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Ah, the good old days. Did you know: The first federal income tax form in 1913 was just three pages long? Social Security numbers didn’t yet exist, so you simply listed your name and address. Tax rates ranged from 1%–6% on income above $3,000.

Fast forward to today. With some 800 tax forms and 7,000 pages of Internal Revenue Code, your 2024 taxes are going to be a bit more involved. This includes new challenges to be faced and opportunities to be mined by digging into the most recent rounds of Federal tax law:

The Tax Cuts and Jobs Act of 2017 (TCJA): Effective January 1, 2018, the TCJA reduced the number of brackets and lowered the top tax income tax rate from 39.6% to 37%.

The SECURE Act (2019) and SECURE Act 2.0 (2022) followed, containing important retirement plan provisions that affect most dentists.

The truth is, we CPAs and tax preparers tend to be “historians” by default, meaning we help you report on income already earned. To expand on the possibilities, consider asking your tax team to work with you on past events as well as future opportunities. Here are some timely tips to guide the way.

The Augusta Rule – Also known as Section 280A of the Internal Revenue Code, allows taxpayers to rent their home for up to 14 days per year without having to include that income on their tax returns. Dentists with Corporations can rent their home for business meetings, provided the amounts are reasonable.

Employ Family Members – Dentists can employ their spouses to include them in the practice retirement plan and their children to shift income from a high tax bracket to a zero or very low tax bracket. The wages a child earns can be used to fund Roth IRA’s. Children can earn up to the Standard Deduction and pay zero federal tax. The Standard Deduction is $13,850 in 2023 and $14,150 in 2024. It is important to check one’s state income tax rates and regulations about employing minors, as well as keeping good records, the

same as you would for any employee.

Maximize Retirement Plan Contributions – Dentists with retirement plans such as 401(k) Profit Sharing Plans or Solo 401(k) Plans should strive to maximize their annual contributions. 401(k) maximum contribution limits are $22,500 for 2023 and $23,000 for 2024. For those over the age of 50, there are extra (catch-up) amounts of $7,500 for 2023 and 2024. In addition, the maximum contributions to a Profit-Sharing Plan are $38,500 for 2023 and $39,000 for 2024. Given these amounts, a dentist aged 50 or older can contribute $73,500 for 2023 and $76,500 in 2024. There are also SEP (Simplified Employee Pension) and SIMPLE IRA’s (Savings Incentive Match PLan for Employees). SEP contributions are limited to 25% of compensation with a maximum of $66,000 for 2023 and 69,000 for 2024. SIMPLE IRA’S are like 401(k) Plans in that they have employee deferrals and employer contributions (2 or 3% in most cases). The deferral amounts are $15,500 for 2023 and $16,000 for 2024 and the over-50 catch-up amount is $3,500. Of course, there are traditional and Roth IRA’s with contribution limits of $6,500 for 2023 and $7,000 for 2024 with the over-50 catch-up amount of $1,000.

Defined Benefit/Cash Balance Plans – Pension Plans, as they are also known, allow later-career dentists to defer large amounts of income into these retirement plans. They are complex and can be costly since they require the services of an Actuary in addition to a traditional Pension Plan Administrator, but the ultimate tax savings can be significant. Think about how a $300,000 - $400,000 tax deduction could offset the gain on the sale of one’s practice!

Health Savings Accounts – HSA contributions require an HSA eligible (high deductible) health plan, but the benefits from a tax savings and financial planning perspective are significant. Individual plan contribution limits are $3,850 for 2023 and $4,150 for 2024. Family plans allow $7,750 for 2023 and $8,300 for 2024. For those over 55, add $1,000 to all the above amounts. HSA contributions lower taxable income, and withdrawals for eligible medical expenses are tax-free. There is no requirement to withdraw funds from an HSA account annually so the balance can be invested and grown over the

years to be used later in life when out-of-pocket medical expenses may be more burdensome.

There are two important provisions in the tax code that are part of or related to the Tax Cuts and Jobs Act of 2017. Section 199A Qualified Business Income Deduction and the Pass-Through Entity Tax Deduction.

TCJA lowered the tax that corporations pay from 31% to 20%. Realizing that wasn’t fair for non-corporate taxpayers, Congress included Section 199A in the act for Sole Proprietors, Partnerships and S. Corporations. Simply stated, these business entities can deduct 20% of their profit with certain limitations. Unfortunately, businesses in a service industry (healthcare, accounting, financial services) are not eligible unless their taxable income is below a threshold. For 2023, the threshold is $364,300 for Joint tax return filers and $182,100 for all others. The deduction is completely phased out once income exceeds $464,200 for Joint tax returns and $232,100 for all others For 2024, the phase out begins at $383,900 for Joint tax returns and $191,950 for all others and the deduction is completely phased out at $483,900 for Joint tax returns and $241,950 for all others. There are many factors that go into determining one’s eligibility for the Section 199A deduction besides income but for most dentists, the math is pretty straightforward.

TCJA limited the Itemized Deduction for State and Local taxes (SALT deduction) to $10,000. A dentist in California with $20,000 in Real Estate tax and $50,000 in State Income tax lost $60,000 of their $70,000 Itemized Deduction. Another dentist in Texas, Florida, or another state with no income tax was barely affected by the $10,000 SALT limit depending on their Real Estate tax liability. After many months of action by several affected states including lawsuits and proposed legislation, the IRS issued Notice 2020-75 in November 2020 allowing Partnerships and S. Corporations (Pass-Through Entities or PTE) to make “Specified Income Tax Payments” (SITP’s) to their states and receive a deduction for those payments on the federal tax returns. While there is no limit on the amount of these payments for federal tax purposes, each state has its own calculation. There are currently 36 states with enacted or proposed PTE level tax. There are 9 states with no personal income tax so PTE does not apply. Washington DC, Delaware and North Dakota have yet to propose or enact PTE taxes. Along with the expiration of the Tax Cuts and Jobs Act in 2025, the Elective Pass-Through Entity Tax goes away. The math is pretty straightforward. If a dentist’s state allows a PTE payment, he or she will save federal income tax equal to their top tax bracket for the amount of the payment. The payments made by a Pass-Through Entity to a state apply to the Partner’s or S. Corporation Shareholder’s state personal income tax.

The SECURE Act and SECURE 2 made numerous changes to retirement plans:

Required Minimum Distributions – Prior to these acts, taxpayers were required to take distributions from their IRA’s and other retirement plans at age 70 ½. Under the acts, most taxpayers may now wait until they reach age 73. For folks born after 1960, the RMD age is 75.

SIMPLE & SEP Roth IRA’s – Starting in 2006, participants in a retirement plan were allowed to designate part or all of their 401(k) deferrals as Roth. SECURE 2 allows contributions to SIMPLE and SEP IRA’s to be treated at Roth. Roth contributions are after-tax but the amounts grow tax-free.

Retirement Plan Start-up Credits – Dentists may be eligible for a tax credit of up to $5,000 for 3 years after establishing a new retirement plan. The credits apply to retirement plan start-up & educational expenses and employer contributions made to the plan for participants. The deduction for the startup costs and contributions must be reduced by the amount of credit received.

Other – For people who have unused money tied up in 529 Plans, up to $35,000 can be rolled over to a Roth IRA tax-free with certain limitations. Also, Qualified Charitable Distributions from IRA’s are increased from $50,000 to $100,000.

Planning ahead is very important when it comes to taxes. It should be something dentists look at during the year to ensure that there are no surprises on April 15th. In addition, tax planning is vital when considering one’s future financial well-being. Saving for retirement is one thing, but saving in the most tax efficient manner possible can have a significant impact on a dentist’s lifestyle in retirement and the legacy they leave behind. Tools such as tax loss harvesting, asset location, and utilizing tax efficient/low-cost mutual funds in a portfolio should be part of every dentist’s Wealth Planning.