If you haven't started your tax planning now, you're late, and this isn't a good year to dilly-dally. Considering the hit most physicians have probably taken on their investments, challenges await. Yet there are opportunities as well.

 

Doug Yoakley, CPA, a founder of Pershing Yoakley & Associates, says tax cuts afforded particularly higher-income citizens during the former Bush Administration are set to expire, potentially pushing some taxpayers into higher brackets. "I don't think there's any incentive to try to keep those in place going forward, so those are some big changes between 2009 and 2010," he said. Yoakley and partner Ed Pershing launched their Knoxville, Tenn.-based firm in 1983. Today, Pershing Yoakley also has offices in Tampa Bay, Atlanta and Austin, Texas. About 80 percent of the firm's clientele is healthcare-related.

 

"I'm not sure what kind of meaningful stand-alone tax legislation we'll have until healthcare reform is finished this fall. Obviously, there are going to be tax provisions in there pertaining to health-insurance coverage," Yoakley added.

 

Also to be dealt with by lawmakers in Washington, D.C., this fall is the estate tax, which disappears at the end of the year. But don't get your hopes up, Yoakley cautioned. "I don't think any practitioner believes that they will let that happen," he said. Currently, the exempt amount is about $3.5 million, and indications are that that will remain the same, he explained.

 

Unfortunately, AMT isn't an acronym for "alleviating my taxes." It stands for alternative minimum tax, and it affects particularly citizens in the range of $200,000 to $400,000 of taxable income, Yoakley said. "The AMT tends to reach out and grab people unexpectedly," he noted. In short, the AMT is a different tax structure entirely, with its own rates and rules for deductions that are less generous than the traditional system. Established decades ago to ensure that the wealthy paid some federal taxes, no matter how many shelters and deductions their CPAs could find, the AMT still today is owed if the regular amount of tax doesn't exceed the AMT. Because the AMT isn't adjusted for inflation and takes into account capital gains, more and more people fall into the category annually and owe the extra money.

 

Because sales-tax and income-tax deductions may be just enough to trigger the AMT, here's what Pershing Yoakley advises its clients: "Looking at their itemized deductions, a lot of them have control of when they make interest payments, when they make charitable contributions, when they pay their property taxes. For those with a lot of itemized deductions, then they need to be on the lookout and do some planning." If paying your property taxes in December and taking the deduction this year pushes you into the AMT bracket, there's no reason to pay the taxes until January. Same thing for sales-tax deductions allowed in some states, such as Tennessee and Florida. For states with a tax on dividend income, it may pay to pay before year's end – or wait until April 15, 2010, and take the deduction next year.

 

For some of its clients who don't have many deductions, Yoakley says the firm takes an every-other-year approach, recommending they "bunch" itemized deductions one year and then skip a year. "That way, they get the full benefit for the most part. Then, on the off year, they get their standard deduction, which collectively between the years will yield a greater tax benefit. Sometimes, it can be a difference of $2,000 to $3,000 in taxes," he said.

 

Finally, when it comes to calculating year-end income, "I always recommend to maximize contributions to qualified plans – their IRA, SEP, 401(k), whatever it is – maximize those contributions," he stressed.

 

The year 2010 offers a unique tax-planning prospect that Congress may extend in subsequent years – or may not. The existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. What's more, half of the taxable converted amount can be taxed in 2011 and the other half taxed in 2012, essentially spreading the tax burden over three years. "This is a great planning opportunity, especially for physicians who are looking at retirement in the near future," Yoakley said. "Why is that important? Distributions out of a Roth IRA later on at retirement are not taxable. Neither the earnings nor the principal are taxable, a big advantage there."

 

Of course, the downside is the conversion taxes. For someone in the 35 percent tax bracket, converting a $100,000 IRA will cost $35,000 in taxes. Yet, for some, financial analysis may prove it's worth it. It's also advisable to pay the taxes from funds other than retirement funds, so the Roth IRA retains its maximum ability to earn.

 

"If you have stocks that you think may greatly appreciate – and some physicians may have biotech stocks or private companies that may far outperform the market – those would be ideal things to move into a Roth IRA. When they get ready to retire and take those funds out, they're completely tax-free, including the earnings," Yoakley said.

 

Pershing Yoakley is affiliated with several other professional firms, including an investment advisory company. In recent meetings with those advisers, Yoakley said advisers are, even in today's economy, smiling on several investments. They call gold and precious metals "almost bulletproof," he said, and also are recommending natural gas, perhaps oil, and utility stocks that pay dividends. For physicians, investing in their own real estate is "a great store of wealth in the future," Yoakley said. "That's different than investing in a strip mall out there, where you don't know who's going to be in it tomorrow and what the long-term viability is."