Veterinarians: Obama vs. Romney and your taxes

Not since Ronald Reagan versus Jimmy Carter has our country been faced with a starker contrast in philosophy of taxation than we see with President Barack Obama and his challenger, Mitt Romney. That's why it's important for veterinarians and practice managers to consider the financial implications of this election day on their bottom lines. Several changes to the tax code hang in the balance, and the polls show a razor-thin margin at press time.

This article will put you in the best position to react to changes, no matter which party takes control of the White House. And I've tried to steer clear of partisan sources of information—think stickittotherich.com or rushlimbaughrocks.org—in this look at the big-ticket tax issues up for discussion for the next Congress and president of the United States.

So, based on this battle for the White House, here's what you could be in for in 2013, whether you've got a big family, a lot of investments, a veterinary practice, student loan debts, or just everyday financial worries.

DELVE INTO THE DISAPPEARING TAX CUTS

With seemingly more lives than your neighborhood cat, the Bush tax cuts (formally known as the Economic Growth and Tax Relief Reconciliation Act of 2001) were set to expire in 2010. After a long and protracted battle, they were extended two more years. These cuts are now set to expire again Dec. 31, 2012. Depending on the winner come November, that may or may not happen. The components of this law that will have the biggest impact on veterinarians and veterinary practices are:

EVERYONE: Income tax. The expiration of the Bush tax cuts will mean a change in the ordinary tax rates, taking them back to their pre-2001 levels. Ordinary income tax rates are the rates that get applied to your taxable income, excluding long-term capital gains and qualified dividends. These changes will affect single-filers with more than $200,000 taxable income and joint-filers with more than $250,000 taxable income. If Congress or the President don't react, the rate will change from 33 percent to 39.6 percent.

INVESTORS AND PRACTICE OWNERS: Capital gains tax. Long-term capital gains rates will revert from 15 percent to their original 20 percent level. This rate is applied against long-term capital gains generated by the sale of an investment (such as a mutual fund) or the sale of a business (such as a veterinary practice). Word on Capitol Hill is that this rate may be subsequently increased to 25 percent at some point in the future. This increase will potentially impact any taxpayer who has a long-term capital gain.

PRACTICE OWNERS: Dividend tax. The tax rate on a qualified dividend paid by a mutual fund or traded stock is 15 percent for most taxpayers. Come January 1, dividends will be taxed at the ordinary income tax rates shown in Table 1, depending on your level of taxable income.

KNOW THE NEW MEDICARE TAXES

Two new taxes, both originating with recent healthcare legislation, take effect January 1. Again, depending on which party is sitting in the White House, these new taxes may or may not stay on the books.

EVERYONE: Medicare tax on wages and self-employment income. In 2012, wage earners and the self-employed are charged a 2.9 percent Medicare Tax. If you're an employee, 1.45 percent is withheld from your paycheck and your employer pays the other 1.45 percent is paid by your employer.

Beginning in 2013, an additional 0.9 percent tax will be charged on higher-income taxpayers ($200,000 or more in wages or self-employment income for individuals, $250,000 or more for married taxpayers).

INVESTORS AND PRACTICE OWNERS: Medicare Tax on investment income. In 2013, a Medicare Contribution Tax of 3.8 percent will be applied against net investment income for higher-income taxpayers (gross income of $200,000 or more for individuals, $250,000 or more for married taxpayers).

Investment income includes the following: interest from savings, certificates of deposits, or corporate bonds; dividends; rents and royalties; income from passive activities, such as rental properties and passive partnerships; and gains from sales of investments. Don't worry, practice owners: Gains from the sale of a business—say, a veterinary practice—are not included

Sample Estimates

So, assuming that capital gain tax rates increase to 20 percent in 2013, a higher-income taxpayer could pay 23.8 percent on a long-term capital gain generated from the sale of an investment (versus 15 percent in 2012). The impact on qualified dividends is even worse. A higher-income taxpayer in the new top bracket could be looking at a tax rate of 43.4 percent paid on qualified dividends from a mutual fund (versus 15 percent in 2012).

LOOK INTO THE LEFTOVERS

EVERYONE: Student loan interest deduction. As of now, there is a $2,500 limit to the amount of student loan interest you can claim as a deduction. This deduction is limited, however, by the taxpayer's income. If a single taxpayer has income greater than $75,000 ($150,000 for married taxpayers), the student loan interest isn't deductible at all.

In 2013, the interest deduction will be further limited. A taxpayer will only be allowed to deduct this interest for the first 60 months of loan repayment (although many veterinarians will be earning more and won't be able to to take the deduction for this long anyway). Any interest accrued or paid beyond that would not be deductible.

PRACTICE OWNERS: 179 write-off for new equipment and furnishings. Over the past few years, this deduction has been a relief for veterinary practice owners looking to their equipment or fix up a hospital. The 179 expense allows an owner to write off, in the year of acquisition, the entire purchase price of a piece of new equipment, up to a maximum of $139,000 in 2012. In the past, owners could finance or lease a major piece of equipment at the end of the year, put very little money down, yet still write off the entire purchase price, providing a large and effective bit of tax planning. This deduction is slated to revert to its original form of $25,000 in 2013.

PRACTICE OWNERS: Payroll tax reduction. A 2 percent reduction in the Social Security portion of an employee's FICA tax is set to expire at the end of 2012. This has been both a bargaining chip and a bone of contention for both parties. Depending on who's in power, this law may or may not go away.

HOW TO TACKLE TAXES

Whether Romney takes the presidency from Obama or not, it will pay now to plan ahead. Here's some general advice for the coming year—or two. Of course, be sure to check with your own accountant before making any big changes:

Change your investment portfolio. Talk to your investment advisor and determine whether reallocating your portfolio makes sense. How would you be affected by the potential tax rate changes? Could shifting your investments help minimize a potential increase in taxes?

Lock in capital gains rates on investments. A golden rule in business: Never let the tax tail wag the dog. Don't let the tax rate scare you into unloading investments early. However, if certain investments have run their course or you're sitting on a significant gain, consider selling in 2012 to lock in the lower capital gain tax rate.

Choose the right time to sell your practice and the right way to structure that sale. If you're in the process of selling your business, try to finish before December 31. And remember, if any funds are to be carried by the seller (otherwise known as seller financing), you will pay the applicable taxes on these funds at the time they are received. For instance, if a seller carries 10 percent of the sales price as an owner-financed note and this seller receives full payment on this note in four years, whatever the capital gains rate is four years from now is what the seller will pay, regardless of when the transaction closed.

Defer your expenses and accelerate your revenue. If the expiration of the tax cuts outlined above will significantly affect you, you might consider moving income into 2012 and pushing expenses into 2013, if possible.

It can be difficult to plan this year and next year's tax decisions without knowing what the outcome of the presidential election will be, but understanding what's at stake will give you a leg up, no matter who's in the Oval Office next year.

Tom McFerson, CPA, ABV, is partner at the veterinary financial and consulting firm Gatto McFerson in Santa Monica, Calif.