment purchased to provide services to persons with disabilities.
- Make sure all of your travel is business-related (continuing education meetings, consults with colleagues, board of directors meeting) in order to eliminate non-deductible personal travel costs. In order to document consults with colleagues, send a letter to your colleague confirming your visit, as well as a follow-up letter thanking her for the opportunity, outlining what you learned from your four hour in-office visit, and inviting her to visit your practice.
- Deduct the cost of business computers and other office furniture and equipment purchased through the practice and used at home for confidential duties such as practice accounting, payroll, personnel, and other management matters.
- Practicing as a C corporation? Reduce your taxable income to zero at year-end by paying a bonus to yourself and making retirement plan contributions, if appropriate. Retaining earnings in your C corporation makes sense only to the extent necessary to fully utilize existing net operating losses and the tax credits discussed above.
- Pay all operating expenses for your business automobile through your practice and deduct the actual cost of operation, rather than the $.575 per mile rate in 2020. The auto expenses which should be paid through the practice include gas, oil, maintenance, repairs, taxes, tags, licenses, and insurance. Keep a log on a three-month basis and show any personal usage as income on your W-2.
- Roll your taxable IRA amounts into your existing retirement plan (if permitted) to avoid income taxes on Roth IRA conversions.
- Convert your regular IRAs (non-deductible contributions only) into Roth IRAs each year so all future earnings will grow tax-free.
- Convert a portion of your taxable IRAs into Roth IRAs following your practice sale, in an amount equal to your itemized deductions, plus the 10% /12% tax bracket amount ($40,125 single or $80,250 married). If you don’t take your Required Minimum Distribution (RMD) in 2020, consider converting a larger amount.
- Employ children age 6 or older through your practice in order to fund college savings or private school costs on a tax-deductible basis. Each child can earn up to $12,400 tax-free in 2020 in exchange for services actually rendered, and earnings in excess of that are taxed at only a 10% rate on the next $9,875 and 12% rate up to $40,125 in 2020.
- Establish and fund the maximum annual contribution of $2,000 per year to a Coverdell Savings Account (formerly known as Education IRAs) for each of your children in order to shelter investment earnings for future tax-free payouts to cover college and/or private school costs.
- Increase the rent charged to your practice for the use of your professional office building and/or equipment to the highest reasonable rate if this property is owned by an FLP, LLC, or Subchapter S corporation on behalf of your children age 19 or older, or children age 19-23 who are full-time students. This will increase the income shifted to their lower tax brackets if their earned income equals more than half of their support.
- Do not claim any college-age children as dependents on your federal or state income tax returns. Rather, have them pay for their college education and living expenses from their own funds, custodial accounts, or by taking distributions from your family limited partnership. Through this strategy, your children will become eligible to claim the American Opportunity educational tax credit ($2,500 a year during the initial four years), and Lifetime Learning credit ($2,000 educational tax credit during remaining years), not otherwise available to you due to your income level.
- Increase charitable contribution deductions by making gifts of property, such as stocks, bonds, artwork, or real estate that have increased in value—in lieu of cash donations—to qualified charitable organizations. The full fair market value of the property is tax-deductible as a charitable contribution if held for at least 12 months and the gain is not subject to income tax—so you can hang on to your cash to pay down debt or invest.
- Defer income into 2021 by delaying billing and collection activities in December.
- Accelerate your personal tax deductions into 2020 by paying any state estimated income tax payments due in January before year-end; if incorporated, increase your state income tax withholding on your corporate salary or bonus before December 31. Also, prepay your home mortgage payment due January 1, and pay all real estate and personal property taxes due before December 31, 2020. However, itemized deductions for state and local taxes are limited to no more than $10,000 annually.
- Use the following strategies to minimize the impact of the $10,000 cap on your state and local tax deduction: unincorporated doctors should deduct property taxes on their office building and equipment on Schedule C; incorporated doctors who lease their office building to their practice should deduct building property taxes on Schedule E.
Be sure to consult with your own CPA before attempting any of these strategies.
John K. McGill, CPA, MBA, JD
John K. McGill, CPA, MBA, JD is a nationally prominent tax attorney and CPA who has specialized in dealing exclusively with the dental profession for more than 30 years. He is President of John K. McGill & Company, Inc., Editor of The McGill Advisory newsletter and shareholder in the law firm of McGill and Hassan, P.A. He is a member of the American Bar Association and the American Institute of Certified Public Accountants.
This article was reprinted with permission from The McGill Advisory, a monthly newsletter with online resources devoted to tax, financial planning, investments, and practice management matters exclusively for dentists and specialists, published by John K. McGill & Company, Inc. (a member of The McGill & Hill Group LLC). Visit www.mcgilladvisory.com or call 888.249.7537 for further information.