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Guide to Year End Tax and Financial Planning Considerations

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It is time for year end tax and financial planning considerations.

Yes, you read that right…I said year end. As in the end of the year. As in “I can’t believe another year has gone by.”

Regardless of your ability to perceive how fast or slow time may have passed, the IRS still sticks to their calendar and has some firm deadlines on when certain planning strategies can be implemented, and even some of those require some “pre-planning” on your end before implementation.

The IRS tax code is nothing short of complex and long. As of 2015, the tax code was over 10 million words.

We hear all the time from OD’s that “don’t know what they don’t know” about tax and financial planning and when certain items need to be considered and acted upon. We all know how easy it is to get wrapped up in the day-to-day of seeing patients and working IN our businesses that we sometimes forget to take a step back and work ON our business (and our finances).

Here we’ll share with you five planning strategies to consider personally and professionally before year end.

(Boring disclaimer: We must state that what we’re discussing here is informational in nature and should always be verified with your personal tax advisors and should not be interpreted as personal advice. Everybody’s situation is different).

Understand Retirement Planning Options

You need to think of yourself as a “dual threat” when it comes to your retirement savings options.

I’m talking about the personal and business strategies that you have at your disposal. If you own the practice, there are even more considerations to weigh when making decisions.

On the personal side, you have up until April 15, 2017 to make contributions to Individual Retirement Accounts (IRA’s), but that doesn’t mean you should put off planning or savings for them until that time. This is one of the few strategies that exist and that you’re able to execute on after 12/31 and have it still impact 2016’s tax year.

There are two types of IRA’s to consider: Roth and Traditional.

The biggest difference between them has to do with the taxation of earnings and deductibility of contributions.

The following table illustrates the difference:

Roth IRA Traditional IRA
Contributions Deductible? No Possibly (based on AGI)
Taxation upon qualified withdrawals in retirement Tax free for qualified distributions Deducted contributions & earnings subject to ordinary income tax

Most people like the idea of building up a portfolio of tax-free investments in retirement, so the Roth IRA is usually a good place to start. In addition, the younger you are, the more time your Roth IRA has to compound in value, giving you even more potential tax-free income in retirement.

On the business side of the equation, the first step is to understand what options you have available to you.

If you are an employed OD at a practice and receive a W-2, you most likely already know whether the owner of the practice already has a plan in place. The most common retirement plans that OD’s have in place are SIMPLE and 401(k) plans. Ask about if/when you are eligible to participate and what the employer match is on contributions.

(Hint: SIMPLES MUST match contributions, 401(k) plans are optional depending on how the plan was set up). Make sure you’re not leaving free money on the table!

Don’t Neglect Your HSA

If you are covered by a healthcare plan that has a high deductible (currently $1,500 deductible for singles or $3,000 for a family plan), then you are able to contribute to an HSA (Health Savings Account).

I can make a strong argument that the HSA is one of the most valuable yet under-utilized planning tools for younger and older OD’s alike.

While there are many benefits of the HSA, one of the biggest benefits of HSA’s is that it is an “above the line” deduction.

This means that it reduces your AGI (Adjusted Gross Income), which is the bottom number on page 1 of your 1040 tax return. This is an important number because it dictates the deductibility and phase-outs of many other tax planning tools, including the IRA options discussed above and the ability to deduct student loan interest.

This is another tool that you have up until April 15, 2017 to make your contributions for tax year 2016.

Get Your First Tax Estimate

This action item is going to vary depending on your employment status. If you are a contracted OD within a practice and are issued a 1099, your tax situation is going to be different than if you are employed as a W-2 associate in a practice and will be completely different if you are the owner of your practice.

For the W-2 associate, you shouldn’t have much planning that needs to be addressed from a tax perspective during the last quarter of the year. Assuming your W-4 was filled out correctly (which tells your employer how much to withhold from your paycheck for taxes), most (if not all) of your tax liability has already been withheld and submitted to the IRS as part of your employer’s responsibility. If you’re worried or want additional confirmation, seek out the guidance of a qualified tax professional like a CPA.

For the 1099 independently contracted OD, the 4th quarter is a good time to make sure you have an idea on what’s going to be coming during this tax season.

If this is your first year out of school and you’ve been a 1099 from the beginning, the IRS has not required you to make quarterly payments of your tax liability. This means that, without getting any estimates here in 2016, you won’t know how much your tax liability will be until you file your taxes in early 2017. If you’re short on available funds to pay your taxes because you didn’t set aside enough throughout the year, this can add some unneeded stress in your life, so be prepared and ask a CPA to help you run an estimate for 2016.

As a general rule, I generally recommend setting aside anywhere from 30-40% of your gross earning as a 1099 for tax liability. (Tease: I’ll be diving into this topic of “1099 Hell” on my next piece…stay tuned).

For the private practice owner, this is a good time to sit down with your CPA (assuming you already have that relationship) and understand how the numbers are looking through the first 3 quarters of production and what your tax situation will look like for 2016.

Depending on your profitability, cash flow, and business needs, this may be a good time to look at making additional purchases in your practice that qualify for Section 179 depreciation to help offset any tax liabilities.

Note: I did not say to go out and spend money on things you don’t need so that you don’t have to pay taxes!! Spending $20,000 on foolish or unneeded supplied/equipment just to avoid paying $5k in taxes (assuming a 25% tax rate) is not a sound business decision, but one I see OD’s make and “justify” more times than not!

If you are practice owner that currently has a SIMPLE IRA and you are thinking about transitioning to a 401k, you have until November 1st to make that decision and notify your team that you are moving the retirement plan to a 401k. Implementing a 401k can be a very wise decision if structure correctly, but make sure that you have done your due diligence on plan and platform selection as the costs (both explicit and implicit) within a 401k can vary widely.

As a practice owner it’s important to know the differences in the “types” of income that you’ll realize on your personal tax return.

Depending on how your practice files its taxes (filling out a 1120S return if it is an S-corp or a 1065 if you set it up as a partnership), the income will “flow through” and be taxed in different ways on your personal return—it is not possible to “shelter” your dollars in your business and prevent them from being taxed on an annual basis without the use of advanced planning techniques such as a qualified retirement plan or other strategies.

Understanding these different flow-throughs can help be more prepared…and thus less surprised…come tax season.

Harvest Investment Losses

If you happen to be in the situation where you have investments that are not held within a retirement account, look at the different holdings that you have and determine if it makes sense to harvest any capital losses that you have with any of your holdings.

You can deduct from your income up to $3,000 per year in capital losses and carry forward any unused balance into future years. If you do decide to sell your investment, just be aware of the “wash sale rule” before you go back and buy the investment (or something similar). Violating this rule would negate the ability to claim the capital loss.

Take a Self-Inventory

This one may seem a bit “touchy feely,” but the last couple months of the year often start spurring the thought processes around goal setting, personal inventory, and reassessment of the past 3 quarters of the year.

Take some time to write down some of your accomplishments that you achieved, areas that you fell short, challenges and opportunities for the upcoming year, and a roadmap to achieve what’s most important to you. Do this for your personal, professional, and financial goals.

All of what I’ve discussed in this article will not get done without your attention and proactive focus. It doesn’t happen by accident…nor does anything else worth doing in our personal or professional lives.

Being successful and achieving what you want in life doesn’t happen by accident. It happens because of intention, focus, dedication, and commitment.

As Aristotle is infamous for saying:

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

Or, another way to look at it:

The difference between “You are successful” and “Are you successful” is you.

Adam Cmejla, CFP®, CMFC® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and President of Integrated Planning & Wealth Management, LLC, a comprehensive financial services firm focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve. Contact Adam at 317-853-6777 or [email protected].

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About Adam Cmejla

Adam Cmejla
We are an independent financial services firm who work with people looking for an established process instead of a random product. We bring a sense of calmness and discipline while creating an honest, unbiased client experience utilizing the perfect combination of the science of financial planning and the art of personal relationships. We specialize in serving clients throughout the country who are optometrists, dentists, and pharmacists.

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