How Tax Prep and Tax Planning Impact Physicians’ Money (And Why Each Matter)

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Taxes don’t just begin and end in April—financial planners and advisors help physicians consider their tax strategy all year long. Creating an efficient tax strategy can help reduce your tax burden and reach your financial goals.

A robust tax plan includes two fundamental processes,

  1. Tax preparation, and 
  2. Tax planning

Let’s take a look at the differences between the two and how they work together to create an efficient tax strategy for physicians.

What’s Tax Preparation? 

Tax preparation is the typical housekeeping system you’re most familiar with—filing your annual federal and state tax returns.

With this process, you have to “check the box” that you submitted everything correctly. Typically, a tax expert completes this process for you, like a CPA, EA, or another professional. 

Tax preparation looks backward and assesses what happened over the past year to ensure you did everything by the book, like documenting all your income, taking the proper credits and deductions, etc. This knowledge is particularly important if and when tax law shifts.

Think about tax preparation like a back story—there’s not much you can change about the past; you can simply fact-check to make sure everything lines up.

For reference, the tax deadline 2022 is April 18, but if you file for an extension, you have until October 17.

Even though most strategic opportunities dry up in December, there are a couple of things you can do to potentially lower your tax bill and boost your investments. 

  • Contribute to your 2021 IRA—$6,000 limit
  • Fund your 2021 HSA—$3,600 for self-coverage and $7,200 for family coverage limits.
  • Contribute to your 2021 SEP IRA or Individual 401k (for those with 1099 income) – dependent on 1099 earnings

Yes, you can still make 2021 contributions to these accounts before the clock strikes midnight! Putting money away in these accounts could reduce your adjusted gross income, which has a domino effect on tax liabilities. 

Even if your tax bill remains the same, extra money in your investments sets you up for long-term success. If you have a little wiggle room in your cash flow, consider maxing out these vehicles. 

What’s Tax Planning?

While tax preparation covers the tax filing process, tax planning takes a more comprehensive look at your tax picture. 

With tax planning, you optimize your tax situation by employing strategies that reduce your tax liability over the long term, like doing Roth conversions, being mindful of realizing gains, tax-loss harvesting, charitable giving opportunities, and more. 

Tax planning requires a rich understanding of your financial goals, so your financial planner or advisor can help guide you through the process. After all, they know your financial goals and values the best!

Unlike tax preparation, tax planning isn’t just a once-a-year event—financial advisors help doctors make strategic tax choices throughout their lives and careers. Since physicians can be such high-earners, regularly monitoring your tax situation becomes critical, so you don’t end up overpaying the government.

What does tax planning look like in practice?

While specific strategies change depending on your circumstances, here are a few examples.

  • Managing your tax bracket
  • Prioritizing where to invest. This includes investing in various “tax buckets,” like traditional, Roth, or taxable accounts.
  • Strategically realizing gains
  • Tax-loss harvesting and selling depreciating securities when needed
  • Structuring an efficient estate plan
  • Using efficient savings vehicles like 529 plans for an education fund
  • Roth conversions when appropriate
  • Strategic charitable giving

As you can see, a lot goes into tax planning—it’s not a one-and-done process!

Why is tax planning so important?

Let’s look at an example that will take the air out of your tires.

Inflated Stock, Inflated Tax Bill: A Case Study

We had a neurosurgeon client who bought Tesla stock when it was very new—about $20/share—in an account outside our management. 

He needed to free up some capital in 2020, resulting in tens of thousands of capital gains when he sold at over $400/share. By not consulting with his advisor, he turned in the 1099 form to his accountant only to pay a hefty tax bill on those capital gains. 

The bottom line? It pays to plan!

Tax Planning Is Year-Round and Long-Term

Remember, tax planning isn’t a seasonal task; it’s something you can work on all year. 

Start thinking about making tax-smart decisions early in the year, like increasing contributions to retirement accounts, determining a charitable giving strategy, or assessing projected income, and talk with your advisor about those goals.

Having these conversations early gives yourself and your advisor more time to carefully weigh all your options. 

Too Much Tesla? A Case Study

We’re not done talking about Tesla yet!

In this scenario, another physician client also bought Tesla stock when it hovered at about $20 a share. He came to our team in late 2019 saying he felt it was becoming too concentrated of a position and that he wanted to craft a strategy to back out of it. 

Once we understood his goals, we consulted with his accountant to better understand the impacts on his return, like selling at various prices and items that could help offset the gain. 

By doing taking the time to collaborate with his tax professional on his unique situation, we were able to: 

  1. Do some significant tax-loss harvesting when the market dropped in March 2020 to help capture some inevitable losses. 
  2. Establish a donor-advised fund to gift some of the Tesla shares to and secure a tax deduction for the gift while saving capital gains tax. He still paid tax on some of what he sold, but the bill was lower than it could have been due to the tax planning.

The tax planning clock doesn’t reset every year; it’s a long-term, 24/7 process. Our team at Vestia can help you create a strong retirement withdrawal plan, for example—what assets to draw from and when. 

Financial advisors can help make these strategic decisions, so you don’t have to try to navigate the process on your own. 

High-Earners Benefit From Comprehensive Tax Strategies

While taxes shouldn’t be the primary driver for every decision you make, it is prudent to understand the tax liabilities that come with them. 

The tax code can be quite complex, and working with a team that understands physician compensation, enables you to follow a financial plan that makes sense for you, your values, and your goals. 

If you’re ready to get more strategic with your taxes this year, get in touch with our team.

​​Disclosures 

Investment advisory services offered through Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, and Vestia Advisors, LLC. Securities offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Rd, Davenport, IA. 52807 (563)326-2064. Member FINRA/SIPC. Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, Vestia Advisors, LLC, and Ausdal Financial Partners, Inc. are independently owned and operated.

This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.  This information is not an offer or a solicitation to buy or sell securities.  The information contained may have been compiled from third-party sources and is believed to be reliable.

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