Tax time is dreaded by most medical and dental practice owners. Did your practice beat expectations, resulting in an unexpected tax bill? Is 2023 the year you finally get a refund? As a practice owner, proactive tax planning helps you minimize your tax bill and avoid unforeseen payments to Uncle Sam. In this article, we’ll cover four different tax moves to consider before you file your 2023 taxes.
#1: Contribute to a Retirement Plan
The first tax strategy is to consider contributing to a Retirement Plan. There are a few different retirement plans that you can establish in your medical or dental practice, many of which lead to a tax deduction, but there are retirement plans that you can contribute to personally as well
An IRA is something anybody can contribute to that has earned income, and depending on their circumstance, they can receive a tax deduction for their contribution or even be able to contribute to a Roth IRA which allows tax free growth and withdrawal upon retirement. This limit is $6,500 for 2023 ($7,000 for 2024), but if you are over the age of 50, you can contribute an additional $1,000.
A Simplified Employee Pension Plan, known as a SEP IRA, is a simplified version of a traditional IRA, allowing you to make contributions for yourself and your employees. Employer contributions to the account are a qualifying business deduction. This type of retirement plan works best if the business has no employees, however, as you must contribute to your employees at the same percentage rate. The contribution limit is 25% of compensation up to a total of $66,000 for 2023 ($69,000 for 2024)
Another type of IRA is a SIMPLE IRA, which allows individuals to contribute up to $15,500 in 2023 ($16,000 in 2024). If you are over the age of 50, you can contribute an extra $3,500 in 2023 and 2024. As an employer, you can also make a contribution into the IRA, leading to a business tax deduction.
Contributing to an retirement plan can be a great way to save for your own retirement, offer a retirement benefit to your employees, and lower the taxable income generated from your medical or dental practice. Contributions are due by April 15th of the following year to be deductible. This means for the 2023 tax year, contributions for Traditional and Roth IRAs are due by April 15, 2024. SEP IRA and Simple IRA contributions are due by April 15th unless you place your return on extension, which extends the due date to October 15th. Finding the right retirement plan depends on your situation and goals, making it important to consult with an expert.
#2: Max Out Your Back Door Roth IRA
Another tax planning strategy for practice owners is to leverage back door Roth IRA contributions. As mentioned above, for the 2023 tax year, individuals can contribute up to $6,500 to Roth IRAs. This threshold is increased to $7,000 for the 2024 tax year.Roth IRA contributions allow medical and dental practice owners to save additional funds for retirement, with all growth in the account tax-free. Medical and dental practice owners over the age of 50 can contribute an extra $1,000 for the 2023 and 2024 tax years.
However, the IRS does put income limits on Roth IRA contributions. For the 2023 tax year, individuals are disallowed from making these contributions with an adjusted gross income above $153,000 for single filers and $218,000 for married filers.
Most medical or dental practice owners will easily exceed these income limits, which is where Backdoor Roth IRA contributions come into play. A Roth IRA conversion takes funds from a traditional IRA and rolls them over to the Roth IRA.
Roth IRA conversions are beneficial for high-income earners that aren’t able to contribute funds the conventional way. There are specific procedures and timelines that need to be followed for Roth IRA conversions, making it important to work with a qualified expert. Like, IRAs, Roth IRA contributions are also due by April 15th of the following year.
#3: Make an HSA Contribution
Making an HSA contribution is another viable tax strategy for medical and dental practice owners. A Health Savings Account, known as an HSA, is an account that allows you to set aside pre-tax money for qualifying medical expenses. HSAs can be established by the practice or the individual and give you the opportunity to lower your taxable W-2 income.
HSA funds can be used for a variety of medical expenses, such as out-of-pocket deductibles, prescription drugs, and other medical treatments. To qualify for HSA contributions, you must be enrolled in a High Deductible Health Plan (HDHP). There are also no income limits. This means you can be a high-earner and still take advantage of this tax move.
However, HSAs do have contribution limits. For the 2023 tax year, individuals can contribute $3,850 to self-only plans and $7,750 for family plans. These contribution limits are increased for the 2024 tax year to $4,150 for self-only plans and $8,300 for family plans. Dental and medical practice owners over the age of 55 are able to contribute an additional $1,000. HSA contributions are due by April 15th of the following tax year.
#4: Contribute to a State-Sponsored 529 Plan
While this one technically cannot be done before April 15th, it is worth noting here anyways as we are now a quarter of the way through 2024.
If you have children, look into your state-sponsored 529 plans. Often times, states (Illinois and Indiana) will give you a tax credit for contributing to their state-sponsored 529 plan. Contributing to these state sponsored 529 plans DOES NOT mean that your child must attend a school in that state either. You can use these funds for most postsecondary education insitutions and in some states, you can use these for K-12 expenses as well. To discuss what your options are, consider implementing a financial plan.
#5: Meet with an Accountant
Your tax situation won’t be the same as another medical or dental practice owner. This makes it important to find tailored solutions to maximize your tax strategy. Meeting with an accountant on a regular basis is a great way to monitor your tax planning opportunities, especially within your medical or dental practice.
Many tax planning strategies are only effective if they are implemented before year-end, as setting up some retirement plans need to be in place before October 1st. Contributions to HSAs and IRAs also have cut-off dates. Not to mention that after the year closes, it can be difficult, if not impossible, to go back and time income and expenses to improve your tax situation.
At a minimum, you should meet with an accountant annually to discuss viable tax strategies for your individual tax situation and your business tax plan. However, many medical and dental practice owners find it’s more beneficial to meet frequently (monthly/quarterly), to take a more proactive approach to tax optimization and practice consulting
Getting Started
Which of these tax moves can you use going into the next filing season? Maybe you decide to up your retirement plan contributions or max out your HSA. Whatever the case, it’s important to find ways to lower your tax bill. If you have questions about these four tax moves before you file your 2023 taxes, please contact us.
