Starting a new business can be incredibly difficult. From the operations to financials, it can be a mess. One of the most difficult to understand components of having your own business is dealing with taxes. With ever-changing tax rules and regulations, finding where you can take advantage of all the deductions, credits, and exemptions allowed is a feat.
With doctors ranking as some of the highest-paid people in the United States, this also puts them in a higher tax bracket. The higher your income, the more you pay in taxes. This is what makes strategic tax planning paramount for practitioners.
Legacy Wealth has developed a quick “cheat sheet” for effectively managing your taxes with these five strategies:
Reduce your taxable income
Diversify your investments
Reduce your owed taxes
Delay the due date on taxes
Long term planning with professionals
Reduce Your Taxable Income
Your first tax planning strategy should be to reduce your taxable income. This does not mean changing your work schedule. Instead, you should be changing your approach to your finances. You can restructure your income and your contributions to bring down the taxable amount of your income.
An incredibly helpful way to do this is to make pre-tax contributions to your retirement accounts, such as a 401k plan. This means that you get a massive tax break on this year’s taxes while growing your money responsibly. Similarly, you can use a backdoor Roth IRA strategy, where you contribute to your IRA and then switch it to a Roth IRA. This strategy does not save your taxes this year, but it can also never be taxed again.
Diversify Your Investments
A significant part of tax planning is managing and strategizing your investment portfolio. Optimizing your investments can allow for greater tax efficiency and less investment risk. There is not a standard rule for investments when it comes to diversity, but most experts recommend the 5/25 rule of thumb. Ideally, you want to stick to five different asset classes and have no more than 25% of your finances in one asset.
Reduce Your Owed Taxes
Similar to reducing your taxable income, you want to reduce your taxable income to reduce the amount of taxes you owe. This means deducting as much as you can! Just as homeowners deduct the interest they pay on their mortgage, this includes finding everything you can deduct from your taxes as a practitioner.
What kinds of things can doctors write off on their taxes? There are refundable and non-refundable tax credits that can be used if you have children and a myriad of self-employed work expenses.
Some examples of self-employed work expenses include:
- Clothing— white coats, scrubs, work shoes, etc.
- Medical or DEA licenses
- Continuing Medical Education (CME) costs
- Cell phone or pager costs
- Home office expenses
- Work-related driving expenses (minus commuting)
- Financial fees— accounting, retirement fees, etc.
- Charitable donations
Delay Due Dates on taxes
This strategy is a two-sided coin. When you cannot reduce your owed taxes, sometimes it is best just to delay them. You are saving yourself from paying the taxes this year, but if your business grows, you could be deferring your taxes to an even higher tax bracket. You will eventually owe your taxes as well as owe taxes on the growth in your account. This is why it is usually better to find deductions instead of deferring. However, if you recently invested in significant real estate, this could be the best strategy for you.
Long-Term Planning with Professionals
Tax planning is not only crucial at year-end; it is a strategy that should be implemented long-term. With a financial plan that is malleable and optimized for your personal and business needs, you can have significant financial health and save on your taxes.
Creating a long-term plan that works for your goals can be difficult, which is why you need a financial planner that can work with you continuously to create a plan for your success. Tax and financial planning are vital for any business owner, but especially physicians who face steep tax burdens every year-end.