Business
Tax changes mean now may be time to buy equipment
■ A column offering help for your wallet
By Katherine Vogt — covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06. Posted Dec. 12, 2005.
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Amid all the buzz about sweeping tax reforms in coming years, some smaller changes that could affect physicians, their businesses and their finances are taking effect in a few weeks.
Changes in contribution limits, credits and deductions that could impact physicians' retirement savings, home and office improvements and equipment or vehicle purchases have been either recorded in 2005 or are about to be added to or subtracted from the books with the arrival of 2006.
One of the most pressing cases for physicians could be Section 179 deductions. They typically cover equipment and computer purchases up to $400,000 by small business owners. Physicians can use these deductions to buy everything from new medical equipment to software for electronic health records for their practices. In fact, given the tax rules, physicians might want to consider making their purchase in the next two years.
In 2005, the maximum total Section 179 deduction allowable was $105,000 in the first year. In 2006, the first-year deduction increases to $108,000. It is scheduled to revert to its historic level of $25,000 in 2007 unless Congress intervenes and extends it once again.
Another incentive for business owners will expire at the end of 2005, when rules affecting office remodeling projects change. For the last few years, certain structural improvements to owned office properties are allowed to be written off on a straight-line basis over a minimum of 15 years -- essentially averaging out the costs for every year. Beginning in 2006, such write-offs will be required to be written off over a minimum of 39 years. So if you're starting a qualified improvement next year, you won't be able to write off the cost as quickly, and get as large a tax advantage.
Taxes and retirement
The new year may also usher in a new type of retirement plan for some physicians. Starting in 2006, the tax code will permit Roth 401(k) plans as an option.
A Roth 401(k) combines the traditional 401(k) with the Roth IRA. Like a Roth IRA, the contributions to a Roth 401(k) are made with after-tax dollars. However, the account can grow tax-free, and its withdrawals -- after you reach age 59½ -- are tax-free. While the Roth IRA has income stipulations that leave most physicians ineligible, the Roth 401(k) has no income stipulations. However, the same investment limits as the traditional 401(k) apply.
The maximum deductible amount for 401(k) contributions is increasing from $14,000 this year to $15,000 in 2006. Anyone older than 50 can put away an additional $4,000 for 2005 or $5,000 for 2006 at no penalty.
An even larger jump was made this year in the maximum deductible contributions to traditional IRAs. The limits increased from $3,000, or $3,500 for taxpayers older than 50 in 2004, to $4,000 or $4,500 in 2005.
Meanwhile, physicians contributing to their employees' SEP (simplified employee pension), profit sharing or other defined contribution plans were able to deduct up to $42,000 per individual in 2005. Next year, the maximum deduction is $44,000.
Even though the change appears to be a simple inflationary adjustment, it is still important because it allows more savings with a critical financial planning tool, said Donald Paris, an accountant and consultant in Darnestown, Md. "It all depends on how you look at those items," he said.
Meanwhile, under the Energy Tax Incentives Act of 2005, taxpayers will soon be able to get credits for making energy-saving improvements to their homes. Paris noted that such work must be done in 2006 to qualify, so physicians might want to wait until then before initiating any projects.
It may also be worth the wait to put off buying a hybrid vehicle until next year, when the deduction for such a purchase is replaced with a tax credit, said Ira Nevelow, a Dallas-based partner with the accounting firm Weaver and Tidwell, LLP.
The rules governing car donations have already changed. Before this year, people who donated a vehicle to a qualified charitable organization could generally deduct the entire Kelley Blue Book value of that vehicle. Now the deductions are limited to the amount of the gross proceeds of the sale.
Other key changes that could affect physician taxpayers in 2006 include the establishment of six-month automatic filing extensions and increases in tax-bracket thresholds for each filing status. Many of these rules are relatively minor adjustments to what could be in store as more talk about tax reform develops in the new year.
In November, legislation creating some new tax cuts was passed by the Senate only after being stripped of provisions that would have extended reduced tax rates for capital gains and dividends beyond their 2008 expiration. But tax experts expect debate to continue about whether those rates should be allowed to expire.
Also in November, the President's Advisory Panel on Tax Reform issued a report calling for sweeping changes including a repeal of the alternative minimum tax and a streamlining of the tax system that could put an end to most itemized deductions, including the mortgage-interest deduction.
But it's too soon to tell which, if any, of these proposals has a shot of making it through Congress. So there's no need yet to reflect them in your tax planning.
Katherine Vogt covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06.