By Steven Jamison, CFP®, CPA
Whether you’re a dentist, dermatologist, or anesthesiologist, one thing is consistently true about high-earning medical specialists: Managing your tax bill can feel like a full-time job. Thankfully, there are many strategies that can streamline your tax planning and help you save thousands of dollars. At Jamison Hanson, we have decades of experience helping medical specialists save big on their tax bills. Here are our 4 tax-saving tips to consider.
Consider a Defined Benefit Plan
A defined benefit plan is one of the main components of a tax-efficient financial plan for medical specialists. These plans have much higher tax-advantaged contribution limits and can be designed to fit the needs of almost any medical specialty. Depending on your age and income, a defined benefit plan allows you to set aside hundreds of thousands of dollars to fund your retirement (and reduce your tax bill), making it possible to save a lot—even if you have little time.
A cash balance plan is a type of defined benefit plan that we frequently recommend for medical specialists. Every dollar contributed to the cash balance plan on behalf of the owner comes right off the top of the owner’s annual income and thus lowers their marginal tax rate. It can also be combined with other tax-advantaged accounts like a 401(k) or 401(h) to increase tax savings even more.
Check out our previous article on the advantages of cash balance plans here.
Add a 401(h)
Similar to a health savings account (HSA), 401(h) plans are used to save for medical expenses. Unlike HSAs, contributions cannot be withdrawn until retirement. Current-year contributions are tax-deductible and the funds will grow tax-free as long as they are used for qualified medical expenses.
A 401(h) is an add-on to defined benefit plans and it does not have any set contribution limits. Instead, the total 401(h) account balance simply cannot exceed 25% of the balance of the main defined benefit plan. By contributing to both a defined benefit plan with a 401(h) add-on, you can boost your tax savings even more than contributing to a stand-alone defined benefit plan.
Utilize a Conservation Easement
If you own the property with historical significance or land which you intend to leave undeveloped, consider utilizing a conservation easement to reduce your tax bill. A conservation easement is a voluntary, legal agreement that will permanently change the use of the land. This will keep the land protected for conservation purposes, but you will still have private ownership over the property and can continue to operate your business as usual—all while receiving valuable tax incentives. Not only that, but you still retain the right to sell the property and pass it down to heirs. Current uses of the land can continue, but future development for non-agricultural or non-open uses is limited.
Understand Bracket Management
Lastly, it’s important that medical specialists understand bracket management. Careful planning around your current and future tax brackets should be the first line of defense against an unnecessarily large tax bill. For instance, if you are reaching the top of a tax bracket, consider deferring income until next year to avoid being pushed into the next threshold. Alternatively, if you are making less money and, consequently, toward the lower end of the tax bracket, you can accelerate other sources of income until you reach (but don’t exceed) the top of the tax bracket.
Tax bracket management can help to avoid the phase-out threshold that applies to specified service businesses like medical specialist practices. In 2022, married couples filing jointly will no longer qualify for the QBI deduction if they have earned income in excess of $340,100. This represents the beginning of the 32% tax bracket. Managing income levels so that you don’t hit the 32% tax bracket will allow you to qualify for the QBI deduction and deduct up to 20% of your income—saving you big on taxes.
Start Saving Today
It’s never too late to start implementing tax-saving strategies in your medical practice. At Jamison Hanson, we are here to help you make the most of your business by keeping more of what you earn in your pocket. Schedule a 15-minute introductory call online or reach out to me at (503) 391-1040 or firstname.lastname@example.org.
About Jamison Hanson
Jamison Hanson is a full-service, fee-only financial planning and accounting firm. The firm name was changed to Jamison Hanson in 2021 when Steven Jamison and Dennis Hanson joined their firms, but the firm’s roots extend through decades of time and early founders, whose legacy the firm retains. Our mission is to make life easier for our clients by serving as their personal financial concierge and assisting with tax compliance, investment management, and other financial needs.
Steven Jamison is President at Jamison Hanson, a full-service, fee-only financial planning and accounting firm. As a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™ professional, Steven uses his specialized knowledge of tax, financial, and investment matters to enhance the lives of personal representatives and trustees and professional practice owners (especially dentists) in Oregon and along the West Coast. With a passion for simplifying finances, optimizing opportunities, and saving money, Steven provides customized wealth advisory and accounting services, including investments, income and estate tax planning and compliance, and retirement planning, so that his clients can stress less and feel more confident about reaching their goals.
Steven prioritizes his clients, building long-lasting relationships that make a significant impact on their financial lives. He graduated cum laude from Brigham Young University with a Bachelor of Science in Accounting and is a member of the Willamette Valley Estate Planning Council and American Institute of Certified Public Accountants. Outside of work, Steven enjoys spending time with his wife, Rachel, and their five children. You can often find him adventuring in the outdoors—biking, hiking, traveling, and swimming. In addition to the Willamette Valley, they enjoy the splendor of the high desert of central Oregon and lush beauty of the Hawaiian Islands. To learn more about Steven, connect with him on LinkedIn.