If there’s one thing you want to avoid in your practice – besides malpractice, of course, it’s making a mistake with the IRS. You never want to be in a position where you owe the IRS more money than you have to send them, and perhaps more importantly, you never want to mistakenly give them more than you owe. That’s why financial planning for doctors is so important.
But many oral surgeons like you are so focused on the technical side of your practice, as well as maintaining the friendliest staff in town, that you just don’t have the time to stay on top of tax law and requirements, especially as it keeps changing. Here is a list of 10 tax mistakes doctors make on their personal taxes:
1. Not Taking Your Personal Tax Planning Seriously
Doctors and CPAs are pretty much on the opposite side of the spectrum. As an oral surgeon, you perform surgeries that help save teeth, jaws, and gum tissue, while a CPA crunches numbers and tries to save his clients’ as much money as possible.
But when doctors spend so much time focused on their practice and don’t consider proper financial planning, they can make some terrible tax mistakes without even realizing it! Trust us, while it might take a year or two, the IRS will eventually let you know if you inadvertently underpaid your personal income taxes. But if you sent them too much by accident, expect to never see those precious dollars again.
2. Not Funding a 529 Plan Before You Head to Dental School
Many oral surgeons open up 529s – a tax advantaged college savings plan – for themselves to help pay for school in a more affordable way. After all, every penny of your tuition you pay for yourself is several pennies less that you’ll owe back in student loans! Besides, it’s common to have a job in undergrad, even if only during the summer, and some graduates who are bound to be oral surgeons take a break before hitting dental school to pile up some cash to survive while they’re hitting the books and making rounds.
3. Not Taking Advantage of the Health Savings Account (HSA) That Your Employees Use to Pay Medical Expenses
Even if you’re as healthy as a horse, you and your family have got to have some annual medical expenses. After all, you make sure everyone has their bi-annual teeth cleanings, physicals, and flu shots at the very least. Add to that catching a common cold, you kid getting an injury while playing a sport, or any other reason you might need to take a trip to urgent care or the ER, medical expenses can add up. And when you’re trying to pay off debt for a dental practice, not to mention student loans, you want every tax advantage you can get.
If your practice provides a high deductible health plan (HDHP), it also provides a Health Savings Account, which takes small tax deductible contributions of your regular paychecks that grow tax-deferred in the HSA so you can pay for qualified medical expenses when they pop up. It can save you a couple of thousand dollars a year and is the best way for high-income earners like yourself to be able to get a tax break on medical expenses.
4. Mistaking an HSA for an FSA
Since an “HSA” and “FSA” just have a one-letter difference between them, it’s easy to get these two acronyms mixed up. But a Health Savings Account (HSA) and a Flexible Spending Account (FSA) are two very different tax advantaged vehicles for paying for yours and your families’ medical expenses.
While you may be so busy building your practice up that you’re not considering financial planning for doctors, you may incorrectly think that an HSA is a “use it or lose it” in a calendar year account. That’s wrong. Only contributions to an FSA must be used within a single tax year. Alternatively, in HSA contributions that you make today grow tax-deferred for years. You can use money you’ve put in an HSA decades later, when it’s more likely you’ll have expensive out-of-pocket medical expenses such as during your retirement years.
5. Not Realizing You Can Contribute to an IRA
When it comes to financial planning for doctors, it seems like there are so many acronyms! Contributing money to an IRA, an Individual Retirement Account, is sometimes overlooked by doctors because they think they make too much money to qualify for this retirement vehicle. The truth is, failing to contribute to an IRA over a traditional 30-year dental career can leave you with a six-figure mistake in your retirement years.
6. Getting Taxed More in Retirement Because You Don’t Use Backdoor Roth IRAs
If you don’t make financial planning for doctors a priority early in your career, you might not learn about backdoor roth IRAs, which are ideal for high-income earners like you. The truth is, backdoor roth IRAs save you from paying income taxes in your retirement years. Wouldn’t you rather keep all that hard-earned money rather than send it to Washington, D.C. every year?
7. Choosing the Wrong Roth Retirement Savings Vehicle
Unfortunately, when it comes to financial planning for doctors, many don’t select the right rote retirement savings vehicle to maximize their retirement savings funds in the future. When they’re so focused on their oral surgeries or operating their practices, they put their personal retirement savings goals to the side, potentially leaving them with significantly less retirement money in their retirement years.
8. Underfunding Your 401k
The number one rule when it comes to a 401k is that you always contribute at least up to the employer match. If you don’t, you’re leaving money on the table! Funding a 401k every year, even if there isn’t an employer match, can also help reduce your income tax liability.
9. Donating Cash Instead of Securities to Charities
Many oral surgeons and other high-income earners are charitable, and that’s a great thing to do. But did you know you can give to the charity of your choice the same funds but reap better tax benefits for you? By donating mutual funds that have grown to your desired charitable gift amount, the charity can sell the mutual funds, and you can avoid capital gains taxes.
10. Failing to Dispute Tax Penalties
Believe it or not, even the IRS has a heart. Sometimes, when you’ve messed up and got a nasty letter from the IRS, you think there’s no way out of it but to pay up – and fast! If you have a first-time tax offense, you can request an “abatement” in a politely-worded letter that begs the IRS to forgive and forget your tax debt. Trust us; it’s worth the ask. The worst that can do is say “No.”
Contact Us for Your Financial Planning Needs
We know that doctors like you are so focused on your patients, your staff, your practice, and your family that you often don’t think about what you’ll be doing in your retirement years. But we can help you save little by little, so you can make your retirement dreams come true whether that’s relaxing on a tropical beach with a fruity drink, playing golf daily, or traveling the world. And in the meantime, we can keep you from sending too much of your hard-earned money to Uncle Sam, too!
If you need help with financial planning for doctors, give us a call at (713) 961-2723.