Tax Tips for Your Practice
By Garrett B. Gunderson and Brett Sellers, CPA
How to Reduce Your Tax Burden & Boost Your Productivity
As a Financial Advocate to chiropractors, I performed a survey of 117 doctors my firm works. 107 of them were overpaying on their taxes, many of them by tens of thousands per year. That didn't surprise me. But what did is that an astounding three-fourths of them were happy with their CPAs.
They're happy with their CPAs for the same reason they overpay on taxes: They simply don't know of anything better. When you're done reading this article, you may want to fire your CPA. But you'll know about safe and legal strategies for drastically reducing your taxes.
Here are the most important things every chiropractor should know about taxes:
Don't Let the Tax Tail Wag the Dog of Productivity
Would you rather pay $1 million or $10 million in estate tax? Most people say $1 million. My answer is always $10 million, because it would mean I made much more money than if I owed $1 million.
Taxes should definitely be taken into consideration with any financial plan, but some chiropractors actually don't want to produce more because they're afraid of paying too much in taxes. They base financial decisions primarily on tax ramifications. In other words, they let the tax tail wag the dog of productivity.
It helps to understand the difference between average and marginal tax rates.
The marginal tax rate is the rate of tax applied to the last dollar added to your taxable income. For example, the current 25 percent federal income tax bracket for a single taxpayer applies to incomes between $34,500 and $83,600. But if your taxable income comes to $83,601, that doesn't bump your entire income to the 28 percent bracket. Only the dollars earned above the bracket are taxed at the higher rate. So even though you may be in the 28 percent bracket, your effective/average tax rate will be much less.
Your first and best defense against taxes is always to earn another dollar, rather than limiting productivity or settling for a lower income in the name of saving on taxes.
Be Proactive with a Tax Strategist, Not Reactive By Using a Tax Preparer
Most chiropractors have a CPA that simply prepares their taxes at the end of each year. This makes them reactive rather than proactive.
Instead of anticipating and strategically solving potential tax problems, such tax preparers scramble to limit your tax liability just once throughout the year. And to accomplish this, they usually tell you to dump as much money as possible into a qualified plan, or recommend other things that you otherwise wouldn't do except to save on taxes, which creates even more problems down the road.
In contrast, a tax strategist makes tax season a non-issue by keeping you organized, creating and tracking financial benchmarks throughout the year, and limiting your tax burden.
It's the difference between traditional doctors and chiropractors. As you know well, traditional doctors play defense with symptoms and rarely address the root causes of health issues. In contrast, chiropractors take a holistic, offensive approach to health and wellness and focus on the cure, rather than alleviating symptoms.
Your tax strategy should be like a wellness program—not a one-time, reactive event, but an ongoing, proactive strategy. It starts with the right accountant "practitioner." An excellent CPA won't simply prepare your taxes. He'll help you take advantage of available tax breaks and new laws, such as the fairly recent Economic Recovery Act. He'll dig deep and amend previous years' tax returns as needed.
The worst mistake you can make is to try to do your taxes yourself. Would you recommend that your patients take a do-it-yourself approach to health and wellness? Sure, they need to be personally responsible, but you have much more specialized knowledge. Your taxes are no different.
It's also ill-advised to use the cheapest tax preparer. This may save you a few hundred dollars in fees per year—while costing you thousands in avoidable taxes.
And how can you tell if your CPA is a preparer or a strategist? Big hint: If you're just starting to think about last year's taxes as you read this article, you have a preparer. A strategist would have worked with you throughout the year to strategize and address potential issues.
Plan for the Future, Don't Defer to the Future
Here's another way you can tell if you have the wrong CPA: You bring her your taxes at year's end, and one of her primary and automatic recommendations to reduce your taxes is to put money in a qualified retirement plan.
This is lazy accounting at best. Are taxes going up or down in the future? Do you plan on being more or less successful in the future? So why would it be a good strategy to save on taxes today in a way that creates a bigger tax burden tomorrow?
Of course, traditional retirement planners will tell you that during retirement you can live on 70 percent or less of your pre-retirement income, and that this will lower your tax bracket.
First of all, no one knows exactly what future tax brackets will be. Second, is this really how you want to spend retirement: living cheaply, afraid to spend the money you've earned for fear of triggering tax consequences? Do you really want to have a lower standard of living when you retire?
In contrast to qualified plans, there are other products and strategies that provide much better exit strategies upon retirement while still offering tax benefits during the growth phase.
This doesn't necessarily mean you shouldn't ever contribute to a qualified retirement plan. But such a decision needs to be part of a holistic, long-term financial plan, not a reactive and misguided accounting strategy based solely on numbers today.