Follow these tips to avoid surprising losses or penalties come tax season.
The holiday season can be particularly stressful for emergency medicine physicians: higher volume of sick patients, higher volume of non-emergent patients affecting your patient satisfaction scores and higher spending on your family and relatives (hey you’re a “rich” doctor aren’t you?).
There’s one area of your life where you can hopefully reduce some of this stress at year end — your personal finances — if you consider some of the following actions:
- Max out this year’s 401k contributions
Employee contribution deadlines are coming up if you’re an employee and your group offers a 401k or 403b, or if you are an independent contractor and have set up your own corporation. The max is $18,500, and if you’re above age 50 you can contribute an additional $6,000 (called the catch up) on top of that for a total of $24,500.
Login to your account and look at the total year to date contributions you’ve made into the plan so far. Because you’ve got limited time, call the plan administrator to make sure a higher amount can be withheld from your last few paychecks of the year. Once the year is over you can’t retroactively make these contributions (unless you are an independent contractor who is taxed as a sole proprietor and you’ve set up your own plan).
- Check all of your employer sponsored retirement plan contributions
One of the great benefits of working as an emergency medicine physician is how flexible your schedule can be and how many different employers you can work for at the same time. That flexibility can lead to more complexity.
If you’re working for multiple employers and they offer 401k plans, you can contribute to both plans to get more employer match. You just have to make sure the total employee contributions from all plans don’t exceed the limits above.
- Establish your own retirement plan
If you’re an independent contractor or recently became one, you can set up your own retirement plan. The preferred one is the individual 401k. While you may be able to make contributions for this year into the plan after year end, you must establish the plan before year end.
Otherwise you should consider a SEP IRA, which can be established after year end. And don’t forget to coordinate these contributions with other 401k plans if you are also an employee.
- Adjust next year’s contributions now
It usually takes one or two cycles to change the amount you contribute to your retirement plans. The IRS just announced 2019 limits. For employees the max next year is $19,000 (or $25,000 above age 50). For independent contractors, you can contribute a combined $56,000 to an individual 401k or SEP IRA (or $62,000 to an individual 401k above age 50). IRA and Roth IRA contributions (if you qualify) have been bumped to $6,000 (or $7,000 above age 50).
- Take your required minimum distributions (RMDs)
If you’re over age 70.5, you are generally required to take required distributions from IRAs and other pretax accounts like 401ks. When you take these distributions, you will be taxed on them. What you may not know is that even if you haven’t reached that age, you are still required to take annual minimum distributions if you’ve inherited an IRA.
For example, let’s say your father passed away last year and you inherited his traditional IRA. You’re required to take annual distributions from part of the IRA based on your age and other factors. This is also true if you inherited a Roth IRA (though Roth IRA distributions are not taxed). Unfortunately, custodians aren’t required to notify you of inherited IRA RMDs and if you don’t take them you could face stiff penalties from the IRS.
- Consider harvesting losses in your brokerage account
While the stock market hit all time highs earlier this year, since then, we’ve seen those gains erased. Some asset classes such as international stocks have lost double digit percentages through October. If you bought shares this year at the highs in a taxable brokerage account and now have short term capital losses, consider selling the original holdings and immediately replacing with similar holdings so you can report the loss on your 2018 tax return.
For example, suppose you bought $10,000 of a security and now it’s worth $8,000 for a short term loss of $2,000. Assuming your federal plus state tax bracket is 40%, then the loss is worth about $800 in tax savings. Be careful that you don’t buy back the original holding within 30 days after the sale or the loss will be disallowed by the IRS.
- Rebalance your portfolio
Rebalancing involves systematically buying investments that are under your target allocation and selling some of the investments that are above the target allocation. This forces you to “buy low and sell high.” Rebalancing should be a year round activity, but given the volatility in markets this year, your portfolio may now be out of whack.
- Give, give and give more
You’re allowed to gift up to $15,000 annually per recipient without the gift being reportable. This is known as the annual exclusion. Got some cousins or uncles who think you’re a rich doctor and who are visiting you this Christmas? Give ‘em a few hundred bucks each and tell ‘em to go away. Or unload some highly appreciated shares of mutual funds you own in a taxable brokerage account to your favorite charity. It’s usually pretty straightforward to do this at most custodians. If you’re philanthropic on an ongoing basis it may make sense to bunch up your charitable giving this year because of the tax law changes enacted earlier this year.
A number of itemized deductions were either eliminated or restricted starting this year such as state and local taxes, unreimbursed employee expenses and the mortgage interest deduction. At the same time the standard deduction increased so even higher income taxpayers like you may end up using the standard deduction instead of itemizing deductions. What this means is that in order to itemize your deductions this year, you should consider “bunching” deductions such as charitable deductions by giving more this year so you can claim the higher itemized deduction and then take the standard deduction next year while minimizing deductions. Also consider contributing to your children’s 529 college savings plan as their Christmas present.
- Use it or lose it…sign up or lose it
If you’re an employee and you’ve made pretax contributions to a dependent care or health care flexible spending account (FSA), make sure you spend that money or kiss it goodbye. While we’re on the topic of employee benefits, it may still be open enrollment season for you. Check which employee benefits you’ve signed up for including group disability insurance, group life insurance and others. Determine whether you really need the coverage. Do you really need to pay for group life insurance coverage for your two-year-old child?
- Bump up your estimated tax payments
If you’re an independent contractor, you’re likely paying estimated federal and state taxes every quarter. Check and see if you made more income this year over last year and if so think about sending a higher fourth quarter estimated tax payment so you’re not hit with a surprise at tax time.
There you go. While you can’t control the number of patients you’ll have to see in the ED this holiday season, you can control other areas of your life to make this holiday season more enjoyable and less stressful.
