Top 20 Questions To Ask Your CPA Before Filing Your Tax Returns
We’ve long recommended that doctors request an extension to file their practice and personal tax returns. Despite IRS denials, studies have shown that filing later decreases the doctor’s audit risk. Moreover, it provides added time to fund retirement plan contributions to achieve the maximum tax savings. Finally, this provides additional time for the doctor and his CPA to review the return, and uncover overlooked deductions, resulting in a lower tax bill.
Recent tax law changes have increased the complexity of the doctor’s return to an all-time high. As a result, the number of errors is increasing, causing doctors to overpay their federal and state income taxes in most cases. Below are the most common tax errors, and the specific questions you should ask your CPA in order to avoid them.
- Did you claim the maximum retirement plan deduction on the practice tax return? Tax proposals from Democratic candidates would bar additional tax-deductible contributions once the doctor has accumulated $3.4 million in aggregate retirement plan and IRA balances. Accordingly, it makes sense to claim the maximum deduction now while it is still available.
- Did you claim the maximum Section 179 expensing deduction (up to $500,000) for new or used equipment purchases made during 2015? Doctors should note that pick-up trucks with cargo areas of at least six feet of interior length also qualify for full expensing.
- Did you claim the 50% bonus depreciation for purchases of new equipment made during 2015? The new law also allows bonus depreciation deductions for luxury automobiles of up to $11,060 in 2015.
- Did you claim the $25,000 expensing election if a heavy SUV or pick-up truck with a Gross Vehicular Weight Rating (GVWR) of more than 6,000 pounds was purchased in 2015?
- Did you immediately expense up to $250,000 of leasehold improvements made during 2015 on office space rented from unrelated parties?
- Did you consider using a cost-segregation study to maximize depreciation deductions for practice/investment real estate purchased or constructed since 1986, to reduce taxable rental profits?
- Did you deduct practice-paid family health insurance premiums, including Medicare Part B and Part D and supplemental Medigap insurance coverage paid on behalf of practicing doctors age 65 or older?
- Did you claim the Small Business Health Insurance Tax Credit (Form 8941) if the practice paid more than 50% of the premiums for staff health insurance coverage? Only 181,000 of the estimated 4,000,000 businesses eligible for this credit have claimed it since it began back in 2010. Doctors who were eligible for the credit in prior years, but did not claim it, should file amended tax returns for 2013-2014 in order to claim their refund.
- Did you deduct contributions made to a Health Savings Account (HSA) if health coverage is provided under a qualifying High Deductible Health Plan (HDHP)? Deductions of up to $6,650 are available for family coverage in 2015 for doctors under age 55; the maximum is $8,650 for family coverage if both spouses are age 55 or older.
- Did you claim the maximum Section 199 domestic manufacturing deduction (Form 8903) for bracket placement, lab, and records-related activities, including use of CEREC, i-CAT, etc.?
- Did you exclude interest income from loans to the practice, dental office building rental profits, practice profits, and capital gains from the sale of the practice and/or dental office building from the 3.8% Obamacare payroll tax on personal investment income (Form 8960)?
- Did you elect to use the de minimus exception ($2,500 per item now) to minimize the amount of supplies and instruments that must be capitalized and deducted when used, rather than being expensed when purchased?
- Did you claim a tax deduction for contributions made to a Simplified Employee Pension (SEP-IRA) related to profits made from a sideline business? Doctors have until the due date for filing their tax return, including extensions, in order to establish and/or fund a SEP-IRA for 2015.
- Did you claim the personal exemption for each college-aged child on their tax return? Children are eligible provided more than 50% of their support came from their earnings, loans and/or withdrawals from their savings including from Roth IRAs, Coverdell Savings Accounts, and Section 529 college savings plans. High income doctors have seen the dependency exemption for themselves, their spouse, and children phased out due to their income levels. Accordingly, if a child qualifies, this results in an extra deduction not otherwise allowed to the family, and qualifies the child for the education tax credits discussed below.
- Did you claim the American Opportunity Tax Credit of up to $2,500 a year (up to $1,000 of which is refundable) for the initial four years of college for educational expenses paid by the children? While most doctors’ income exceeds the limit to claim the credit (Modified Adjusted Gross Income of $160,000 or less if married; $80,000 if single) on their return, the credit can be claimed on the children’s returns, if properly structured.
- Did you claim the Lifetime Learning Education Credit (up to $2,000 a year during remaining years) for the cost of graduate and professional school paid from a child’s funds? Again, most doctors are not eligible to claim the credit on their returns due to the income limits. However, the credit can be claimed on the child’s return, if properly structured.
- Did you claim the Child Care Tax Credit of up to $600 for one child or $1,200 for two or more children under the age of 13? One side benefit of employing a spouse through the practice is the ability to claim the Child Care Tax Credit which is otherwise lost if the spouse has no income.
- Did you make sure that capital gain on the sale of personally-owned stocks and mutual funds is reduced through adding reinvested dividend amounts to the tax basis?
- Did you calculate the gain on “back door” Roth IRA conversions correctly on Form 8606? If properly planned, there should be no gain nor tax due on “back door” Roth conversions.
- Did you request a refund of all tax over-payments in order to avoid giving the federal and/or state government an interest-free loan?
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