Tax Preparation: Plan to Cut Your Losses

There probably isn't a person in theworld who doesn't procrastinate atsome point in time. Whether it'sneglecting to rake the leaves in the fallor putting off a visit to the dentist, we allavoid doing some task we loathe.

At this time of year, that task oftenturns out to be income tax preparation.It doesn't really matter if we're anticipatinga refund or expecting to make apayment, many of us still find ourselvesscampering in search of a missing receiptor 2 as the April 15 deadline approaches.Filing an extension is no magic cure; itonly puts off the inevitable. Roll up yoursleeves, sharpen your pencil, and dig in.Re-examining your strategies and organizingyour paperwork is a vital firststep. In doing so, you will develop goodhabits that will help you now and inmany tax-filing seasons to come.

1. Get Yourself Organized

It is often said that order is the firstlaw of heaven. It is also the first lawin tax preparation. Debbie Webb, CPA,with Thompson, Derrig & Craig, suggeststhat the best way to get organizedis through computerized accountingprograms such as QuickBooks or Turbo Tax.

"Keeping track of income andexpenses, especially if the physician isself-employed, is tremendously important,"Webb explains. "There are usuallymore expenses than you realize.And since many people often forget tokeep receipts, getting in the habit ofentering information into a computerizedaccounting system on a regularbasis can make life at income tax timeso much easier."

For example, Webb points out thatautomobile mileage compiled for businesspurposes, while it might not seemlike a great amount day to day, can addup. Deductions cannot be taken formileage incurred between home andthe first stop of theday, because that'sconsidered commuting.But when a physiciantravels from theiroffice to the hospital or vice versa, thatmileage can be deducted. It's also thetype of deduction that can be reconstructedeven after the end of the year.

"It's better to keep track of it duringthe year, but there's no requirementthat the record be made at thetime you incurred the mileage,"Webbexplains. "If physicians can go backand reconstruct the trips, they cantake the deduction for the mileage.But it is important to write the figuresdown once you determine them."

Larry Schwartz, CPA, partner atCarlin, Charron & Rosen LLP (www.cpane.com), echoes the importance ofbeing organized and keeping accuraterecords. He points out that good tax-preparationsoftware can be purchasedfor under $100, and magazinearticles are availablethat rate the differentproducts. "Thereis a big difference,capability-wise, betweenthe software that's at the bottomof the chain and the stuff that'smid-priced, and the cost difference isonly about $30. So read the literaturebefore you buy."

Keeping organized, accurate recordswill also enable your tax preparerto do a more effective and efficientjob. As David Root, CFP®, chairman ofD.B. Root & Co, points out, it can helpyou save time and money in terms ofbillable hours that the preparer has towork. The more time your preparerhas to spend looking through statementsand records that are not wellorganized, the greater the end billcould be. Developing an organizedmindset and keeping your records inan orderly fashion will save you timeand money in the long run.

2. Maximize Those Deductions

Once the clock struck midnight onDecember 31, 2002, there wasn'ta lot to be done to impact your 2002taxes. However, your contributions toa qualified retirement plan can andshould be maximized.

If your practice has a qualified plan,such as a simplified employee pension(SEP) plan or a 401(k), and the maximumdollar amount of contributionshas not yet been made, you have untilyour tax return is filed in April—or inAugust or September if you file anextension—to contribute. For thoseage 50 and over, current catch-up provisionscan make those numbers meaningful.For example, 401(k) limits for2002 are $11,000. But the catch-upprovision tacks an additional $1000onto that for 2002, and $2000 morefor 2003. The key is that the qualifiedplan had to be established by December31, 2002.

Now, here's where the importanceof keeping accurate records comes into play. Whether or not you itemize onyour income tax return, there are still awide range of deductions you can takefrom your gross income, including thefollowing: IRA contributions; studentloan interest payments; moving expenses;medical savings account contributions;one half of self-employmenttax; health insurance premiums for theself-employed; contributions to a self-employedretirement plan (eg, Keogh,SEP, and saving incentive match planfor employees); forfeited interest onearly withdrawals from CDs; andalimony payments.

There are also a number of itemizeddeductions you may be able totake. These include medical and dentalexpenses, mortgage interest, charitabledonations, and investment interestexpenses. In the case of charitabledonations, however, you must have areceipt from the charity for any donationof $250 or more.

To help sort through all thesepotential deductions, Schwartz suggestsnot 1, but 2, meetings with yourtax preparer. "The first meeting iswhat I call the planning meeting,"Schwartz explains. "This is where thephysician and the preparer outline thefinancial activities that occurred during2002. Then, armed with that outline,the physician can begin to puttheir records together."

Too often, Schwartz says, only 1meeting occurs, and the preparer willtake whatever information the clientprovides and put it in the form of a taxreturn. Deductions are then easily forgottenor overlooked. "The preparercan look at the physician's return fromthe prior year and ask some verypointed questions to capture informationon additional deductions. That'swhy the 2-meeting approach is great."

3. Find a Tax Preparer

Having the right surgeon for a procedureis critical. Having the righttax preparer for your situation mightnot fall into the same life-and-deathcategory, but it's close.

"First of all, the individual shouldbe a certified public accountant (CPA),and their firm should specialize inphysician planning, so they understandthe game they're in,"explainsSid Friedman, president and CEO ofCorporate Financial Services.

Schwartz agrees, and offers ananalogy. A good friend of his hastheir taxes prepared by a CPA firmthat handles bank audits. WhenSchwartz asks his friend if their preparerever raises specific issues, theanswer is usually no. "They're greatauditors, but they're not great taxpreparers,"Schwartz says.

It's also important to find a preparerwith whom you can develop a comfortlevel, someone who has the samesense of understanding and can communicatewith you relative to yourdesire to be conservative or aggressive."Tax law is not black or white,"Schwartz says. "Just like medicine,there are gray areas."

To help determine that comfortlevel, ask lots of questions: If I hiredyou, what might you do differentlythan I'm doing right now? Whatmight you do that would save mesome tax money? What do you seethat I've been doing wrong?

In addition, Friedman says, anygood accountant will ask questions oftheir own. They'll want to know whatyou've done from a tax strategy perspectivethat has worked well, andwhat hasn't. They'll also want toknow what you'd like to accomplish inthe future. "Being honest and open isthe key,"Friedman explains. "If thephysician is not going to be honestwith the tax preparer, they might aswell not interview them."

The interview process is critical,Root says, stressing that physiciansshould interview at least 2 or 3 taxpreparers before making a selection.He compares it to selecting an officemanager or a physician's assistant."The tax preparer is every bit asimportant to the physician as that keyperson in their office. The preparercan help them maximize the dollarsthat are being kept in their pocketand not being spent on taxes."

In addition, don't hesitate to aska prospective tax preparer for references."We tell all new clients thatthey can call our current clients toget feedback on the work we do,"explains Neil Becourtney, CPA, partnerat JH Cohn LLP (www.jhcohn.com). "Don't be bashful in askingfor those references."

How can you find a good CPA?Word of mouth is one of the bestways to get a recommendation. Relyon advice from someone you trust,not someone down the block whothinks a wonderful new 3-cent stockwill make them $1 billion.

In addition, contact your statesociety for CPAs and a list of taxpractitioners in your area. Moststates are not allowed to make recommendationson these preparers,but it's a starting point. In addition,you can check with your state boardof accountancy to see if the CPAyou're considering has ever hadcharges brought up against them."Remember,"Root says, "with respectto competence, not all tax preparersare the same."

4. Begin Planning Your Tax Strategies

Your 2002 income tax preparationwould not be complete without layingsome groundwork for 2003. Withthat in mind, schedule a meeting withyour tax preparer for right after April15, and give yourself optimal time totake advantage of tax planning strategies.As Schwartz explains, there areessentially 2 types of tax strategies: taxminimization and tax postponement.

"With tax postponement, if youdon't have to pay a tax this April 15 andcan instead push it ahead to April 15,2004, you have 12 months to hold on tothat money,"Schwartz explains. "Thathas value. It lowers your 2002 taxes, andwith rates coming down again in 2003,you'll save some money. The bottom lineis, it puts more cash in your pocket, andhopefully you can invest that in themarket and get a return."

Root suggests budgeting early whenit comes to qualified plan contributions,and urges physicians to establish a planfor employees if it does not already exist."One of the primary inhibitors towardsetting up these plans has been the formulafor calculating how much doctorscontributed vs how much they have tocontribute for employees,"Root explains."But the provisions of these plans havebecome much more flexible."

It's called comparability testing. Itmeans that physicians with existing profitsharing plans, where basically equalamounts were shared among all the practice'semployees, can now class-base theircontributions. Employees at the practiceworking at different levels can receivedifferent percentages of money. "For thephysician, it means the ability to contributeup to $40,000 is quite possible,while not having to fully fund for employeesat the same percentage rate."

That's why Root advocates designing along-term plan with your tax preparerearly in 2003. "It can make a major differencein terms of being able to design aplan that enables you to put more dollarsaway today and shelter them from currenttaxation. Taking the time and initiativeto do that planning today can meantens of thousands of additional dollars inyour pocket years down the road."

All the planning in the world meansnothing without execution. "No matterwhat plan you decide on,"Friedman says,"if you don't put it into practice, it's nogood. We spend more time planning a 2-week vacation than we do the rest of ourlives. Planning is important, but if you'renot going to execute, don't waste yourtime."