While unfortunately there’s no silver bullet to avoid paying taxes entirely, there are a number of things you can do to reduce the amount of taxes you do have to pay. In this episode, we share our year-end tax planning checklist and walk through some of the different areas to consider and specific strategies you can implement. We cover employer retirement plan contributions, Health Savings Accounts, 529 college savings plans, charitable giving, and backdoor Roth IRA contributions.
Outline of this episode
- The year-end tax planning issues to be aware of [0:24]
- The most significant way most physicians can save on taxes [1:14]
- Review your Health Savings Account contributions [4:17]
- College savings accounts (529 accounts) can be a tax-saving vehicle [8:15]
- Charitable giving can help you avoid taxes [12:47]
Take advantage of your employer’s retirement plan options
401ks and 403bs are great opportunities, as well as 457 plans. If you make pre-tax contributions, you can reduce the amount of tax you have to pay today. Each account has a limit to how much you can contribute each year. For 2021, the employee contribution limit is $19,500 for 401k, 403b, and 457 plans (if you are under 50 years of age). If you are over 50 years of age, you can make an additional $6,500 contribution. These limits apply to each account, so if you have multiple accounts, be sure to keep that in mind. How does this apply to year-end tax planning? Check to see if your contributions for these accounts are taking advantage of the maximum amount you can contribute. If not, and if you’re able, adjust your remaining pay period deductions to maximize your tax savings by making increased contributions.
Review your Health Savings Account contributions
An HSA (Health Savings Account) is not available to all physicians, but if you do have access to one, it’s a great way to save on taxes. Contributions to these accounts are tax deductible and the funds can be withdrawn tax-free to pay for healthcare costs. At age 65, you can withdraw the money for any purpose but you will just have to pay taxes on every dollar you withdraw (similar to a pre-tax IRA). It’s often said that these accounts offer triple deductions — tax free contributions, tax free growth, and tax free withdrawals — which is correct if these accounts are used properly. If you are eligible, look into maximizing your HSA account as a possible tax-saving vehicle.
529 accounts (education savings accounts) can help with tax planning as well
529 accounts were originally intended to provide a tax-free way to save for college room and board expenses. But through the years the definition of qualified educational expenses has been expanded. Now you can use a 529 account to pay for books, fees, and equipment to be used for education, as well as up to $10,000 in student loan debt and in certain states private K-12 costs (though not in Michigan). Each state has its own criteria regarding what qualifies as a 529 expense or not and how much you are allowed to contribute to receive a state tax deduction (since 529 plans receive no federal tax deduction). You can also use these plans to contribute on behalf of others, and even yourself.
This episode also includes strategies regarding charitable contributions and backdoor Roth IRA contributions.
Resources & People Mentioned
- Podcast episode #4: The Best Way to Save For College As a Michigan Physician
- Podcast episode #23: 5 Strategies for Tax-Efficient Charitable Giving
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup