Professional advice for deciding the best business structure and how to likewise further reduce taxes for high income earners
If you’re interested in keeping the amount that you owe to federal, state, and local governments as low as possible, here are a few tips as offered by three financial experts regarding how to reduce taxes for high income earners.
Create your specific financial plan
“Financially speaking, developing a solid financial plan as early as possible in one’s career as a chiropractor is the key to long-term financial success,” says Michael Larson, senior wealth advisor at Spectrum Wealth Management in Indianapolis, Ind. “The establishment of a sound budget (and sticking to it) in order to reduce debt, putting money aside for investment purposes, and effectively managing your risk are of the utmost importance. This creates the framework for successful financial decision-making throughout one’s career.”
For new practitioners starting their own clinic, Larson says that developing a sound financial plan involves working with a qualified insurance professional to help mitigate risks. It also includes seeking advice from an attorney and CPA to decide the best business structure for how to reduce taxes for high income earners.
“Business owners could potentially structure their organization as a sole proprietorship, a limited liability company, or an S corporation,” Larson explains. “Each structure has its benefits and unique tax structure that should be taken into consideration before being chosen.”
Whether a new chiropractic professional or you’ve been seeing patients for years, Larson encourages practitioners to “seek out advice and guidance from your financial planner, attorney, or CPA when establishing or updating your organization’s entity type to ensure that you are maximizing your income potential and mitigating your tax exposure as much as possible.”
For those interested in pursuing a partnership at an existing clinic, Larson recommends creating an agreement that addresses issues such as:
- Income generation and sharing
- Partner responsibilities
- Liability insurance coverage
- Buy/sell arrangements
- General decision-making responsibilities
- Current and new patient list and division of responsibilities
- Employee considerations
- Any pre-existing debt considerations
- Contingency plans
- Exit strategies
Don’t be afraid to deduct legitimate expenses
“A lot of self-employed practitioners, like chiropractors, don’t know what business expenses they’re eligible to deduct or are afraid to take those deductions for fear of being audited,” says Joshua Zimmelman, managing director of Westwood Tax & Consulting LLC in Rockville Centre, N.Y. “The truth is, if your deductions are valid and legitimate — and you have the paperwork to prove it — you shouldn’t be afraid to claim it on your tax return.”
Zimmelman shares that common tax deductions for chiropractors include:
- Rent or mortgage interest paid for your office space
- Utilities for the office, as well as the telephone service
- Malpractice insurance premiums
- Health insurance premiums for practice owners and staff members
- Licensing and dues for professional organizations
- Continuing education tuition
- Job supplies like scrubs, towels, paper for the adjusting tables, etc.
- Office supplies, equipment, and software
- Laundry-related costs
“Even if you do get audited, if you can back up your claims, you’ll get through it unscathed,” says Zimmelman. “As long as your deductions are ordinary and necessary, and you’ve got a meticulous record of documentation, you shouldn’t worry.”
How to reduce taxes for high income earners and save for retirement
“Chiropractors should create a solo 401k retirement plan for themselves if they are a solo practitioner without employees,” says Bill Hampton, tax strategist and financial planner at Hampton Tax and Financial Services, LLC in Stockbridge, Ga. “These 401k contributions can significantly decrease their taxable income.”
Hampton advises that practitioners can contribute up to $20,500 to a traditional 401k, with those aged 50 and up allowed to contribute an additional $6,500 annually as a “catch-up” contribution. You can also make up to $40,500 in employer contributions, says Hampton.
If you have employees, the employees must be included in the plan.
“The IRS limits total combined contributions made by employers and employees to $61,000,” Hampton explains. “The limit is $67,500 for participants aged 50 and up, which reflects the catch-up contribution amount allowed.”
Use these checklists to make sure you’re maxing-out your options and doing everything you can to take advantage of available reductions for high earners.