The end of the year is rapidly approaching, and with it comes the necessary task of reviewing tax documentation. Preparing tax returns is rarely fun, but it is vitally important, especially for high earners. With that in mind, here are some items to consider before the end of the year to ensure your taxes are in good order.
Tax-deferred Retirement Plans
Tax-deferred retirement plans are a deduction that physicians often miss. Many fail to take advantage of the retirement options available and do not max out their account. Generally, this is because they simply don’t realize just how much money they can invest and the huge tax benefits available to them. Consider these thoughts – Every dollar put into a tax-deferred retirement account will not be taxed this year. And, if you are taxed at the highest bracket, there are substantial income taxes associated with your level of earning. For some this could be close to 50%.
Physicians who are paid on a 1099 should be able to contribute 20% of their income into a SEP-IRA (up to $53,000). And, if you make under $250,000 / year, you might qualify to contribute even more than 20%. For healthcare professionals who are employees, the 401k contribution might be limited to as little as $18,000. However it is important to remember that some plans will match or at least allow a self-match up to the $53K limit. Finally, if you are 50 or older you can contribute an extra $1,000 per year in your Roth IRA (Roth Catch up Contributions).
While the Roth IRA did not raise its contribution limits for 2015, it does allow the investor to shelter their funds from future taxes. Up to $5500 can be put into a non-deductible IRA (and $5500 for a spouse as well).
One expense that physicians often forget is the cost of their own health care. By creating a medical savings account, these expenses can be paid for using pre-tax dollars. Additionally, health care premiums can be deducted as a business expense as well as the contributions to the health savings account.
Business expenses are also a commonly overlooked write-off. Generally this is because doctors are unaware of what can and can’t be deducted. Keeping track of things such as travel, meals, accommodations, office equipment and supplies, medical equipment, licensing fees, exam fees and other items related to running a medical practice is important when tax time comes along.
Charitable items are a great source of tax breaks for physicians. Any item donated to a charitable organization can be deducted. Additionally, if you spend a lot of time driving to and from a charity, those miles can also be deducted.
Don’t forget about Tax-Loss Harvesting
While losing money is not a favorite pastime of investors (or anyone for that matter) tax-loss harvesting is an excellent solution to lessen the blow. An advantage of taxable accounts is the ability to use any investment losses that might occur to lower your tax bill. Tax loss harvesting offers the investor several benefits. They provide an interest-free loan to defer capital gains taxes and you can use remaining tax losses to deduct up to $3,000 from your income taxes each year. This can amount to up to $750 depending upon your tax bracket. Finally, any remaining losses can be rolled into upcoming years, so you can defer your capital gains and apply up to $3,000 against your income each year until your losses are used up.
Fees from Investment Professionals
One tax break that is regularly overlooked are the fees incurred for receiving investment advice. This is why it is so important to work with a fee-only provider who has your best interests in mind and can educate you on all the tax advantages available. Additionally, investors can rest assured that the advice they are receiving is for their benefit and not lining the pockets of the advisor.
For more information or if you have questions regarding tax considerations you should be aware of before year-end, please feel free to contact the Financial Fiduciaries team.