Are You Missing Out on Year-End Tax Planning Moves?

Every year, come February or March, most physicians send their financial documents off to tax preparers. This timeframe does indeed enable them to file on time and prevent late payment fees. But there's a hitch to this approach.

We all hate paying taxes, but waiting this long to do the paperwork can put you at a disadvantage. How? You could be missing out on some valuable tax-saving opportunities if you don't proactively plan ahead.

Uncover Opportunities With Year-End Tax Planning

It's November, and it may seem like April 15 is miles away. Like most people, you'll get through New Year's and then deal with taxes. Well, think again. It's the perfect time to start considering how you might save some money in taxes.

Tax planning opportunities for employed physicians paid via W2 are limited, but they do exist. There's even more opportunity for docs in private practice, both for individual physicians and the group as a whole.

So take the initiative. The first step is to contact your tax preparer around early November and let them know you'd like to review the previous year's return to discuss potential opportunities for saving money on this year's return.

Here are some of the opportunities you might uncover.

Where Might Tax-Savings Opportunities Exist?

Harvest tax losses.

Go through your portfolio and look for investments that have a loss. The market keeps rising, but just wait. The market will decline at some point, and then you can turn lemons into lemonade.

If you are considering selling off a losing investment, does your rationale for buying this investment still ring true? If not, consider selling it. Still have faith in the investment? You can sell it, book the tax loss, and rebuy the same position, as long as you wait at least 30 days to satisfy the wash sale rule. This rule requires that you not immediately repurchase an identical investment if you want to take the loss for tax purposes, but rather wait at least 30 days. If you don't want to be without the investment for a month, you can sell it and buy a similar investment to keep those dollars in the market.

Don't miss pre-tax savings opportunities.

Stay on track to fully fund any retirement plans with a year-end funding deadline, such as 401(k) and 403(b) accounts. If you're turning 50 in 2021, you can defer an additional $6500 to your employer's retirement plan — $26,000 per year, rather than $19,500.

Look into the possibility of a Roth conversion.

A Roth conversion could be a winning strategy, in particular for retired docs who have not started Social Security or RMDs (Required Minimum Distributions) —who may temporarily be in a very low tax bracket. At the same time, while a Roth conversion is generally not advisable for high-income docs in practice, it might be sensible if, in a given year, you land in a lower tax bracket than usual.

For example, I have clients who made bets on private investments that didn't work out and resulted in losses. Booking that loss this year could provide the opportunity to reduce their income. Another instance could be if you made a significant contribution to charity, maybe using your Donor Advised Fund. Your accountant might find other ways to lower your tax bracket to take advantage of the Roth conversion opportunity.

Fully fund your Health Savings Account (HSA).

Are you enrolled in a high-deductible health plan? If so, you're eligible to fund an HSA with pre-tax dollars, allowing it to count as a tax deduction.

Here's how it works. You can fund up to $3600 for a single health plan and $7200 for a family plan. Good news if you turn 55 this year: You can defer an additional $1000 to your HSA for a total of $8200. But it gets even better. If your spouse is also 55 or older, they, too, can open and fund an HSA with $1000. Simply by fully funding your HSAs, you've just gotten $9200 in deductions.

Remember contributions to your 529 plan.

Did you contribute to a 529 college savings plan this year? If so, great! Now it's time to find out if your state allows a tax credit and/or deduction. Just be aware that sometimes this deduction only applies if you contribute to your own state's 529 plan. On the plus side, seven states allow for a state tax deduction or credit for 529 money contributed to any state's plan.

Decide which tax year in which to realize income.

The year in which you realize your income can impact your taxes. While many physicians have little control over the timing of their income, it's more likely among those in private practice, retirees who draw money from qualified (pre-tax) accounts, or investors selling positions with capital gains in taxable accounts.

Let's dig deeper. Let's say you're retired and need to withdraw $100,000 from your portfolio to cover the next 18 months. Should you withdraw it all now, take some this year and some next year, and from what accounts? It's best to work with a tax professional who has the software needed to model these scenarios.

Don't miss your Required Minimum Distribution (RMDs).

If you are 72 or older, make sure you take the full RMD required. If you have more than one retirement account, such as an IRA or 401(k), the amount of your RMD has to include all of those accounts. Remember that the IRS will impose a 50% penalty on any required amount you fail to take.

Avoid tax surprises.

If you don't correctly account for all your taxable transactions — such as capital gains and investment distributions — you can be unpleasantly surprised with an unexpectedly large tax bill or even penalties for underpayment. To avoid these problems, review these distributions YTD with your preparer before year-end to understand the implications on your taxes.

See Where You Stand — and Plan

Don't just let taxes "happen" to you. To pay less and avoid overpayment surprises come April 2022, review your tax situation between now and year-end. Contact your tax preparer today for a thorough review of opportunities that may be available.

The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.

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About Dr Joel Greenwald

Joel S. Greenwald, MD, is a graduate of the Albert Einstein College of Medicine in Bronx, New York, Joel completed his internal medicine residency at the University of Minnesota.

He practiced internal medicine in the Twin Cities for 11 years before making the transition to financial planning for physicians, beginning in 1998.

Joel's wife is a radiation oncologist, making him all too familiar with the stress of medical practice.

Knowing firsthand the challenges of practicing medicine, Joel's passion is making the lives of physicians easier by helping relieve them of financial worries.

Connect with him on LinkedIn or on his website.

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