PERSONAL TAX PLANNING
Retirement Plan Contributions
For those participating in Simple IRAs or 401ks, any year end contributions have to be done by 12/31. Check your tax bill and make sure you are maximizing those accounts as appropriate. 2021 limits are $13,500 for Simple IRAs ($16,500 for those over age 50) and $19,500 for 401ks ($26,000 for those over age 50).
Tax Loss Harvesting
With the way the stock market has been going, you may not have many losses in your investment portfolio. However, if you do and have some gains in a non-retirement you want to take off the table such as appreciated Tesla stock, look at selling securities with a loss and selling and equal amount of gain for a neutral capital gains bill. Be careful though- you cannot buy either security back for 30 days in order to avoid wash sale rules.
Hopefully your CPA is doing a year-end tax calculation to make sure your estimated tax payments are on track and there are no nasty surprises (if they aren’t, I highly recommend getting a new CPA), plus looking at what top income bracket you are in. For high income earners who are charitably minded, unexpectedly high tax years are a good time to pre-fund an annual church donation or support a cause you feel passionately about.
Charitable giving is still giving away money though. Consider this: if you are in top income bracket of 24%, you are giving away 76₡ or every dollar. But if you are in the top bracket of 37%, that number changes to giving away 63₡ for every dollar. For single time high income years (such as a practice sale), a donor advised fund is a great strategy to pre-fund future giving.
529 Planning for children in private school
An interesting strategy that will depend on your state rules is to fund private school education (even primary and upper school) through 529 plans. This strategy is for state plans that:
- Offer a state income tax deduction for plan contributions (please note most states only offer this contribution for state-sponsored plans, not just any plan)
- Allow plan assets to be withdrawn for private school tuition
This works best when you have college funds set aside elsewhere for university tuition since typically the goal of 529 plans is to save for higher education, not take an annual state tax bill break for private school. The ins and outs of this are a bit complicated, so be sure to consult your advisor about what makes the most sense for you.
Backdoor Roth IRAs
Although the final version of the 2022 proposed tax bill has not passed yet, backdoor Roth IRAs (which is making a non-deductible contribution to a traditional IRA and “converting” it to a Roth with no tax consequence) is on the chopping block for all income levels. In my mind, this is the single biggest easy-to-execute loophole in the tax code, and if you usually wait until the following calendar year do your current year contribute-and-convert, I suggest doing it now. Please note this strategy is best utilized for those who do not have any IRA money outstanding.
FOR PRACTICE OWNERS
Deducting Home Office Expenses
If you have a home office that you use for your practice and nothing else, you are eligible to deduct your home office. It doesn’t even have to be a room in your home- there was an IRS court case in a vacation apartment in NYC that has a certain area sectioned off and designated for business only, and it qualified. This means you can deduct a pro-rated amount of your utilities, property tax bill, insurance, and could even depreciate your home value (although if you plan to sell your home while still earning income I don’t recommend this as it is subject to depreciation recapture, which make the depreciated portion of your home ordinary income at the time of sale).
Renting Your Home for your Practice
From time to time I get asked about renting a personal residence for the practice as a tax strategy. This is in fact a legitimate question- you can rent your primary residence for up to 14 days per year and not claim the income. So if your practice was to rent your home it could be a deductible expense to the practice but not considered income personally.
Usually this is accompanied by little to no actual use of the home, which I would not advise. However, some ways practice owners could take advantage of using their home for practice expenses are:
- Practice strategy meetings
- Year End or even monthly
- Can be just for management or the whole staff
- Holiday parties
- Milestone parties
The trick is you have to use your home for the practice AND justify the expense. So if you are hosting a breakfast quarterly goal setting meeting for your staff, have your office manager or underutilized staffer call local event venues (let’s assume your home is nicer than a Holiday Inn so think high-end) and get a quote for space use, food and beverage. Please note this means that you must personally provide food and beverages if it’s included in the quote. This provides justification for the cost and actually hosting these types of meetings can justify this tax strategy.