Wealth Matters for Physicians

ArticleTax Strategy for 2020 May Be as Exceptional as the Year Itself



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by Carolyn Yun, CPA, CFP®, Financial Advisor

Tax Strategy for 2020 May Be as Exceptional as the Year Itself

Learn How Physicians Can Benefit from a Trying Financial Period

The year we’ve just lived through will always be remembered for great disruption, loss and change. As physicians prepare to file their tax returns for 2020, the year’s uniqueness carries on, offering some unusual opportunities to translate last year’s difficulties into tax advantages.

For physicians, especially those with their own practices, 2020’s restrictions might have significantly lowered business income, as offices shut temporarily, expenses for protective equipment rose, some patients chose to stay away and staff may have reduced their hours to care for family members sheltering at home.

In addition, persistently low interest rates, diminished stock dividends and depressed capital gains distribution could mean your investment portfolio in 2020 may have suffered an equally bumpy year.

Typically, certified public accountants (CPAs) and financial planners help clients find ways to avoid paying too much when tax season rolls around. This year, we’d like to share some suggestions that could help medical professionals take advantage of income dips and lower tax brackets — including accelerating income and seizing unusual deductions that may apply for this filing or in 2021.

Accelerate Income

Last year, though trying in many ways, created a near-perfect financial storm for many physicians with ordinarily high income. With reduced earned income, many physicians will find themselves in significantly lower tax brackets for 2020. And it’s likely a good year to prepare for less-favorable tax treatment ahead for affluent Americans under the Biden administration.

Besides entering a lower marginal tax bracket for last year, once you fall below $200,000 for individuals or $250,000 for joint filers, two additional surcharge taxes are no longer triggered. The first is the additional Medicare tax, which is a further 0.9% applied to earned income above those thresholds, on top of ordinary income tax brackets. The second is the Net Investment Income Tax (NIIT), which is an additional 3.8% applied to your investment income on top of capital gains tax brackets.

If you are someone to whom the additional Medicare tax or NIIT no longer applies for 2020, you might consider generating income to realize the lower tax rates, last year was a good year to do this. You could consider selling highly appreciated investments in your taxable portfolio and reinvest the proceeds by repurchasing the same securities, thereby receiving a step-up in cost basis. Remember, when you go to sell securities in retirement, you are only taxed on the gain over your cost basis, which may greatly reduce the future tax applied on a sale.

Roth IRA Conversions May Make Sense

Another tactic that may serve physicians well is shifting some pretax retirement savings into Roth retirement savings. This move incurs taxes on the pretax retirement savings while tax rates remain low, rather than waiting until years later when you retire and tax rates likely will have climbed.

For physicians currently situated in a lower tax bracket after 2020, we recommend switching 401(k) or 457 plan contributions from pretax to Roth. Another strategy is to perform a back-door Roth IRA contribution, which can still be taken until the tax filing deadline for 2020 or 2021. However, neither is as powerful as converting IRA assets to Roth assets because there is no restriction on conversion amount or income cutoffs. In addition, Roth conversions can be performed by specific dollar amounts to keep you within certain tax brackets.

It’s best to work with a financial advisor or tax professional when considering a Roth conversion to avoid tax surprises.

Potential Deductions for Your Practice

Furthermore, provisions of the early 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act legislation opened some seldom-seen windows for small-business deductions. From accounting for personal protective equipment (PPE) expenses for your practice to payroll deferrals and tax credits, it’s crucial to work with a tax professional to benefit from as many of these relief measures as you can.

For example, the CARES Act allowed for 100% of a business’s net operating losses (NOL) for 2018, 2019 and 2020 to be carried back to the prior five tax years to limit taxable income. Previously, NOLs were subject to a cap of 80% of taxable income. This allowance effectively lets you claim a refund from those years’ tax returns already filed.

In another case, physicians who have invested in and implemented new telehealth infrastructure can claim valuable tax deductions to offset their ordinary income. Businesses may take 100% bonus depreciation on the cost of qualified property both acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.

Speak with a Financial Professional

Relief measures related to the pandemic and other special circumstances experienced in 2020 may make your tax return due this year out of the ordinary. Schedule a complimentary consultation with Altfest online, or contact Jesse Frehling at (212) 796-8732 or jfrehling@altfest.com.


About Altfest

As the preferred wealth manager for members of the Medical Society of the State of New York and the New York State Dental Association, as well as the preferred wealth management education provider for the New York Chapter American College of Surgeons, Altfest specializes in providing comprehensive wealth management services tailored to healthcare professionals. Altfest’s advisors integrate custom financial planning with investment management in order to address all elements of an individual’s finances. Altfest serves individuals and families as a fee-only fiduciary and is one of the leading registered investment advisers in New York and the United States. Altfest was founded in 1983 and currently has $1.5 billion in assets under management. Information is provided for educational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.




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