9 Ways to Start Tax Planning for Next Year

Today is Tax Day and if you’re like me, you may have just done your taxes and realized you owe money back (or perhaps your refund was less than you expected). While many people just accept their refunds or pay what they owe, be different. Start putting things in place now so you can lower your tax bill next year. In other words, don’t just focus on tax filing, focus on tax planning. Here are a few ideas below:

1. Max out pre-tax retirement accounts and Roth accounts

Let’s start by reducing your taxable income. One of the best ways to do that is to stuff money into pre-tax retirement accounts. This means using the 401K or 403b at your job or opening a solo401K if you are self-employed. Last year, you could stuff $20,500 into retirement accounts but this year (2023) the amount has increased to $22,500 per person. Along with using pre-tax retirement accounts to save money in taxes in the current year, you can also consider Roth accounts like a Roth IRA to save money in taxes in future years. For those like me who may not be able to contribute to a Roth IRA directly due to your income, contributing to a Roth IRA indirectly via the backdoor (by contributing to a traditional IRA and then converting that money to a Roth IRA) is another good option.

2. Stuff money into additional tax-advantaged accounts (457b)

Many physicians and governmental employees have additional pre-tax accounts open to them such as a 457b or deferred compensation plan. These plans are not retirement accounts, but they do allow you to contribute as much as $22,500 a year (in 2023) into them. The money you contribute is not taxed which can save you thousands of dollars in taxes the year you contribute to it. Just be sure to contact your human resources department to see if you have the plan and are eligible to use it. Also check out the 457b plan details and ensure your employer is stable.  

3. Consider the use of a Healthcare Savings Account or (healthcare) Flexible Spending Account

A Health Savings Account (HSA) is an investment account open to those who have a high-deductible health insurance plan. As of 2023, you can put up to $3850 if you are single or $7750 if you are married (or have family members on the account). The money you contribute is not taxed and you can then invest that money which will help it grow to an even larger amount over time. You can then remove the money out of this account tax-free if used for health expenses (in the current year or during any year in the future). For those who are not eligible for an HSA (because you have a different type of health insurance plan) you can usually use the healthcare flexible spending account. This is an account that allows you to put money away (pre-tax) that you plan to use on healthcare expenses throughout the year. Unlike an HAS, you cannot invest the money in the account and it must be used within a 12-to-15-month time frame, but if you know you will have healthcare expenses (from doctor visit copays, prescriptions, and procedures) using an FSA may be beneficial and save you money in taxes as well.

4. Use the Dependent Care FSA

If you are someone with children or other dependents like aging parents that you care for, consider using the dependent care FSA. This is an account you can stuff money into each year (tax free) that you can use to pay for dependent care expenses like daycare costs for your kids or nursing home costs for your parents. The max amount you can put into this account as of 2023 is $5000 for those who are married (or $2500 for those who are single or file their taxes separately). If you are a parent who is going to spend that money anyway, you might as well save a little bit in taxes to do so.

5. Take advantage of deductions like charitable giving and mortgage interest

If you are someone who has a home or likes to give to charity or churches each year, you may have other tax saving measures open to you. If the amount that you give each year and spend on mortgage interest (not the full mortgage payment but the amount that is used to pay interest) exceeds the standard tax deduction, then it may be in your best interest to itemize your taxes. When you itemize your taxes, you are able to take advantage of other deductions in the tax code (for charitable giving and mortgage interest payments) that could save you even more money in taxes. Ask your accountant to run the numbers and see if that makes sense for you.

6. Tax loss harvesting

If you are someone who invests a decent amount of money in taxable brokerage accounts (ie. If you invest money outside of retirement accounts) then you may be able to take advantage of other deductions. As we’ve seen over the past few years, the stock market does not always go up. Sometimes it goes down. When it goes down the value of some of your investments decreases. You may be able to sell some of those investments at a loss and then use that loss on your taxes to decrease the amount you owe. (You can then buy back a similar investment at a later date) Speak to your financial advisor to determine if you have enough money in brokerage accounts to tax loss harvest and whether or not it makes sense for you to sell some of those losses to offset your taxes.

7. Consider changing your business structure  

It’s 2023 and many more people have side businesses and hobbies that bring in extra income. Perhaps it is time for you to re-think your business structure because doing so may help you save money in taxes. Many people opt to make their business an LLC, but when it comes to taxes, you still have choices. You can choose for your business to be taxed as a sole proprietor (in which you will have to pay self-employment taxes) or….you can choose for your LLC business to be taxed as an S Corporation. Choosing to tax it as a sole proprietor requires less work but if you choose an S corporation then you may be able to save money in self-employment taxes which can amount to thousands of dollars per year. Speak to your business manager or tax professional to determine if you should reconsider your business structure and how it is taxed.

8. Get some 1099 income

If you aren’t someone who wants to start an entire business or hire a tax professional, perhaps you can still use some of your side income to your advantage. You don’t have to have an official LLC or a business corporation to take advantage of some of the benefits in the tax code. As long as you have some 1099 income you can start deducting expenses that are related to that income and you can even get an employment identification number to open up a solo401K (which is a retirement account for people with side income and businesses). Opening a solo401K will allow you to stuff even more money into retirement accounts. If you make a good deal of money, you can even open a “Megabackdoor Roth account” to stuff up to $66K into retirement accounts each year as of 2023.

9. Restructure compensation from your job

If you are someone who is employed and has no desire to start a business or get side income, there are some other things you can consider to lower your taxes. One idea is for you to think of other ways to get compensation from your job in ways that are taxed differently. For example, many doctors have money for Continuing Medical Education (CME) at their jobs which is fully reimbursable. Instead of increasing your salary, maybe you ask for more CME money and fewer restrictions on how it is used so you can get thousands of dollars each year tax free to spend on electronics and courses or conferences in exciting places? If your job has a retirement match, maybe you negotiate a higher retirement match instead of a bigger salary since the money your employer puts into retirement accounts is tax free?

Tell me, what changes do you plan to put in place this year to reduce your taxes? Have you tried any of the ideas above?

7 Tax Tips to Keep in Mind

One of our largest expenses each year is the amount we pay in taxes. Although we should all contribute to various government programs and priorities, it behooves us not to pay more than we need to. Here are some tax tips to keep in mind:

1. Contributions to retirement accounts lower your taxes. As a young professional, you have many uses for your money. Perhaps you want to go on vacation, drive a nice car, or maybe just need to keep up with rising housing costs. Regardless of the expense, it is important that you not lose sight of the bigger picture. Many of you would like to build wealth or at least become more financially stable. One way to do that is to invest money on a consistent basis. Ironically enough, investing money through retirement accounts not only helps build your net worth, but it also helps lower your taxes. When it comes to tax lowering strategies, investing through retirement accounts is a no-brainer.

2. Remember that every dollar is not taxed the same. I’m constantly reminded of this whenever I’m contemplating a new side hustle or business partnership. The tax code is progressive. This means that lower amounts of money are taxed at lower rates than higher amounts of money. As soon as you reach certain thresholds you could jump from one tax bracket to another resulting in a higher tax bill. This is important to keep in mind as you continue to progress in your career. Chances are that you will make increasing amounts of money as you continue to work, so understanding the tax implications is vital. If someone is in the 24% tax bracket, then they will only get to keep about 76cents of each dollar they earn (and this doesn’t account for state and FICA taxes). I’m not saying earn less, but don’t forget that the more you earn, the more you will owe in taxes, so plan accordingly

3. Don’t forget to account for FICA taxes. For some reason, when I think of taxes, I think of my federal tax rate. Oftentimes I forget about another high tax: FICA taxes. FICA is the Federal Insurance Contributions Act that mandates workers contribute to Social Security and Medicare. If you are employed, then your employer deducts these taxes from your paycheck. However, if you’re self-employed or own a small business like I do, then this tax becomes a lot more noticeable. Those who own a small business or who turned their side hustle into an LLC are now responsible for paying taxes on the money they earn. In addition to paying federal and perhaps state taxes on the profits, they must also pay these FICA taxes. As a self-employed person, you have to pay the employee half of FICA taxes and the employer half of these taxes. This amounts to an extra 15% in taxes you must pay, on top of your normal federal and state taxes. You may want to consult with a tax attorney or accountant for the best strategy when your business becomes profitable.

4. If you’re single and childless, you’ll likely pay more in taxes. I’m reminded of this fact every year around tax time. Many of my friends from high school who have kids are usually excited to be getting money back from their taxes. Meanwhile, I file my taxes and just hope I don’t owe anything. Why is it that my friends are getting money back and I’m not? Could be due to a variety of reasons, but there are a couple things to note: 1) single people have higher tax rates than people who are married and file their taxes jointly and 2) people who have children get more tax credits and tax deductions than people who don’t have kids. I’m not saying get married and have kids to lower taxes. This is just some insight as to why some folks may owe more or less in taxes than others.

5. You must pay taxes on business profits. Many people are entrepreneurial and have dreams of building a business they can call their own. While there is nothing wrong with this aspiration, don’t forget about one of the responsibilities of owning a business: added taxes. As a business owner, you must pay taxes on profits you make. This means you have to keep good records of business revenue and business expenses so you can determine the business profit amount to pay taxes on. Since you don’t have to pay taxes on business expenses, be sure to keep receipts of business purchases you make. Failing to do so could result in higher taxes.

6. You may be able to write off some educational expenses. This was a pleasant surprise to me the year I graduated medical school. I was able to get a noticeable sum back on my taxes that year by accounting for my time in school. The IRS has a tax credit called the “lifetime learning credit” worth up to $2000. If you’re someone who paid for some sort of schooling in 2021, you can take advantage of this credit. Those who were still in undergrad may be eligible for a different credit that results in even more money. Simply ask your school for “From 1040” so that you can enter the necessary information to get the credit.

7. You can deduct some of your charitable donations. Many people give a portion of their earned income away. Some people do it at their church and give 10% of their income as tithes. Other people give to certain non-profits or noteworthy causes throughout the year. If you do something like this as well, keep in mind that you may be able to deduct this expense. Everyone can deduct at least $300 of charitable donations. Depending on your tax bracket and the way you file your taxes, you may be able to deduct even more.

I am not a tax lawyer or accountant. However, each year I continue working in my career and building my side business, I learn even more about ways to be more efficient with my money. This includes profitable tax strategies.

What tax strategies have you learned this year?