6 Tax-Planning Levers You Can Still Pull Before Tax Time
It's already February, and we're cruising right into tax season.
Since the New Year passed, all tax-planning opportunities went with it, right?
Not quite – there are still tax planning opportunities to take advantage of for 2024 after the New Year.
With changes in tax laws and evolving strategies, there’s plenty to consider. Without further ado, here are 6 Tax Planning Strategies you can still use after the New Year to impact your 2024 tax return.
Feel free to skip to the topics that directly apply to you 👇.
1. Traditional and Roth IRA Contributions
Deadline: April 2025 tax filing deadline (no extensions)
You can make up to a $7,000 contribution to a Traditional or Roth IRA ($8,000 if you’re 50+). Roth IRAs won’t give you a deduction this year but can provide major tax savings in retirement.
There are limitations:
Traditional IRAs: For married couples, if you or your spouse are covered by a workplace retirement plan, your incomes may be too high to get a deduction. You can still contribute, you just won’t get a deduction.
If you’re married and filing taxes separately for student loan planning, this is brought down to $10,000 of Modified Adjusted Gross Income (MAGI) - most likely phasing you out of the deduction.
Roth IRAs: Direct Roth IRA contributions phase out between $230,000-$240,000 for married couples ($146,000–$161,000 for single filers).
If you’re over the income limit, you may still use the "Backdoor" Roth IRA contribution route, explained next.
2. Backdoor Roth IRA Contributions
If your income is too high to contribute directly into a Roth IRA, there’s a workaround often called the “backdoor” Roth IRA contribution.
In a “Backdoor” Roth IRA contribution, you:
- Make a non-deductible contribution to a Traditional IRA (by the deadline)
- Convert those dollars to a Roth IRA (soon after, but no actual deadline)
You’re just moving after-tax dollars from the Traditional IRA into the Roth IRA, essentially ending up in the same place with a couple extra steps.
Be sure to tell your tax pro you’re doing this, and make sure it’s tracked correctly in your tax return. Form 8606 is the key form in your tax return that tracks non-deductible IRA contributions and Roth conversations. Or, make sure your financial planner is communicating with your tax pro.
Beware of the pro-rata rule! If you have any other pre-tax IRAs (Traditional, SEP, or SIMPLE), part of the conversion will be taxable. The IRS views all pre-tax IRAs as one big IRA account for this purpose, and views it as converting a mix of pre-tax and after-tax dollars.
If you have a 401(k) plan, a common workaround is to directly rollover the pre-tax portion of your IRA into your 401(k) account before the end of the tax year you’re completing the 2nd conversion step.
Then, you can convert the after-tax amount into your Roth IRA. Of course, this is more complicated - or not possible - if you have a SIMPLE IRA plan or SEP IRA.
Even if you can’t complete this “backdoor” contribution, it may still make sense to contribute after-tax dollars into your Traditional IRA if you know you’ll be able to use the 401(k) rollover in the near future.
You may not want to let the tax years’ contributions go to waste. As with all things, you’d want to work closely with your financial advisor to figure whether this makes sense and to ensure it’s done appropriately.
3. Health Savings Account (HSA) Contributions
Deadline: April 2025 tax filing deadline (no extensions)
HSAs offer triple federal tax benefits - contributions are deductible, the growth of the investments are tax-deferred, and if used for healthcare expenses it can all be withdrawn tax free! Heads up: Each state is a bit different for state taxes.
For 2024, you can contribute up to $4,150 for individuals, or $8,300 for family coverage, if you’re enrolled in a qualifying high-deductible health plan (HDHP).
Over age 55? You get a $1,000 bump!
Contributions can avoid even FICA taxes if done through payroll. Unfortunately, practice owners taxed as S Corporations are not able to benefit in the same way.
🎙️ Check out this podcast episode on HSAs to learn more!
4. SEP-IRA Contributions
Deadline: Business tax filing deadline, including extensions
Primarily used for self-employed or 1099 optometrists, SEP-IRAs allow you to make contributions up to:
👉 Taxed as an S Corporation: 25% of total employee compensation
👉 Taxed as a Sole Proprietor: Requires some adjustments to your net income to subtract out both your contribution and half of the self-employment tax, roughly ending up at ~20% of net income.
👉 with a cap of $69,000 in 2024. It’s a simple tool for self-employed ODs to get a nice sized contribution before tax time.
Though, you may really want to turn to the…👇
5. Solo and Traditional 401(k) Profit Sharing (and After-Tax) Contributions)
Deadline: Employer contributions by the business’s tax filing deadline, including extensions
You can still make substantial contributions to your 401(k) plan via profit sharing contributions, a deductible expense to the practice.
They can provide a meaningful enough deduction to help you phase back into certain deductions and credits practice owners often start to lose (e.g., the 20% QBI deduction or Child Tax Credit).
You do need to contribute to all employees in the plan. However, depending on the method/calculation of profit sharing you’re using (pro-rata, age-weighted new comparability / cross-tested, etc.) and your wages, it’s possible that most of the contribution can be skewed toward your account. Chat with your advisors and plan TPA to calculate out the contribution method that makes the most sense.
If you have a Solo 401(k) with no employees other than your spouse, you can not only do profit sharing contributions (for the deduction) but also after-tax contributions for the “mega backdoor Roth contribution.”
What are the limits? The profit sharing limits are similar to the SEP IRA mentioned above.
The total amount of dollars that can go into your 401(k) account across all types of deposits - including your employee contributions, employer match, and profit sharing, is $69,000 for 2024. There was an additional $7,500 catch up employee contribution if you’re 50 or older.
Late to the party? You can still set up a new Solo 401(k) plan!
If you’re business is taxed as:
✅ Sole proprietorship: You can open a new Solo 401(k) plan by the April tax filing deadline (without extensions), and thanks to the SECURE Act 2.0, you can make both employee and employer portions of the contributions.
✅ S Corporation: You have until the March corporate tax filing deadline (including extension up to September) to open a new plan, but you can’t make employee contributions.
🎙️ Want to learn more about maximizing your 401(k) plans in the practice? Check out this podcast episode.
🎙️ Curious about retirement plan options for 1099 or self-employed ODs? Then this episode is for you!
6. Cost Segregation Studies for Property Owners
A cost segregation study can help accelerate your real estate depreciation, allowing you to deduct a larger portion of costs earlier through bonus depreciation. And it can be done by your - or the entity’s, if it’s a partnership - tax filing deadline.
These studies break down your building into component parts - like fixtures and equipment - that qualify for faster depreciation and bonus depreciation, separating these components from the permanent structure.
Due to the typically passive nature of real estate losses, cost segregation may make sense if you have other significant passive income to offset and plan to own the property long-term.
Alternatively, it can also be beneficial if you have opportunities to offset active income like wages and practice profit (e.g., through commercial property used in your practice or short-term rentals).
This can even be done for properties bought and “placed in service” in past years, without amending prior returns. It's not for the faint of heart - rely heavily on your professionals here.
For properties placed in service in 2022 and before, 100% of the cost of qualified property is eligible for bonus depreciation. After that, it’s come down 20% each year (barring an act of Congress):
🗓️ 2022 and earlier: 100%
🗓️ 2023: 80%
🗓️ 2024: 60%
🗓️ 2025: 40%
🗓️ 2026: 20%
It’s not always a slam dunk. Remember, depreciation is tax deferral. Unless you die with the property, it's not a permanent deduction. If you sell the property, you may end up paying taxes on depreciation through depreciation recapture.
It also means you have less depreciation expense ongoing to offset your rental income. If future tax years will place in a higher tax bracket, you may not want to accelerate the depreciation into a single tax year.
With the guidance and calculations of your financial and tax advisors, it’s possible you can use a timely cost segregation study during an unusually high taxable income year and reinvest the tax savings productively.
🎙️Want to learn more? Check out this podcast episode I did on using real estate losses to offset your other income.
Take Action Now
There are still opportunities to impact your 2024 tax bill and to build long-term financial security. Work closely with your financial advisor and tax professional to see which options best fit your situation.
Got questions? Need guidance around these topics? Let’s chat! Simply respond to this email, or click here to schedule a time to talk about the financial questions on your mind.
New From our Education Hub
|
|
Episode 125: Implementing a Strategic Planning Week to Level Up Your Optometry Practice
Dr. Chad Fleming walks through how he implemented a strategic planning week, and intentional planning time is critical for your optometry practice.
|