As the tax filing season under the Tax Cuts and Jobs Act (TCJA) comes to a close and extensions are being addressed, many tax advisors and financial planners have had the opportunity to address common concerns with their clients over the last six months. The information contained in this article brings to the forefront issues that many taxpayers deemed to be the most important to them.
Consider how filing your income tax return can impact public service loan forgiveness (PSLF). If you are employed by a tax-exempt organization and you have a qualified loan, it is possible for your student loan to be forgiven after 10 years of employment. The loan repayments are calculated every year and are based on your adjusted gross income (AGI) from the previous year. The more you make, the higher your loan payment is for the next year, which increases the likelihood of paying off your debt before the 10-year period lapses. It is good to determine what your tax differential is between married filing jointly and married filing separately, and whether the potential savings justify giving up the ability to have your loan forgiven.
Take advantage of the qualified business income deduction (QBID). The TCJA lowered the C-corporation tax rate to 21 percent. In order to give non-C-corporation businesses some similar benefit, the TCJA created a qualified business income deduction to reduce the effective tax rate. Many physicians receive pay for depositions and locum tenens work, which could be reported as sole proprietor income on the personal income tax return. That income could be eligible for the QBID if certain parameters are met and AGI is under a certain threshold.
Speaking of sole proprietor income, consider how you are currently substantiating the deductions you are claiming to offset that income. In a recent article published by Accounting Today, the tax gap - the difference between taxes owed and actually paid - is around $460 billion, $390 billion of which is attributable to underreporting, which includes taxpayers who understate their income or overstate their deductions. There are no tax forms that the IRS receives for deductions claimed. Always keep underlying receipts (credit card statements are not enough), and make sure the expenses are ordinary and necessary and that the documentation is contemporaneous (originating as the expense is incurred). These qualifications are also important for the more generous vehicle deductions afforded under the TCJA, especially when determining business versus personal use of vehicles with a gross vehicle weight rating of over 6,000 pounds.
Depending on your unique circumstance, consider opening a donor advised fund (DAV) for charitable contributions. A DAV allows you to contribute cash or securities to a charitable investment account that can be used to support your desired charities. The funds can be invested for tax-free growth, and you could recommend gifts to almost any IRS public charity. You would receive the deduction in the year you contribute the assets to the account rather than when they are disbursed. This vehicle helps support a technique known as "stacking"- allowing you to bundle, or "stack," multiple years of charitable deductions into one year to exceed the standard deduction threshold when you would otherwise benefit from the standard deduction. The DAV allows you to stack those contributions for income tax purposes while allowing you to fulfill your philanthropic goals over multiple years.
For the long-term, it may be worth considering deferring into your employer's Roth 403(b) or Roth 401(k) plan. In making post-tax contributions today, you are saving yourself from tax at retirement. The deferrals (not any match nor profit sharing contributions made to your account by your employer), grow tax free and are distributed tax free at the time of retirement. In 2019, let's assume you defer the maximum amount allowed by the IRS of $19,000 as Roth contributions at age 35. Let's also assume you are in the 35 percent tax bracket (30 percent% federal and five percent state). You would pay tax today of $6,650 that you would otherwise save if these were traditional deferrals. But if that $19,000 grows tax free and is distributed tax free and doubles every 10 years, it grows to just under $230,000 - and that is only on one year's deferrals. Paying 35 percent tax today for that money to grow to $230,000 yields an effective tax rate of just under three percent.
With the first filing season under the TCJA behind us, this time of the year provides many opportunities to plan for 2019 and beyond. These considerations, among others, should be part of your total tax plan. It is never too early to be proactive.
Jonathan G. Kassouf, CPA, PFS is a Director, Kassouf & Co, where he specializes in accounting, tax and consulting services to small businesses with an emphasis on physician practices.