Tax Planning

Tax planning to help frontline medical employees

While the basics of tax planning apply regardless of occupation, there are nuances in certain areas that need to be considered in order to optimize planning. For medical professionals, demanding schedules and special considerations due to high incomes can pose particular tax planning challenges. Tax professionals can serve health professionals well by encouraging them to take the time necessary to develop a long-term tax plan.

Why we prioritize tax planning

Every financial decision we make affects the taxes we have to pay. Tax planning, whether helping a doctor running a practice or a medical assistant managing their personal finances, ensures that tax breaks are maximized and tax liabilities are minimized.

While effective tax planning can reduce taxes payable this quarter or year, effective tax planning will help keep tax payments to a minimum for years to come. Developing an effective tax plan should include setting long-term goals and putting in place practices to ensure that those goals are achieved.

With a solid tax plan, individuals and organizations can anticipate and prepare for tax obligations, which will reduce the stress that tax season can bring. Without a plan, efforts to meet statutory tax obligations can suffer from inefficiencies and layoffs. In the worst case, poor tax planning leads to unnecessary fees, costly overpayments and avoidable tax penalties.

Lower taxes by reducing taxable income

The high salaries that medical professionals normally earn need not be reflected in high taxes. The taxes are based on the taxable income, which can differ greatly from the actual income. Effective tax planning can include several provisions aimed at reducing taxable income.

Retirement plans offer ways to lower taxes by reducing taxable income. Contributions to input tax accounts such as 401 (k) accounts or profit sharing plans are tax deductible for the year in which the contribution is paid. By maximizing contributions, the taxable income is minimized and taxes deferred until retirement.

Charitable donations are another way to reduce taxable income. Funds donated to qualified charities can be deducted from taxable income. For those with securities accounts, donating securities can provide even greater tax breaks than donating cash by providing a deduction and lowering capital gains taxes associated with the sale of securities.

Invest tax-efficient

Gains on investments are typically considered capital gains and are subject to taxation. In order to further increase your investments and at the same time reduce taxes, you should add tax-efficient investment instruments to your portfolio.

Tax managed mutual funds and exchange traded funds typically generate fewer capital gains than actively managed funds. Certain bonds, including municipal bonds and Treasury bonds, are also tax-free.

While tax deferred investments can improve a client’s tax position in the short term, a diversified investment strategy that includes a wide range of investment vehicles can result in a more manageable long-term tax position.

Follow updates on tax law

Changes in tax law are common. Updates can lead to changes in a customer’s tax liability even if their financial situation does not change. Tax plans should be reviewed and updated whenever there is a change in tax law.

For example, recent changes to the Tax Code have included a change in the effect of deductions on taxable income. In general, the change made it more advantageous to use the standardized deduction than to break down the deductions.

The change in deductions has numerous implications for tax planning, especially in the area of ​​charitable giving. Individuals and businesses dealing with individual deductions now must weigh the benefits of “bundle deductions,” a technique that makes taxpayers postpone their contribution entitlement from one year to the next. Taxpayers can also consider maximizing the benefits of individual deductions by pooling donations that are typically made over several years into one large donation made in a single calendar year.

The COVID-19 pandemic has resulted in a myriad of changes in US tax practice, from extending filing deadlines to introducing tax credits and rebates available to certain individuals and businesses. Some of the tax breaks are specific to frontline workers. As the pandemic continues and new relief measures are put in place, it would be wise to put tax plans in motion or revise them to take full advantage of the benefits available.

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