Income tax is a fact of life. It shouldn’t be, but it is–we live in a world today where we do not know anything else. It is a wildly subjective and inefficient system, but it is something that we cannot afford to neglect, given the fact that income tax is probably the greatest expenditure a Private Practice Millionaire will make over a lifetime.
Therefore, it is imperative that we begin to understand the rules and how to apply the basic Golden Route® financial prosperity principle of “Keep Your Taxes to a Minimum.” Any entrepreneur who believes in him/herself will realize that s/he will always be a better fiduciary of that money that the government will. Therefore, it is actually moral and ethical to minimize one’s income taxes.
But how to do it?
There are 7 simple ways to reduce taxes in a Private Practice Millionaire household while creating future wealth. These expenses are considered “above the line,” (that is above the Adjusted Gross Income line on the Form 1040) and will give a full dollar-for-dollar deduction against earned income. Some of these expenses will occur in the practice itself and some will occur at the household level on the personal return. In any case, the primary rule is that the expense must be allocated in a way to create greater future value and not be wasted to “save taxes.”
- The first way is to invest in effective consultants and training systems. This consists of paying fees to consultants and coaches for strategic programs as well as information products that summarize critical knowledge in practice management, marketing, leadership and technical processes. These may be deductible expenses through the business and, if that specialized knowledge is learned and applied, will create future income and increases in the business value itself.
- Effective marketing campaign expenses. All practice owners have some idea of the upcoming year’s marketing initiatives. These can be paid for in the current year, perhaps at a discount, to prepare for the next 12 months. These expenses can include, website design and maintenance, direct mail projects, new brochures, video production projects, email campaigns, etc. This can add up to several thousand dollars of future investment that can be deducted from this year’s taxes.
- Hire and train personnel. If you are in the proper condition to hire on the next employee, then do so. This expense may reduce current taxes while staffing up for next year’s expansion. As for training, it is very important get create an efficient and productive group. The only way this is done is through staff training. They need to be trained on their technical skills, but they also need to be trained as staff members in a group and how to function as a team. The more you invest in training your staff, the more they will bond to the practice and take ownership for the results and growth of the firm. Do not underestimate the value in this—it’s worth millions.
- Qualified plans. These are retirement plans that are qualified under the Internal Revenue Code for special tax treatment. They include plans like 401(k), Profit Sharing, Defined Benefit Plans, and a host of other esoteric terms and code section numbers. These plans are set up by a Plan Sponsor, typically the private practice owner, and can take contributions in amounts ranging from a few thousand dollars to over $200,000 a year, depending on the circumstances. Establishing and contributing to these kinds of plans can not only create current year tax breaks, but can also accumulate significant wealth over a career.
- Individual Retirement Accounts. IRAs are accounts that work like qualified plans—contributions can be made on a tax-deductible basis and grow tax-deferred. Most Private Practice Millionaires who contribute to qualified plans will not qualify to also make tax-deductible contributions to IRAs due to income limits, but if you do not have any qualified plan option, then you may make a full IRA deductible contribution regardless of your level of income. If nothing else, check with your accountant to see if you qualify, and if so, consider setting up and/or making a contribution to the IRA.
- Health Savings Accounts. Also known as HSAs, these are medical expense accounts that can be established when coupled with a high deductible health insurance plan. In an effort to get people to shoulder some of the risk for their own healthcare costs, the government allows people to set up HSA accounts at qualified banks to accumulate money to pay for out-of-pocket expenses. The maximum contribution for 2014 is up to $3,300 for an individual or $6,550 for a family (if you are 55 or over, you can add another $1,000). These contributions are 100% tax-deductible and can act in many ways like an IRA, except designated for future health care expenses.
- Qualified Tuition and Fees. You can pay for qualified tuition and related fees for yourself, a spouse or a dependent and take a deduction on the current year return if you don’t make too much money. That is, if you make $80,000 Modified Adjusted Gross Income in 2014 as a single person or $160,000, married filing jointly, then you have earned yourself out of a deduction. Below that, talk to your accountant as to what qualifies as tuition and related expenses. If you’re in the right circumstance, then this can provide some much needed tax relief.
These 7 basic strategies are useful to private practice professionals. There are many, many more deductible expenses that are part and parcel to the private practice ownership experience and are way too numerous to mention here. The best way to take advantage of these tax savings is to educate yourself on the types of expenses that qualify for preferential tax treatment and how to arrange your financial and economic affairs to take advantage of what the law allows.
A good place to start this process is the Private Practice Millionaire Academy. On this 3-day adventure, we spend a bit of time on the most important elements of your overall tax plan and how it relates to your overall financial and economic experience as a Private Practice Millionaire.
Wishing you success while you Live Your ART!®