Last minute tax strategies for ODs

March 29, 2021

On March 17th, the IRS gave into pressure from the government and lobby groups to extend the deadline for personal tax returns from April 15th to May 17th. While this creates some relief for filing in the next 18 days, if you expect to find yourself with a high bill this year, make sure you've taken advantage of these 3 tax mitigation strategies:

A Traditional or SEP IRA contribution While this sounds like a basic strategy, it can be pretty powerful for practice owners. With a traditional IRA you can contribute $6,000/year and ($7,000 if you're over 50). The amount is 100% deductible for individuals who do not participate in a retirement plan at work, but has income limits to deduct for families who are covered by a work plan (phase out begins at $65,000 for single tax payers, $104,000 for married filing jointly).

For the right practice owner, a SEP contribution can be even more impactful, especially for practices who have had high staff turnover. The contribution limits are 25% of income up to $57,000/year. So a practice owner who made $100,000 in 2020 can contribute up to $25,000.

The catch is the practice owner has to make a pro-rata contribution for eligible employees, so if they contribute 25% of their salary they have to contribute 25% of each eligible employees salary too. Eligible employees are only those who are 21 years old and have worked in the practice 3 of the last 5 years assuming less strict requirements were not put into place. I work with several practices that have a newer employee base, and this is a great way for the owners to defer personal taxes without having a large contribution requirement to their staff.

Already made that traditional IRA contribution for 2020 but want to do a SEP? You have until April 15th to un-do traditional IRA contributions for the prior year.

A Health Savings Account (HSA) April 15th is also the deadline to make HSA contributions. These are pre-tax contributions to a special type of tax-free account to be used for health expenses only. A cool feature of HSAs are that they can grow tax-deferred indefinitely into the future and are always tax free so long as they're used for eligible health expenses.

You can open a HSA if you participate in a high deductible heath plan. The IRS defines a high deductible health plan as one with a deductible of at least $1,400 for an individual or $2,800 for a family. An individual can contribute $3,600; a family can contribute $7,200 for 2020. There is also a $1,000 catch up for those age 50 and older.

Profit Sharing for Sole Proprietorships (or LLCs/S-Corps that filed an extension) If your practice has a 401k plan and is designed in a favorable manner, a profit sharing contribution can be a great way defer taxes and reward employees after a tough year. Basically a practice owner can contribute to their and eligible employees accounts using an IRS approved calculation, which can be as simple as using the same % of salary for everyone like a SEP IRA or implementing age-based discrimination to shift more dollars to older employees.

Your 401k's TPA (Third Party Administrator) can calculate profit sharing for the prior year upon request and should know how many employees are eligible and what you would have to contribute on their behalf. Many times this isn't a "home run" for employers but rather shifts dollars that otherwise be paid to the IRS into employees' 401ks.

One note of caution if you're excited to have an extra month to file returns: for doctors who had a difficult 2020 and may qualify for the latest round of stimulus, it's better to file earlier before check amounts are calculated. If 2019 income doesn't qualify you but 2020 does if

the checks are calculated before you file your 2020 return, you may have to recoup the stimulus dollars one your 2021 returns... a long ways from now. Those who qualify are individuals who's AGI is less than $80,000 and couples who jointly earned less than $160,000.

Happy tax filing! Natalie

P.S.- Hayes Wealth Advisors works exclusively with Optometric Practice owners to help them build wealth outside their practices through customized, industry-specific planning. We have built planning tools to comprehensively answer the questions that face practice owners in today's environment. Our services are available both on a one-off basis or in the context of a full financial plan. Set up a call if you'd like to learn more about how Hayes Wealth Advisors can help you make the best financial decisions for your practice and family.


Helping ODs Build Wealth Outside Their Practice

Natalie Hayes Schmook, MBA

Certified Financial PlannerTM Certified Valuation AnalystTM Certified Exit Planning Advisor (404) 954-1133

Hayes Wealth Advisors provides financial planning through a Comprehensive Personal Wealth Action Plan and long term, customized investment management services. Our goal is to help optometrists to build wealth outside their practice in such a way that they are able to live life to their fullest regardless of market conditions.


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