Tax Planning Targets to Aim For Mid-Year

Evon dives into mid-year tax planning targets optometrists and practice owners should keep an eye on as we work through the rest of the year. 

He talks through specific points of planning he thinks about as he works with clients and their tax professionals, including:

• Trajectory and sources of income
• Are we on track for tax payments and withholdings?
• Adjusted gross income (AGI) and phaseouts for deductions and credits
• Opportunities around itemized deductions, especially donations to charity
•  Taxable income and tax brackets
• Qualified Business Income deduction and potential phase outs
• And more! 

Hopefully this helps you have productive conversations with your own tax professional, financial advisor, and other professionals in your corner! 

Have questions on anything discussed or want to have topics or questions featured on the show? Send Evon an email at podcast@optometrywealth.com.

Check out www.optometrywealth.com to get to know more about Evon, his financial planning firm Optometry Wealth Advisors, and how he helps optometrists nationwide. From there, you can schedule a short Intro call to share what's on your mind and learn how Evon helps ODs master their cash flow and debt, build their net worth, and plan purposefully around their money and their practices. 

Resources mentioned on this episode:

• The Optometry Money Podcast Ep 47: An Optometrist’s Guide to How Taxes Work
• The Optometry Money Podcast Ep. 49: An Optometrist’s Guide to Business Entities
• The Optometry Money Podcast Ep 51: An Optometrist’s Guide to the Qualified Business Income Deduction
• IRS Tax Withholding Estimator
• The Optometry Money Podcast Ep 53: An Optometrist’s Guide to Estimated Tax Payments
  
  
  

The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

Transcript

Evon: 0:04

Hey, everybody. Welcome back to The Optometry Money Podcast, where we're helping ODs all over the country, make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planning®practitioner and owner of Optometry Wealth Advisors, an independent financial planning firm, just for optometrists nationwide. And thank you so much for listening. Appreciate your time and attention today and onto this episode I am excited to talk to you all about sort of a mid year, early fall tax planning review. And it's usually about this time. towards the mid year, end of summer, early fall, where I start to get together and work together with the, with my clients tax professionals, tax team. And start to take an early look, sort of a sneak peak at what we expect the tax year to look like. And so whether it's on my end, whether it's on the tax professionals and we're starting a tax projection. Trying to project out where we expect the rest of the year to go. See what we're expected in the land and see if any adjustments or actions are needed. We want to sort of be aware of the direction we're heading and see if any course adjustments, any course corrections need to be made. And so I want to talk to you about some of the things that I'm sort of seeing and thinking about as we go through this. some of the targets that we might be aiming for with clients. To give you an idea of what to think about for your own finances, for your own tax planning, and to talk about with your own professional team. So I want to talk about specific parts of a. Of an optometrist tax planning that we might think about. As we take a look at these early projections. And so with that in mind, let's go ahead and dive right in. And the first thing we'll look at is just to take a look at where we expect the income to land. At the end of the year. Meaning of that. If you are an employed associate, we're taking in your wages from you and potentially your spouse, trying to project out where we expect your income to land. through the rest of the year, maybe you're self-employed. And for practice owners, we're trying to take an early projection of your profit and loss, trying to anticipate what your revenue is going to be through the rest of the year. Your cost of goods sold what the operating expenses are going to be in the practice for the rest of the year, trying to project out as well as we reasonably can. Understanding that the earlier in the year, you look at this, there's still some uncertainty with how the rest of the year will unfold. Although, if you have enough years of history, you kind of have a feel for seasonality in the practice. But, we, we try to project that out through the rest of the year. And hopefully as the practice owner, you're looking at your own practice numbers. Just for business planning purposes. but it's also important for tax planning purposes. So we get, can at least get an idea of what to expect to the rest of the year. And again, I like to think of this all as a living document, right? We're we're taking a look at this now and then as the year unfolds. And as we get more certainty around how the, as the months actually come and go. we can make some better decisions, but the first thing we're really looking at the first building block is just to get an idea of what income is expected to be through the rest of the year. And what are our sources of income? Is it wages? Is it profit? is it, is there any self-employment income, things like that. So just try to get a feel for what income will look like through the rest of the year. The next important thing we want to take out of these early projections. These early conversations is, is, are we on track with withholdings and estimated tax payments? One of the biggest frustrations that I continue to see around. Especially practice owners, but I think this is for everybody. Is that they're surprised by the outcome at tax time. And they have a tax bill due that they weren't expecting. And so they got to come out with cash in order to pay this tax bill and then also prepare for the next year, the next tax year. So not really knowing what to expect in terms of the tax due at tax time and being unprepared in terms of tax withholdings and estimated tax payments. That's continues to be one of the biggest frustrations that I see. And one of the easiest simplest parts of tax planning. It's just, are we withholding enough throughout the year? And that's going to just be as a result of the overall tax projection. And there's a couple of things we kind of want to keep in mind. One of them is that we want to avoid penalties for under withholding. And so from that perspective, there's two safe harbors we kind of want to aim for. number one is that we can pay 90% of the current year's total tax. Which is uncertain, right? We're we're projecting that out as we go. Or we can pay a hundred percent of last year's total tax. Now if your adjusted gross income, if your AGI last year, Was$150,000 or more then you have to pay 110% of last year's tax. So you have these sort of safe harbors to aim for. And to where, if you withhold enough throughout the year to meet those requirements. You can avoid under withholding penalties. And there's two means there's two ways of withholdings are paying taxes throughout the year. if you are a business owner or if you're self-employed. one of the ways you can do that is through quarterly estimated tax payments, which are due on the 15th of April, June, September, and then in January. or if you have wages, you can do tax withholding through wages. So if you're an employed associate, or if you own a practice or business that's tax as an S corporation, you're going to have a reasonable wage requirement. So you'll be able to withhold through wages through, through your just regular payroll. And so number one is trying to avoid, trying to meet those safe harbors at least. making sure that we're avoiding under withholding penalty. the other thing we want to plan for of course, is to make sure that we are preparing for the tax due right? So that we have enough cash either we're withholding enough throughout the year or we're saving enough cash. So that at tax time we can roughly get us there. And so withholdings and estimated tax payments are probably one of the simplest, but really beneficial high-impact means of tax planning, just being prepared for the tax that's coming at the end of the year. the next thing we kind of want to take a look at is adjusted gross income AGI. if you, if you've heard our prior podcasts on the basics of how income taxes work, we kind of describe the, the flow of a tax return. Sorta the tax formula. Right? So it starts at the very top with gross income, which is all of your sources of income. wages, taxable business profit, taxable profit from real estate investing, basically all the different means of income that you could be earning. except all the stuff that is specifically excluded by law. So that's gross income, and then you get certain adjustments or deductions, and then you subtract those out and that leads to your adjusted gross income. And, and so the adjusted gross income number or AGI, or you might see modified, adjusted gross income, which is a version of adjusted gross income that adds back certain things. the AGI number is really important because it helps determine whether you qualify for certain deductions or credits or whether you start to phase out of them. Or whether you phase into additional taxes. So that adjusted gross income number is a really important sort of target to work around. Those deductions that lead to adjusted gross income. so those are your 401k contributions that are pre-tax because those lower, the wage number that ended up on your tax return, health savings account contributions. Half of the self-employment taxes, Potentially health insurance premiums if you're self-employed., deductions that lower taxable business profit. Those deductions that eventually lead to the calculation of adjusted gross income. We typically would call those above the line deductions. Like if you imagine AGI is the line and everything above that is above the line. All things being equal. We kind of want to prioritize those deductions. If we're trying to plan carefully around this AGI number. And some examples of the things that your AGI or modified AGI phase in or out of, or for example, the child tax credit, which starts to phase out at around$200,000 for a single filer. 400,000 for joint filers. impacts the additional tax of the net investment income tax. So if you have investment income, capital gains, interest, things like that, dividends. those start to apply to you if you have an AGI of$200,000, if you're a single filer,$250,000, if you're a joint filer. your ability to contribute directly to a Roth IRA is impacted by your modified, adjusted gross income. A premium tax credits for health insurance particularly if you're in the early years of a cold start, And your income is relatively lower in those early years. the amounts of child independent care credit that you qualify for if you're working parents with dependent care expenses. and also very importantly, it impacts your student loan planning because your adjusted gross income on your most recently filed tax return. Is the default starting point for determining your, the next 12 months payments. If you aren't an income driven repayment plan. So this adjusted, so this AGI number is an important factor in determining quite a lot of different planning points there. And so that's one thing we want to keep an eye on. The next thing we want to keep it on Is itemized deductions. Every taxpayer gets to pick between a standard deduction amounts or deducting a certain list of. Very specific personal expenses such as certain healthcare expenses, mortgage interest and importantly, charitable contributions, donations to nonprofits and charities. this certain list of deductions can be added together. And if it's higher than the standard deduction amount, you can take this total of itemized deductions. And so we want to take a look at that and say, okay, what do we expect these itemized deductions to be. are you regularly contributing to charity or nonprofits? Should we be bunching those contributions together? To lead to a higher amount in one year and take advantage of that itemized deduction. Should we be using something like a donor advised fund to allow you to do that in one year and then, and then actually donate those dollars over a set amount of years. So. We can look at that list of itemized deductions and see if there's any planning opportunities that come with that. next thing we look at is taxable income and taxable income is really important because taxable income is actually the dollar amount that goes through those tax brackets that you're probably familiar with. Right now it's 10%, 12%, 22%, 24% so on and so forth. And so taxable income is obviously important because it determines how much of. How much of those dollars ends up in each of those tax brackets? And it determines how close you are to getting into the next tax bracket, meaning dollars. Start to get taxed at that next higher tax rate. So it tells us if we need to try to plan to keep some of your income out of that higher tax bracket. for certain types of incomes that are taxed at capital gains tax rates, like long-term capital gains from selling investment assets that you've held for longer than a year. Or qualified dividends of taxable income is going to determine how much of that type of income is taxed at 0% or 15% or a 20%. And so taxable income is an important part of determining your actual tax that you pay. At tax time. but a really important target for taxable income has to do with the qualified business income deduction. So if you are self-employed. Or if you own a practice or another business, if you are taxed as a pass through entity, for example, a sore proprietorship or an LLC that's taxed as a sole proprietorship or an S corporation or partnership. Your taxable income before that QBI deduction. Determines, whether you start to phase out of that deduction or whether you get the full amount or have phased it or are, or don't qualify for it at all. And so for those practice owners out there for those business owners out there, that QBI deduction is an important target as well. Because if we start to notice that you are getting into the phase-out ranges, which for single filers, it starts at$191,950, and then phases out over the next$50,000 of taxable income. Or if you are filing jointly, it starts at$383,900 and then phases out over the next hundred thousand dollars of taxable income. But you can start to see by looking at that qualified business income deduction. And we can start to see whether you're getting into or close to that phase out range. Or if you are outside of that phase out range, and if we can take action to bring you back inside of it, then that's an important target as well. So we want to take a look at that. Qualified business income deduction and that taxable income to see how much planning or how much really opportunity we need to do. In order to get you back into that. Some situations I've seen where practice owners are, fortunate enough to earn plenty of income to where they're shooting straight through that. Right. There's really not major opportunities to bring them back into it. many practice owners we've seen they're there within that phase out range or weekend. or we're pretty close to outside of it, meaning we're we're pretty close to getting back inside of it. So when you start to look at these targets adjusted gross income. Child tax credit. Qualified business income deduction in the, in the taxable income. When you start to look at these targets and see how far or how into, these phase out ranges you are for different credits or deductions, things like that, or additional taxes. Then you can start to see where the opportunity is then you can start to see, okay, what are the planning tools we have available to us? Do we want to prioritize deductions or, do we, do we prefer to pay tax today? And if we want to prioritize deductions, we can start to see the impact of those deductions. You know, if we're able to take reasonable deductions and bring you back into those phase out ranges for these credits or deductions. Then those deductions not only have an impact at your marginal tax rate, meaning that it's not only going to save you 32% or 24% on those deducted dollars. But the tax impact is magnified because you also start to increase potentially those credits or those deductions. So if you're close to these targets, then you can start to see how large of an impact certain deductions can have on the final tax outcome. And so lastly, as we kind of look through those, then we can kind of see the different planning levers that we have. Where are the opportunities? Do you know? Number one really is. Can we get a game plan for adjusting if necessary your tax withholdings, either through W2 or adjusting your quarterly tax payments. We can look at retirement plan contributions. Do we need to increase or adjust your employee contributions to 401k plans? Should we be doing Roth versus pre-tax? Should we be increasing that to try to get closer to the max, do we need to plan on adjusting your plan itself? Maybe you're in a simple IRA plan and you are. And you are outgrowing that simple IRA plan and need to take advantage of the larger maximums in a 401k plan. So do we need to plan to make adjustments to the, to the retirement plan and the practice? or do we need to plan to use profit sharing contributions in your 401k plan? And if so, how much cash do we need to start to prepare for at the end of the year? And that's where your plan administrator needs to get involved. So it's really, you kind of see the team approach happening here with all these different levers here. Do we need to amend the plan in order to even allow for profit sharing, or maybe you have the wrong type of profit sharing available. Some plans I've seen have pro-rata where they probably should be using a new compatibility, profit sharing formula. So does your plan have the most appropriate profit sharing formula your practice for your business? Are we using health savings accounts? If you qualify for HSA contributions. is there any planned business reinvestment, meaning are there any equipment purchases, are you planning to buy an edger or their improvements to the office? Are there any planned reinvestments into the practice? And I want to emphasize"planned" meaning I wouldn't recommend buying equipment just for the tax deduction. We want to make investments into your practice that are going to have a return on that investment. So, are there any planned reinvestments and how do we plan around potential depreciation for those investments? Are you planning to, or did you just recently purchase the commercial property that your practice operates in? what about planning around your state taxes? many states, if not most states at this point, Have a pass through entity tax credit. Should we, or are we planning to take advantage of that pass through entity tax credit? If you are a partnership or, S corporation. So we want to take a look at all these different planning opportunities and levers that are ahead of us and with the combined team members of your financial advisor, very importantly, your tax advisor, or tax professional. And other professionals that are involved, for example, your 401k plan administrator, we can start to take action as needed. Again, we're, taking an early look at what we expect your income. And the rest of the tax year to unfold. And then as we get closer to the end of the year, I like to look at this again. with the professional team. somewhere around November later in the year, we can start to see more solid numbers and make better plans for any end of the year actions. And then things like profit sharing contributions, for example, actually need to be done until the tax filing deadline of your business. So those are some of the things we look at. We look at the income trajectory, what are all the different sources of income we're expecting? We'll look at tax payments through withholdings and estimated tax payments. we look at adjusted gross income and are we close to, or within or outside of certain phase out ranges for deductions and credits and taxes. we look at. We'll look at itemized deductions. Are there particular planning opportunities? There we look at taxable income, not only because it determines the tax rates that your income falls into. But also because it impacts the qualified business income deduction. So are we within or close to a phase out there? For the qualified business income deduction. And then we can think of ideas and levers that we can pull. Sometimes again, if your income is unusually low, maybe you've just recently called started a practice, maybe you're in between career opportunities, something like that. Maybe we're prioritizing paying tax in this year. Maybe we're prioritizing Roth contributions rather than, than pre-tax. Other times we're trying to target those specific thresholds and use deductions strategically to get you inside of it. So. Every situation is different. Please, talk to the professionals in your life, your own financial advisor, especially your own tax professional, your CPA or EA enrolled agent. Yeah, I'm giving you very general information that hopefully is food for thought. Things that help you to think through your own situation and have conversations with your own professionals. But ultimately I'm just a guy talking on a podcast. I don't know anything about you. Please talk and ask questions of your own professionals. Talk to your own tax professional. and try to get a handle on your own tax planning. Try to get an idea of where you're headed. Even if it's this early in the year, even if the rest of the year is slightly uncertain, try to get an idea of what the rest of the year it looks like. And then you can adjust as you get closer. And part of the reason of me saying that is obviously just sort of a general disclosure that is good to stamp onto the, an episode like this, but. Also I'm fortunate enough to be involved in, uh, several online groups and communities of different types and full of very highly intelligent, skilled professionals. And I see a lot of questions asked in those groups that are not only to a group of non professionals in that particular topic. I mean, they, the group itself doesn't have the expertise to even answer it. But also no one really knows the specific circumstances of the person asking it. You know, often in a one sentence post from an anonymous person. So there's nothing wrong with asking for help among your peers, but there are so many topics and questions that you're best served talking to the professionals in your own life that are highly skilled and knowledgeable in a particular topic, but also know your specific circumstances and can help you find the right answer for your particular situation. And personally my own business has a very proactive service model and the way I work with clients. I am fortunate to work with other great tax professionals that also are very proactive and forward-looking. Focusing on advisory work. So please, if you need a good tax professional, especially if you're a practice owner looking for one that works specifically within Optometry, reach out to me, please let me know. But with all this, hopefully this is helpful general information. It helps you to think and give you food for thought, as you're trying to think about your own finances and your own taxes, and, uh, gives you some things to talk about with your, your own professionals. If you have any questions, you can reach me at podcast@optometrywealth.com, or reach out if you have any thoughts, questions, ideas that you'd like to see in a future episodes always appreciate the feedback and the reviews we see on apple podcasts and things like that. So appreciate all of your thoughts and feedback in making this show just more impactful and of higher value to you. You can check out any links and resources. I mentioned in this episode, in the show notes, which you can find at the educational hub on my website. www.optometrywealth.com. And while you're there, please check out all of the other articles resources, podcasts, episodes we've done. And if you're interested to learn more about what it looks like to work with Optometry Wealth Advisors, to help you navigate decisions, all around stuff we talked about today and so much more, feel free to schedule a no commitment introductory call. And we can talk about what's on your mind financially, and we can share how I help optometrists navigate those same decisions all over the country. And what that really appreciate your time. if you're planning to be at Vision Expo West in Las Vegas, coming up over the next couple of weeks, please reach out to me. Would love to get a chance to meet you, to talk with you. To hear about what's on your mind, what you think about the podcast. so hopefully we can connect there. Otherwise we'll catch you on the next episode. In the meantime, take care.