Tax-Efficient Planning Strategies for Nurse Practitioners (PART 1)
You have established yourself in your field, commanding a certain level of income for your expertise. That same level of income that requires careful tax-planning considerations due to the associated restrictions and phase-out limits set by the IRS.
You wouldn't expect your patients to read their own X-ray. We wouldn't expect you to prepare your own tax return.
1 - Maximize Plan Contributions
Because you are a high income earner, it is important to take advantage of the pre-tax contribution benefit which has the potential to reduce your taxable income. Given the fact that you have the capability to save the maximum allowed within your employer's retirement plan, maximizing your pre-tax contributions can be one of the best ways to pay less tax in the current year, and keep more of the money that you earn.
- Retirement Plan Contribution Limits for 401(k), 403(b) and most 457 plans1
- $20,500 (under age 50)
- $27,000 (age 50 and older)
- Employers can make a matching contribution or profit sharing contribution up to 25% of compensation up to a maximum of $61,000.
- Total employer/employee contributions cannot exceed $61,000; $67,500 if age or older.
- IRA Contribution Limits (Traditional and Roth)2
- $6,000 (under age 50)
- $7,000 (age 50 and older)
- Income Eligibility Requirements for a Roth IRA3
2 - Contribute to a Health Savings Account (HSA)
No other profession realizes the health benefit of quality healthcare better than Nurse Practitioners, so allocating dollars toward future medical expenses certainly hits a vein. Now add the fact that HSAs qualify for a triple-tax benefit, you've got a prescription for tax-savings success.
Here is how it works:
- Contributions are tax-deductible
- Investments grow tax-free
- Withdrawals are tax-free for qualified medical expenses
Employee and Employer Maximum Contributions4
- $3,650 for individuals (health insurance policy must have a deductible of at least $1,400)
- $7,300 for families (health insurance policy must have a deductible of at least $2,800)
- Individuals 55 and older can contribute an additional $1,000.
About 68% of people turning 65 will need some form of Long-Term Care during their lifetime.5
We all know that the cost of healthcare is rising. By contributing and investing HSA funds, you can create a nest egg dedicated to paying for medical expenses in retirement.
📌PRO TIP - Be sure to deduct your contributions when you file your taxes if they are not being payroll-deducted.
3 - Explore Tax-Focused Gifting
Smart moves can help you manage your taxable income and taxable estate. For instance, if you’re making a charitable gift, giving appreciated securities that you have held for at least a year is one choice to consider. In addition to a potential tax deduction for the fair market value of the asset in the year of the donation, the charity may be able to sell the stock later without triggering capital gains.
This discussion of tax-focused giving is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your financial, tax, and legal professionals before modifying your gifting strategy.
The annual gift tax exclusion gives you a way to remove assets from your taxable estate. You may give up to $16,000 ($32,000 if you are married) to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption of $12.06 million for 2022.6 Managing through the annual gift tax exclusion can involve a complex set of tax rules and regulations. Before adjusting your strategy, consider working with a professional who is familiar with the rules and regulations.
4 - Consider Tax-Loss Harvesting
Tax-loss harvesting refers to the practice of taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can be an approach to manage your tax liability.
Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to, potentially, offset capital gains next year.7 But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same in the coming years.
By taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year. Before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.
If you’re looking into this strategy, familiarize yourself with the IRS’s “wash-sale rule.” This rule indicates that investors can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale.7
5 - Coordinate With Your Team of Advisors
It's important to have your team of advisors working together to implement any of the strategies mentioned above. There are things you may be able to do now to address both your current tax obligation and those you may be required to address further down the road.
You know better than anyone that your financials are unique - and your needs can differ greatly from those of friends and family who work outside of the healthcare industry. As a result, your financial plan deserves the dedication of a financial advisor who specifically works with and knows how to help medical professionals.
An advisor who is able to accommodate your busy (and often erratic) schedule, address your student loan debt, assess your risk coverage options and help prepare a legacy for your family. Additionally, you may want to work with someone who can help you establish a practice and transfer it to new ownership when you’re ready to retire. Finding a well-suited financial advisor can be one of the most impactful decisions you make regarding your financial plan.
If you need a professional advocate or simply want a second opinion, please see the calendar link below to schedule a convenient time to chat.
This content is developed from sources believed to be providing accurate information, and provided by My NP Advisor. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.