Understanding taxes is a crucial aspect of managing your finances, especially as a high-earning professional. It's easy to get caught up in the idea of minimizing your tax bill, but it's important to remember that paying less in taxes is not, in itself, a good financial goal.
The problem with this goal is it leads people to do stupid stuff and to be vulnerable to people selling bad financial products. You should really want to pay more in taxes since that usually means you made more money and, in the end, are still coming out ahead. Remember you should pay every penny you owe to the government, but you don’t need to leave a tip.
If you want to lower your taxes, it’s important to have more than a vague understanding of how our taxes works, what tax bracket you expect to be in, and which activities are incentivized and disincentivized by the IRS. Knowing how they work will help you to better manage your own finances and to actually have intelligent discussions with others about government and tax policies.
Remember that your marginal tax rate, or tax bracket, is the rate at which your next dollar earned will be taxed. Your effective tax rate is the total tax paid divided by your total income. Your effective tax rate is always less than your marginal tax rate.
Paying your taxes is important, and not just for staying on the good side of the IRS. Taxes fund essential government programs that help us all. Still, giving up one-third or more of your hard-earned pay can be painful. For doctors who want to keep more of their earnings in their pockets, reducing taxes is essential.
The biggest tax deduction available to most doctors and other high earners is to simply save for retirement. Tax-deferred retirement accounts like 401(k)s and 403(b)s allow you to save money at your currently high marginal tax rate, protect those investments from taxes and creditors as they grow, and use account withdrawals in retirement to fill the lower tax brackets. The lifetime tax savings are likely higher than the amount you contribute to the account.
Not only is a business a great way to build wealth, it offers many ways to reduce your tax burden. As a business owner, you gain access to valuable deductions and tax-saving strategies not available to W-2 employees. You can write off expenses like home office costs, travel, business meals, professional development, and even retirement contributions. Plus, structuring your business correctly can help reduce your taxable income through deductions like the Qualified Business Income (QBI) deduction or tax-advantaged retirement plans.
There are a plethora of ways to give money to charity and receive some of that money back in the form of a lower tax bill. If you itemize your deductions, anything you give to charity shows up on your Schedule A as a deduction. But there are plenty of other creative and unique ways to give to charity, such as Charitable Remainder or Charitable Lead Trusts and Donor Advised Funds. The best way for retirees to give to charity is often Qualified Charitable Distributions from IRAs.
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There are three great reasons to do your own taxes.
The first is you save money because you’re not paying somebody else to do it for you.
The second is that it really doesn't take a lot more time to do it yourself since tax software can pull in most of your information from last year's return and download many of the accounts you have.
But the most important reason is that doing your own taxes teaches you the tax code—at least the parts relevant to you—which causes you to make better tax decisions in the future.
That said, any year your financial situation changes dramatically is a great year to have a high-quality tax accountant look things over to see what else you could do.
For those who desire professional help, there are two sides of tax aid: tax preparation, which is the actual filling of the forms, and tax strategizing, which is planning in advance to lower your tax bill.
We have curated and vetted a list of tax professionals who are experts in the areas they are listed. Fees are generally per project/return or at an hourly rate.
Medical school may not have taught you about money, but we will.
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