Last-Minute Tax Tips for Doctors
2018 may be over, but there are still last-minute opportunities to manage and minimize your tax liabilities before the filing deadline, especially for self-employed doctors who are business owners.
Lower Your Taxable Income
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a very generous tax deduction, known as the Qualified Business Income (QBI) deduction for businesses organized as pass-through entities (i.e. S-Corporations/LLCs). To qualify, your taxable income must be below a given threshold based on your filing status. Therefore, look for opportunities to lower your taxable income to take full advantage of this new deduction. Examples include retirement contributions, HSA accounts, bonus depreciation, cost segregation, accelerating expenses, and deferring income.
Get Your Real-Estate Tax Deduction
Good news, the IRS finally issued clarification that investments in real-estate qualifies for the QBI deduction, as long as certain conditions are met. If you own investment real-estate and want to qualify for the deduction, make sure to:
- Maintain separate books and records for each property
- Spend at least 250 per year performing services for the property
- Keep detailed and “contemporaneous” records of your time, and
- Avoid triple net leases because they do not qualify.
Make a Pension Plan Contribution
Contributions to retirement plans, such as pensions, are one of the best ways to minimize taxable income to not only qualify for the QBI deduction mentioned above, but also to reduce your overall tax liability. While 401k contributions must be made during the calendar year, pension/profit sharing contributions can be made well after the year ends. As a result, they are an excellent way to manage your taxes after the fact.
Don’t Forget UseTax
Use tax are taxes you pay on purchases made outside of your home state of residence. For example, if you live in California and attend a conference in Las Vegas and buy something from an exhibitor/vendor, you are required to pay use tax, even if that vendor does not collect sales tax from you. The same applies if you buy something online (even from Amazon) and the seller does not collect sales tax. California has become very aggressive in collecting use tax and knows exactly where to search in your records to see if you’ve purchased anything without paying tax. Didn’t keep your receipts or don’t know if you owe any use tax? Don’t worry, California Franchise Tax Board has a nice table you can use to estimate your use tax.
If you are self-employed, you must make estimated tax payments to both the IRS and your state of residency (and state of sourced income). To avoid penalties, ensure your estimated tax payments coincide with when you earned the money. For example, if you earned most of your annual income in the first quarter, your estimated tax payments should also be made in the first quarter. Also, states such as California want their money earlier. California estimated tax payments differ from federal such that 70 percent of your taxes must be paid by second quarter to avoid a penalty. If you own a pass-through entity such as an S-corporation/LLC, you must also make estimated state taxes.
Tax planning is a year-round endeavor and requires vigilance to minimize taxes, avoid penalties, and keep more of your money in your pocket. Work with a qualified CPA who understands your industry to do a 2019 tax projection to take full advantage of the new tax laws, including the generous 199A QBI deduction, and identify opportunities to minimize your 2019 taxes.