Save Big Before Year-End: Essential Tax Moves for Law Firm Owners (Ep. 89)
As the year draws to a close, many law firm owners find themselves grappling with the complexities of tax planning. Could a few smart moves before December 31st help you keep thousands more in your pocket? Let’s dive into some essential end-of-year tax strategies that could significantly impact your bottom line.
Maximize Retirement Contributions
One of the most effective ways to reduce your taxable income is through retirement contributions. These contributions not only secure your future but also offer substantial tax advantages. Consider these plans:
SEP IRA: Allows up to 25% of your income contributions, with a maximum of $66,000 for 2024.
Solo 401(k): Offers the ability to contribute more than SEP IRA due to its employee and employer portions.
Traditional IRA and Roth IRA: Contribution limits are $8,000 if over 50, and $7,000 for everyone else.
Consider Roth Conversions
If your income has been lower than usual this year, it might be the perfect time for a Roth conversion. This strategy involves moving money from your traditional pre-tax retirement accounts to a Roth IRA, paying the taxes now so your retirement withdrawals will be tax-free.
Take Advantage of Charitable Contributions
High-income years are an excellent opportunity to think about giving to charity. Donations to qualified charities are tax-deductible:
Donor-Advised Fund: This allows you to get an immediate tax deduction while deciding later which charities to support.
Qualified Charitable Distribution (QCD): If you're of retirement age, this allows you to meet your RMD requirements without it counting as taxable income. Ensure this is done directly from your IRA to the charity.
Optimize Income and Expenses Timing
Balancing your income and expenses can be a strategic move:
Defer Income: Delay collecting income by moving invoicing to January or asking clients to hold off on payments until after December.
Accelerate Expenses: Prepay expenses like office rent or subscriptions to push deductions into the current tax year.
Don't Overlook Deductions
Several underused deductions can give you significant tax savings:
Home Office Deduction: If you have a home office exclusively for business, you can deduct a portion of your rent/mortgage, utilities, and internet.
Business Expenses: Ensure all business expenses are on business cards for accurate record-keeping and deductions. This includes software subscriptions, office supplies, marketing costs, and client meals.
Health Insurance Premiums: If you're self-employed, you may deduct these premiums for increased savings.
Avoid Common Pitfalls
As a law firm owner, staying on top of estimated tax payments is crucial to avoid penalties, especially as IRS interest rates have increased. Also, consider:
Depreciation: Take advantage of the current tax law’s bonus depreciation before its potential expiration at the end of 2025.
Employee Benefits and Bonuses: Decide whether these should be given out before year-end or deferred to manage your tax liability effectively.
Conclusion
Taking a few proactive steps now can make a massive difference in your tax bill and overall financial wellbeing. Smart tax planning is a vital part of your wealth-building strategy.
