Not Too Soon to Plan for 2013 Tax Changes

2012 is barely underway, but big tax changes for 2013 are coming up quickly, and you should keep them in mind during 2012. Not only will the nature of practicing medicine change, but doctors will need to consider the health care reform legislation’s financial and tax impact on their practices and their own pocketbooks.

In addition to calling for a massive overhaul of the United States health care system, the health care reform legislation enacted in 2010 includes several significant tax changes starting in 2013. And on top of that the Bush tax cuts are also scheduled to expire at the end of 2012.

Due to the 2010 legislative and the likely expiration of the Bush Tax Cuts next year, tax rates for individuals will increase in 2013 as follows:

Recall that in 2010, Congress and the administration waited until the middle of December to eventually pass legislation to defer the expiration of the Bush tax cuts. This year could produce a similar wait-and-see scenario. The speculation will continue to build this year, but it may not be until after the November 2012 elections that anything gets done. It could even get moved back to January 2013. Either way, legislation will need to be enacted in order for these higher tax rates not to take effect.

The tax changes included in health care reform take effect at varying points over the next decade. However, if doctors review their personal tax situations now, they may be able to soften the blow of the impending, higher taxes in 2013. Doctors should pay close attention to the following tax changes from the health care reform:

0.9% Medicare tax (also referred to as the Health Insurance or "HI" tax) imposed on the wages/salary and self-employment income that exceeds $200,000 for single taxpayers and $250,000 for married taxpayers

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3.8% surtax assessed on net unearned income if modified adjusted gross income (AGI) exceeds $200,000 for a single taxpayer and $250,000 for a married couple

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The new 0.9% Medicare tax is one that doctors should become familiar with as it will apply only on earned income (whether employed or self-employed), and it is without a cap. Further, this tax impacts married couples more that single taxpayers. There are limited planning opportunities for this tax, one of which is to reduce salary/compensation subject to this tax by maximizing contributions to one’s retirement plan.

The 3.8% surtax, however, is not only a higher tax rate, but it is also more complicated. The onset of this new surtax allows for some tax planning opportunities, which may need to be considered in 2011 and 2012, before it becomes effective. This new surtax is 3.8% of the lesser of the taxpayer’s

• Net investment income; or

Excess of modified adjusted gross income over the “threshold amount.” (Threshold amount is $200,000 for single filers; $250,000 for married filing jointly; and $125,000 for married filing separately.)

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In addition, consider the following planning ideas in dealing with this new surtax:

• Convert Regular IRA accounts to Roth IRA accounts before 2013 to take advantage of the lower tax rates.

Maximize contributions to IRAs and other retirement plans as the new 3.8% surtax does not apply directly to distributions from IRAs and other qualified retirement plans (including Roth IRA distributions). But, while retirement distributions themselves are not subject to the surtax, they are included in AGI, possibly causing other investment income to incur this surtax.

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Assess the tax impact of investment changes to individual growth securities versus mutual funds to perhaps soften the impact of additional taxes on mutual fund distributions.

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Consider adjusting your investment strategy as tax-exempt interest income and certain other tax-deferred income vehicles are not treated as part of investment income for purposes of this new 3.8% surtax.

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Health care reform and higher taxes could be a prognosis of further headaches for doctors. Proper planning could help reduce the impact on doctors and their practices.

Keith Kamperschroer, CPA, CHCC, is the managing director of Health Care Services at Kolb+Co. He can be contacted at kkamperschroer@KolbCo.com. Jim Brandenburg is a tax shareholder at Kolb+Co. and can be reached at jbrandenburg@KolbCo.com. Kolb+Co. is located in Brookfield, Wis., (262) 754-9400.

Keith Kamperschroer is a proud member of the National CPA Health Care Advisors Association. The HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact us at info@hcaa.com.