End-of-Year Tax Tips: Do What You Can Before It's Too Late

Dennis G. Murray, MA

Disclosures

November 15, 2017

In This Article

Take Advantage of Tax Breaks

With the frantic pace of the holidays fast approaching, now's the time to take a few minutes to consider making some moves that can reduce your tax bill for 2017. Many of these strategies have been hiding in plain sight for years, but tax experts say it's still surprising how many doctors fail to take advantage of them.

Although the Trump administration is proposing significant revisions to the tax code, a complete overhaul may not happen until next year, nor is it likely that any new legislation will be retroactive to 2017. Therefore, it'll be on your shoulders to find as many tax breaks as you can, to reduce the amount you owe come April 2018.

With that goal in mind, here are six tactics to consider that might help you shave down your tax bill. They'll get you thinking about what you can do before December 31, as well as what may require you to lean on your tax advisor for further guidance.

1. Look at Ways to Lower Your Tax Bracket

Donor-advised funds. Making more money than the year before is always a good thing. But if you suspect that your income for 2017 may put you in a higher tax bracket—whether from regular earnings or a windfall—you'll need to find all the deductions you can before the end of the year to avoid paying more in taxes.

So, what can you do? One option is to consider setting up a donor-advised fund (DAF), to which you make an irrevocable lump-sum contribution, receive an immediate tax benefit, and establish an account from which you can direct money to your favorite charity (or charities) over several years. This move will not benefit everyone, but under the right conditions for high earners who also want to make charitable contributions, it can help save money on taxes.

"We have a client who's receiving a deferred compensation payout of several hundred thousand dollars at the end of this year," says Joel Greenwald, MD, CFP, a financial adviser in St Louis Park, Minnesota. "We'll help her open a DAF in 2017 in order to offset as much of this income as possible. Then, going forward, she'll be able to make her regular annual charitable gifting from the DAF."

The best feature about a DAF is that it provides flexibility, says Larissa Grantham, CFP, a financial planner with Stepp & Rothwell in Overland Park, Kansas. Physicians can add to the fund whenever they want to, receiving a tax deduction each time.

"Donor-advised funds are particularly useful for a doctor who has a big one-time tax year for whatever reason and can use a large deduction, but doesn't want to make the gifts all at once," Grantham explains. "They're also convenient for someone who wants to donate appreciated stock to make many gifts to various charities throughout the year."

In general, cash contributions totaling up to 50% of your adjusted gross income (AGI) can be made in a single tax year, with donations of appreciated securities limited to 30% of AGI. The actual degree to which you may benefit will depend on many factors, so you and your tax advisor should put your heads together as soon as possible if you think a DAF may be right for you.

2. Property Taxes and Insurance Premiums

In addition to donating more to charity, you could consider paying your first-quarter property taxes before the end of the year (if your town allows it), to give you more to write off. By the same token, make your January mortgage payment in December, to deduct additional mortgage interest in 2017.

"I frequently get clients who ask about making the January and February payments in December, but this doesn't work with February—only January," cautions Robert G. Baldassari, CPA, MST, a principal with Matthews, Carter & Boyce, a tax advisory firm in Fairfax, Virginia.

Likewise, if you pay for your own health insurance, are there any tax-deductible premiums you can pay in advance? What about bills for medical malpractice insurance that are due early next year? The same logic applies to premiums for automobile and property and casualty insurance—again, to the extent that you're qualified as an independent business owner and the tax laws allow it.

3. Make Sure You're Contributing Enough to Your Retirement Plans

Rather than save, most people can always find something to spend their hard-earned cash on, and doctors are no exception—especially those fresh from residency, who may have scraped by for years while putting in long hours. But every dollar you put into a qualified, tax-deferred retirement account reduces your taxable income by the same amount, which in turn shrinks the amount you owe in taxes.

Here's how it works: If you defer the maximum allowable amount this year ($18,000), your contributions will save you $5040 on your tax return if you're in the 28% tax bracket and $5940 if you're in the 33% bracket. (Doctors who are aged 50 years or older can sock away $24,000, bringing those tax savings to $6720 and $7920, respectively.)

If you're not able to max out this year and your employer makes matching contributions, at the very least save the amount that your company is willing to match. To do otherwise is to leave "free" money on the table.

Doctors who aren't eligible for company-sponsored retirement plans have the option to contribute more to their Keogh plans, which have higher limits and are geared toward small-business owners. "We review all of our clients' pay stubs in the second half of the year. It's surprising how many times we've found folks who aren't on track to defer the maximum amount, but were certain that they were on track," Dr Greenwald says.

Although not directly tied to retirement savings, health savings accounts (HSAs) allow you to set aside money for out-of-pocket medical expenses while enjoying a tax deduction as well as tax-free growth. "Many of our clients don't spend from their HSA, preferring to have them accumulate and grow for healthcare expenses in retirement," Dr Greenwald says.

"It's not a large sum of pretax money that can be deferred in a given year, but taking full advantage each year and investing the HSA for growth will pay off in the long run." The contribution limits for 2017 are $3400 for individuals and $6750 for those covered under qualifying high-deductible health plans, with those 55 or over eligible to make an additional $1000 pretax contribution.

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