Simply put, if you have more than 30% in federal, state and self-employment taxes, you are likely overpaying. Missed opportunities to reduce taxes can lead to dentists losing thousands of dollars. Dental bookkeeping can lead to dentists suffering “damages” of more than a million dollars over their entire careers.
Tax overpayment can be reversed, fortunately. You pay a lot of taxes every year if you are like most dentists. You may not know that some of this tax may be allowed to be kept. As long as you follow certain procedures and treatment plans, each of these tactics are permissible within both the spirit and text of the law, legislation and IRS rules.
1. Choose the right business structure
Dentists are required to pay no taxes if they operate under an incorrect company form. It is difficult and critical to choose the right business entity. For hassle-free tax filing, you can team up with specialist dentist accountants.
Most effective practices require management by multiple bodies. Although this adds to the complexity of the situation, the potential benefits, such as tax savings, almost always outweigh the challenges. Income shifting is a tax-saving strategy that minimizes taxable company revenue. Your firm may establish two separate corporate entities, such as a S” corporation having a December 31 fiscal calendar year and a C” corporation having a June 30 fiscal year.
2. Enhance the value of medical insurance
One of the most overlooked and undervalued aspects of tax planning is medical benefits. You risk higher taxes and lower company revenues if you don’t deduct medical expenses from pre-tax income.
For integrating medical benefits into your tax strategy, sole proprietorships are less likely to have the same options as corporate entities. For example, companies with employees can access Medical Expense Reimbursement plans that allow them to deduct medical expenses as company expenses. You cannot form a plan if you are the sole owner.
Your firm can be taxed as an entity, meaning you are considered your own employee. This gives you tax savings and medical benefits that partnerships and sole proprietors do not have. To maximize your medical benefits, you should be qualified to act as your own employee.
3. Choose the right retirement plan
Many dentists find it difficult to save enough money for retirement. Retirement plans can help you achieve financial stability and maintain a certain standard of living. The first step to choosing the best retirement strategy is setting a budget. What amount would you like to contribute each year? What is your overall budget for the plan if you have employees? What proportion of this contribution is your company responsible for?
There are many retirement plans to choose from, including 401(k), profit-sharing, defined benefit, SEP and SIMPLE IRA. How do you decide which one is best for you? Profit-sharing programs offer more flexibility in yearly contributions for dental practitioners. If you’re 50 years old or older, a profit-sharing program that includes a 401(k), allows you to contribute between zero up to $56,500 each year. This is as flexible as it gets.
How can you reduce your taxable income while increasing your retirement plan contributions? A defined benefit plan does not have any contribution restrictions. Instead of that, you have to support the monthly retirement income you can provide after you start receiving your retirement benefits.
4. Families may be hired
An IRS-approved tax method that allows you to employ your children may allow payroll tax deductions for family members. This will also help your children earn money for education and other expenses. Children younger than 21 years old are exempted from unemployment taxes. However, children aged 18-18 years are exempted from payroll taxes, Social Security, Medicare and unemployment taxes.
Your children’s wages are exempt from Medicare and FICA taxes. This regulation may be applicable to sole proprietorships or LLCs. Depending on your tax rate, and other factors, you could save as much as $3,042, if you pay your child $8,000. Employing your child may be possible if you are a “S” Corporation (or a C Corporation). However, it won’t bring in nearly the same tax savings. Earnings paid to a spouse, parent or other person are exempt from unemployment taxes. Earnings are subject to FICA and Medicare taxes.
A proactive tax approach is key to tax planning for dentists. Contrary to dental practice accounting, which organizes what has already happened, tax planning and tax bookkeeping allow you to take strategic steps during tax years that remain active. These laws provide tools that dentists can use to manage their finances to lower their tax burden.
Your CPA must be consulted no later than 90 day after you file your return to assess your previous year and make any adjustments for the current. Side enterprises, property rents and charity donations should all be examined. These areas are critical and you can discover potential issues and solutions. You can also take proactive steps to tax-saving strategies and capitalize on opportunities.