Podcast Ep. 133 Strategic Tax Planning Levers in the Optometrist’s Tax Return

[00:00:00] Hey everybody. Welcome back to the Optometry Money Podcast, where we’re helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors and independent financial planning firm just for optometrists nationwide.

Evon: And thank you so much for listening. Really appreciate you tuning in and listening this week.

Are You Pulling the Right Tax Planning Levers?

Evon: And I’ve got a question for you. Are you pulling the right levers in your tax planning? This is a question I explored in a recent article I wrote for Independent Strong, which I’m gonna link to on the show notes.

Because we, we often talk about tactics, how do we get certain deductions, how do we do fancy things like the Augusta Rule for renting our home to our practice, or paying our kids in our business, or accelerating depreciation and all this fancy deduction stuff. But [00:01:00] what I wrote about in the article and what I’d like to touch on today is that we should start by taking a step back and thinking a little bit more strategically.

What are we actually trying to plan around for taxes? What are we trying to influence to get certain outcomes? And what is the outcome we’re actually aiming for? As we’re right at the end of tax season – unless you filed an extension – you’re very likely getting your personal and practice tax returns at already at this point.

The Flow of the Tax Return Formula

Evon: And when we step back and look at how the tax return works, we see that there’s a flow to how your taxes are calculated. There’s a formula to play around with. It’s sort of like a funnel in that all sources of income flows into the top of the funnel unless it’s specifically excluded by law. Then you subtract certain deductions, then you’re left with a taxable income.

This is actually [00:02:00] what flows through the tax brackets to calculate your total tax. So you get your tax and then tax credits offset the tax, and then you compare that to the tax payments you’ve made over the year, and that tells you whether you have a tax due or whether you have a refund. And so there’s this sort of funnel and flow to how the tax return works in order to get to the final result.

Key Levers of the Tax Return to Plan Around

Evon: And. There are key levers. If you look at that tax return, there are key levers that you can plan around, that you can pull, that you can play around with. And looking at this funnel, each stage is sort of a chance to evaluate and to optimize and impacting one part of the tax return. One of these levers can have positive or negative impacts on all the rest.

And so what are some of those key tax planning levers that optometrists should know about?

The Sources of Income You Have

Evon: The first one is the different sources of income you have. What’s actually what, what types of income are actually flowing to the top, and [00:03:00] what does this tell us? What it tells us, what tax rates, those different types of income are going to be taxed at.

For example, your wages and your practice profit. They’re gonna see ordinary tax rates like 22 and 24 and 32%, and so on. Long-term capital gains, on the other hand, are gonna see different tax brackets, 0% potentially, or 15% or 20%. So the type of income matters. It also tells us how losses are handled, depending on the type of losses they are, if they’re real estate losses, and whether they can be used to offset your other income or not.

Or if there are capital losses, for example, what are our restrictions there with how we can use losses? And importantly, if you have taxable investment accounts, it’s a great way to see how much income the investments inside of that particular account are kicking off. And whether you need to make some improvements, some very common [00:04:00] issues that I see looking at new client accounts.

I see that there are often taxable bond fund in these, in these accounts. So some examples are every account that you own is invested the exact same way. And so rather than put the bonds in the account that it’s most favorable for, you have bonds in these taxable accounts and they’re kicking off a lot of income, and that income is taxed at those ordinary higher income tax rates. So that’s one example. You might have REIT funds kicking off income, or you might have really actively managed funds, mutual funds. Kicking off a lot of income because there’s a lot of trading happening in those funds. And so that’s an opportunity to see, okay, how much income are my accounts kicking off?

And are there opportunities for improvements? Are there areas for improvements? So that’s sort of the first one, the type of income you’re actually working with.

Adjusted Gross Income (AGI)

Evon: The second one is adjusted gross income or AGI. This is probably one of the most important levers, one of the most important [00:05:00] line items on the tax return to keep an eye on and and to, to see if there’s opportunities for improvements.

Because your AGI or a modified version of it determines whether you’re eligible for certain deductions or credits. Uh, deductions allow you to lower the amount of income that’s actually taxed. Tax credits. On the other hand, like the child tax credit, which starts phasing out at about $400,000 of AGI tax credits are a dollar for dollar offset of your tax due.

And so your AGI impacts your eligibility for certain credits and deductions. If you, if it’s too high, you start to phase outta them. It impacts your eligibility for ACA health insurance, premium tax credits. For those of you in the early years of practice ownership. It impacts your ability to contribute directly to Roth IRAs.

It also determines if you phase into certain [00:06:00] extra taxes, like the net investment income tax higher Medicare premiums in retirement. So there’s potentially additional taxes you might face if it’s high enough. For those of you with federal student loans, it’s also the default starting place.

I. For calculating income-driven repayment plan monthly payments, which is effectively if you, if you think about it, it’s effectively an additional tax on your income. So AGI is a hugely important line item to watch and to plan around and pulling this lever and decreasing AGI can sometimes lead to phasing into back into those certain deductions and credits.

Or if it gets high enough, you start to lose those, but also face into those extra taxes. Along with potentially higher student loan payments. So all things equal, we’d like to keep a close eye on this and we’d like to see deductions show up above this line. In other words, we’d like to see those deductions lower your AGI.

And a lot of the ways we plan for [00:07:00] deductions and tax deferrals, they do end up above AGI: pre-tax retirement contributions, for example. HSA deposits, depreciation, business deductions, those are all things that can help reduce AGI. So adjusted gross income is an important lever.

Itemized vs. Standard Deductions

Evon: Itemized versus standard deductions, that’s an important lever. You either get to take a standard deduction amount. Which is a set amount that all taxpayers get to take and deduct against their income.

That’s $30,000 in 2025 if you are married, 15,000 if you’re single. Or you can take itemized deductions, which is a list of very specific personal expenses that you can pile up like donations to charity or nonprofits, state and local taxes, up to $10,000, and mortgage interest. And you can take the higher of the two.

So if your list, if your pile of [00:08:00] itemized deductions is more than 30,000, for example, if you married, then you can take that list of deductions. On the other hand, if it’s, if that list, if that itemized list is smaller. You’re taking that standard deduction. So a lot of times you hear sort of the, the points that, well, your mortgage interest is tax deductible or your donations to charity are tax deductible.

Well, the reality is they’re sometimes tax deductible. I. But for most taxpayers right now anyways, it’s actually not. And so we can think strategically around those itemized deductions and, and we can look for opportunities to pull that lever. For example, we may decide not to donate to charity or church or a donor advised fund every year, and instead donate every second or third year.

And so you bunch these donations every few years, which allows you to increase your itemized deductions amounts so you can actually benefit from [00:09:00] those donations while you still get the standard deduction amount in the years in between. And so looking at that strategically can help as well.

Qualified Business Income (QBI) Deduction

Evon: Next you have the qualified business income deduction.

This is for those practice owners out there that own pass through business entities, so S corporations, partnerships, sole proprietorships

for practice owners that qualify this is essentially a 20% deduction on a modified version of business profit, basically operating business profit. And I’ll linked in the show notes to an episode and a blog post I did diving into this even more. But optometrist practice owners will start to phase out of this deduction once your taxable income before the deduction starts to hit a certain point, so for example, in 2025, if you’re married, filing taxes jointly. Once your taxable income before that deduction hits $394,600, you start to [00:10:00] phase out of it. You start to lose it at $494,600. You lose it all together. And so this is a lever, this is a really important lever for business owners, even if you’re self-employed with a, uh, with side income, side business income.

This is a really important lever to plan around. As you start to see yourself phase out of this timely deductions can help bring you back into eligibility. And for those practice owners that are taxed as an S corporation. You’re also balancing your wages versus your profit because wages are not eligible for QBI only your business profit and the higher your wages, the lower your profit.

So there’s some balancing considerations with what you’re paying yourself as a wage versus with a bunch of different variables really, versus what the net profit’s gonna be. And it’s really important. I, I should note that at the end of this year, 2025. The QBI deduction is set to expire and [00:11:00] quite a bit of personal tax items, including just about everything I’m touching on today are going to revert back to pre 2018 tax law, and so it’s expected by many that Congress is going to act to extend a lot of this, including the QBI deduction, but we really just don’t know.

Uh, until a law is actually passed. We don’t know what, what tax law we’re gonna be working with in 2026 and beyond. So something to keep an eye on. We are expecting it to continue, but we cannot be certain until the law is actually passed.

Taxable Income – What Actually Flows Through the Tax Brackets

Evon: And then next we have taxable income. This is the next lever to think about, and taxable income is the income after all these deductions that actually runs through the tax brackets.

To calculate your tax and the amount of taxable income you have determines your marginal tax rate. That these are the tax rates. You tend to see like 12%, 22, 24, 30 per 32%, and so on. And [00:12:00] remember that not all of your income is taxed at that tax rate. It’s a progressive tax system, meaning that your income goes through brackets and it’s filling up these lowest tax rate brackets first and only the income within that specific bracket of income is taxed at that tax rate. So 10%, 12%, 22%, 24%, and finally 32% and so on. And so your marginal tax rate that everyone talks about is really what the highest or last bits of income are going to be taxed at. And same thing for capital gains tax rates as well.

Your taxable income determines how much of those capital gains are gonna be at zero, 15, or 20%, or potentially 23.8% for those extra taxes.

And for this lever, keeping on where you fall and what opportunities come. For example, if you’re creeping from the 24 tax bracket into the 32% tax bracket.

We might favor [00:13:00] pre-tax contributions or other deductions to keep income away from that 8% jump in tax bracket. Other times we may actually want to add income onto the tax return or focus on Roth contributions or sell investments at a 0% capital against tax rate, just depending on what the situation looks like.

So taxable income is a really important one. And then finally, we can talk about tax payments and withholdings and nothing can stress you out quite like not knowing how much you’re going to owe at tax time, especially if you are surprised by a big tax bill at tax time.

And a lot of that’s really just a mismatch of the amount of tax payments and withholdings that you make during the year versus the tax that’s calculated. And so tracking your withholdings and quarterly tax payments if you’re making quarterly tax payments. To be on track each year is a pretty big part of my projections with clients as I talk about that, because we’re trying to avoid just that uncertainty and [00:14:00] avoid surprises.

And a goal that you might wanna shoot for is to at least meet the IRS Safe Harbor thresholds, which means that if you withhold or pay into the system a certain amount of dollars. Then you’re not gonna owe a, an under withholding penalty, an extra amount there. And so what that is, is that you can withhold or pay at least 90% of this year’s tax, or 110% of last year’s total tax.

I. If your AGI exceeds 150,000, so it’s either or. You can look at 110% of last year’s total tax or try to get within 90% of this year’s total tax. Those are some basic thresholds you can try to aim for.

Case Study – Married Optometry Practice Owners

Evon: So putting it all together, we have the flow of this tax return and, and we have these different points on a tax return to target to look at and, and to tinker with.

When looking for opportunities and at times impacting some of these points, can give [00:15:00] deductions an even bigger punch. For example, in the case study, I included in the article, which I, I recommend me reading so you can see how the numbers are working. Imagine you’re a couple, both ODs with two young kids, you’re married and you own a practice together. At the amount of income in the practice that I had talked about.

You are getting into the 32% tax bracket, you’re only partially eligible for the QBI deduction because your taxable income’s too high and you’re not eligible at all for the child tax credit for your two kids, that’s a $2,000 credit for each kid under 17 because your AGI is too high. And so that’s sort of the situation you’re looking at and.

You can project out the tax year and you can start to see how pulling these different leverage points can impact your results. What improvements can we make?

Some of our key levers here are gonna be taxable income because we’re starting to phase into a new tax bracket. Adjusted [00:16:00] gross income is a lever here because that’s what determines the child tax credit eligibility, and then again, taxable income because it determines the QBI eligibility. So trying to impact those levers and helping us phase back into these, uh, deductions, credits, and lower tax rates.

Are opportunities we might project and see what we can do.

Evon: So let’s say for example, you decide to make a a large profit sharing contribution to your 401k plan, and this is a tax deferral. So we’d also kind of evaluate the likelihood of,of those pre-tax dollars being withdrawn in retirement at a more favorable tax rate. But it could be anything. It could be the new OCT that you’re planning to buy and accelerate that depreciation. It could be an improvement or build out to the practice. It could be a new exam lane. Maybe you bought the commercial property of your practice and we’re, we’re considering a cost segregation study.

This is where the tactics then. All these specific deduction opportunities start to come into play. In order to to impact these [00:17:00] leverage points. So you have this large tax deferral. What are the results? Well, you brought your income back into the 24%, uh, percent tax bracket.

So you avoided that 8% jump.

You were able to phase fully back into eligibility for the QBI deduction. And you’re eligible for most of the child tax credit. And when you look at the effective tax rate that your deduction provided, meaning the amount of taxes saved, divided by your deduction, by the amount of the deduction, the effective tax rate, you got a deduction at ended up, in this case even higher then the 32% tax bracket you started in.

And of course this is all a simplified case study example with a hypothetical situation. And I’m sort of obligated to say, you know, check in with your own Advisors and tax professionals to see what actually makes sense for your specific situation. But.

That’s the power of looking at these different leverage points [00:18:00] and seeing where the impact can happen. Why is that? Well, again, we brought you out of a higher tax bracket for that bit of income. We phased you back into certain deductions and we increased the amount of credit you’re getting.

So it had an even bigger punch. And good tax planning isn’t just about stacking up as many deduct deductions as possible. It’s about looking for opportunities to get the biggest bank for your buck out of every deduction and over your lifetime. And sometimes that means accelerating deductions into current years.

Sometimes that means accelerating income or spreading out deductions or over a set of years. And as you map out the year now that we’re, we can start to look forward now to 2025. I’m now looking at client tax returns and reviewing those.

As you map out the year, take time to review these key levers, these, these key strategic planning opportunities with your own financial Planner and your tax advisor.

And [00:19:00] if you don’t have anyone projecting these things out and having these conversations with you, let’s schedule an intro call. Let’s talk about. How we can help you make better tax planning decisions and work together with your own tax professional. And, and as you project the year out, some questions to ask are, what types of income are you working with?

What tax brackets apply and how close are we to lower or higher tax brackets? What deductions or credits are you phasing out of? And what extra taxes are being triggered and, and why. And then finally, how would additional income or additional deductions or tax deferral affect all of these different factors?

So hopefully this was helpful to you as you plan, as you look ahead towards 2025 and beyond and far beyond. Please let me know if you have any questions you can reach me at podcast@optometrywealth.Com. Check out the article in Independent Strong. And then finally, if you’d like to learn more about these things on a regular basis, what you’d want to do is subscribe to My Weekly Eyes [00:20:00] on the Money Newsletter.

I write all about this stuff each week and other important financial planning topics specific to Optometry and Optometry practice ownership and if you do, you’ll get a free guide to all of the financial and tax planning numbers you need to keep in mind for 2025.

With that, really appreciate your time and your attention. We will catch you on the next episode. In the meantime, take care.