As a woman in medicine, your time is limited. This was true before the COVID-19 pandemic and it’s even more true now. Between your patients, your profession, and your personal life, there’s not much left for analyzing your taxes to make sure you’re not overpaying. At Serenity Financial Planning, we get it. It’s common to let your tax strategy fall by the wayside until it’s time to file, especially with everything else going on.
In fact, many of our clients come to us not realizing how much money they could save in taxes with a little planning. If you’re a woman in the medical profession, here are three reasons you might be overpaying in taxes and what you can do instead.
Unclear Financial Picture
It’s easy to overpay in taxes if you don’t have a consolidated view of your assets, especially if you have a dual-income household. As medical professionals, many of our clients find themselves in the top tax brackets, even before accounting for income earned by a spouse. Because of this, it’s critical for both spouses to be on the same page when it comes to factors that affect tax liability, including total income and available deductions.
Depending on your specific situation, you may be able to defer income to later years or accelerate deductions in order to minimize your current-year tax bill. But these strategies can only be implemented once you have a clear picture of your current financial situation. Think of your tax bill as a patient, one you can’t properly treat until you have a better understanding of the current symptoms and family history. Once all that is identified, you can diagnose the illness and prescribe a remedy. Your tax bill works in the same way. You must first have a clear picture of your income sources, assets, and liabilities before the best deductions and tax strategies can be applied.
Not Harvesting Tax Losses
Tax-loss harvesting is the strategy of selling investments at a loss in order to offset the appreciation of other assets. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. This is a very common strategy for reducing taxes and is another reason why a high-level view of your finances is so important.
You might hold on to a losing investment longer than needed if you don’t realize that the loss can be used to work in your favor. Not only could a loss reduce your taxes on capital gains, but if it exceeds your total gain, it can be used to reduce your taxable income by up to $3,000. (1) It may not seem like much, but if used consistently, this strategy can create significant tax savings over time.
Under-Utilizing Tax-Advantaged Accounts
In one of the top-earning fields in the country, medical professionals should look to reduce their taxable income as much as possible to avoid overpaying in taxes. The most common method is through the use of tax-advantaged retirement accounts like 401(k)s, 403(b)s, and 457 plans. Depending on your employment situation, you may have one or more of these accounts already, but it’s likely you aren’t maximizing your contributions. In fact, only 12% of 401(k) participants maximized their contributions in 2020. (2) If you fall in the other 88%, not only are you missing out on huge retirement savings, but you are also overpaying in taxes. Here’s why.
The 2022 annual contribution limit for tax-advantaged retirement plans is $20,500 (or $27,000 for those over age 50). (3) The great thing about these contributions is that they are considered pre-tax, meaning they reduce your overall taxable income in the year of the contribution. You cannot avoid the tax, but it will be deferred until the funds are withdrawn in retirement, when you could potentially be in a lower tax bracket. If you are a physician earning $230,000 per year, a contribution of $20,500 would reduce your taxable income to $209,500. This would drop you from the 35% tax bracket to the 32% tax bracket and could save you thousands in taxes! And that’s just one tax-saving strategy. Imagine what else can be accomplished with a holistic view of your finances and team dedicated to making the most of your money.
Stop Overpaying Today
As a medical professional battling the ongoing pandemic, you have worked so hard for our families and communities over the past two years. Now is the time to let us help you feel confident and prepared as you enter this tax season. At Serenity Financial Planning, we have the tools and expertise to help you avoid these common mistakes. If you’d like to learn more about how we can help, schedule a no-obligation introductory meeting online or reach out to me at (858) 251-4545 or firstname.lastname@example.org.
Sima Alefi is founder and wealth management specialist at Serenity Financial Planning, a boutique financial firm serving women in the medical field. With two decades of experience, Sima provides her clients with a serene approach to investing while helping them pursue their goals. Sima and the Serenity team strive to offer personalized strategies for their clients’ needs while also making their clients feel heard and cared for.
Sima has a bachelor’s degree in business management and holds the Chartered Financial Consultant® and Accredited Asset Management Specialist℠ certifications. She cares deeply for her community and is an active member of the Kiwanis Club of La Jolla, Sharp Healthcare Foundation, San Diego Nice Guys, and acts as a North County Advisory Board Member for the North County Food Bank. She is a lifelong learner with a dedication to growing in knowledge both personally and in the industry to assist her clients better. Sima enjoys music and exploring the beautiful Californian outdoors. To learn more about Sima, connect with her on LinkedIn.
Serenity Financial Planning and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.