Tax Planning vs. Tax Preparation: The Key to Unlocking Wealth for High-Earning Dentists
One of the largest value adds we provide is an explanation and implementation of proactive tax planning over just tax preparation.
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Tax preparation is a necessary commodity, a routine part of running a business or working as an individual. It involves compiling your annual earnings and expenses, and filing your income tax return to the IRS. However, this is simply a reporting activity, and while necessary, it doesn't typically offer any strategic advantage.
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On the other hand, tax planning is a strategic approach that involves understanding and utilizing tax code to minimize tax liability. Tax planning is not a once-a-year event; it's an ongoing process of understanding changes in the tax law, analyzing how these changes will impact your personal and business finances, and making adjustments throughout the year to reduce your tax liability.
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Now, let's consider the example of a dentist who owns their own business and makes $600,000 per year. Without tax planning, the dentist would simply prepare their taxes at the end of the year, likely owing a large amount in taxes due to their high income.
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With strategic tax planning, several legal strategies could be implemented to minimize the tax liability. Here are a few examples:
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Retirement Contributions: Maximizing contributions to a SEP-IRA or a solo 401(k) could lower the taxable income by up to?$66,000?(as of the IRS 2023 limits).
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Equipment Purchases and Depreciation: If the dental practice needs to purchase equipment, Section 179 of the IRS tax code allows for the deduction of the full purchase price of qualifying equipment in the year it was placed into service. This could potentially be a large deduction depending on the cost of the equipment.
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Hiring Family Members: If the dentist has children, they could be hired to work in the practice. This can shift income to the children who are likely in a lower tax bracket, while also providing an expense for the practice.
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Health Savings Account (HSA): If the dentist is eligible, contributing to an HSA can provide a triple tax benefit: deductions for contributions, tax-free growth, and tax-free withdrawals for eligible health expenses.
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Charitable Contributions: Donating to charity, especially with appreciated stocks, not only supports a cause close to the dentist's heart but also provides a tax deduction?and permanently avoids any capital gains tax.