By Natalie Hayes Schmook, MBA, CFP, CVA
In March and April my inbox is flooded by ODs who need last minute tax-saving strategies.
While there are a few strategies available to ODs after the year ends, tax planning is best done in the year tax planning is needed. And with December 31st just around the corner, now is the time!
Here are three things that MUST be done in 2021 to count for this tax year when you file your returns:
- Maximize your qualified plan at work. If your practice offers a Simple IRA or 401k, or if you have a solo 401k, now is the time to max it out if you are anticipating owing taxes. The maximum for 2021 is $13,500 for a Simple IRA plan ($16,500 for those over 50) and $19,500 for a 401k ($26,000 for those over 50). Practice owners have the flexibility to bonus themselves to meet these limits, but employed ODs need to plan in advance based on their paycheck amount.
Practice owners with a SEP, there’s no rush—these contributions can’t be made until 2022 (but before you file your corporate returns).
- Frontload charitable contributions. This strategy has come up frequently over the past few years with practice sales resulting in higher-than-usual income, but for ODs with charitable inclinations, funding your church or favorite nonprofit’s budget in the current calendar year has a direct impact on taxable income. A great way to do this is through a donor advised fund, which is like a mini private foundation. Be aware though: charitable donations reduce tax liability, but you are still giving money away.
For example, an OD whose highest tax bracket is 32%, giving away $100 results in $0.32 of savings, but also $0.68 of a donation. I usually recommend this strategy for unusual years like a practice sale and only for those who have a charitable inclination.
- Find deductions through your practice. In general, I am in favor of incurring expenses as they come up to keep finances clean, but in unexpectedly high tax years (like years where large HHS grants or high production occurred), you can tweak some expenses to help your current year tax bill. Prepaying rent, utilities or other bills early, buying inventory you’ll soon need, paying bonuses early or hiring your kids to help market your practice are all small ways to alleviate your tax bill.
Next month: A tip for funding your retirement goals.
Missed previous Money Talk installments?
The Student Loan Conundrum: To Refinance or Not to Refinance
Is Your Portfolio On Track For Retirement? Use The 4% Rule
Personal Spending Is A Mission-Critical Piece To Retirement Planning
5 Common (But Fixable) Retirement Planning Mistakes