5 Ways to Lower Your Future Tax Bills

In case you missed it, 5 Ways to Lower Your Future Tax Bills by E. Andrew Gerner, CFP® was originally published as part of the Maryland State Dental Association’s April 2016 e-mail newsletter.

April 1, 2016

5 Things You Can Do Right Now to Lower Your Future Tax Bills

By E. Andrew Gerner, CFP®

I take pride that the Maryland State Dental Association refers its membership to me and my firm for investment and financial advisory matters.  I wish I could work personally with every member, and I’ll never stop trying to do so.  But I’m a realist and the best I can hope to do is work with a reasonable percentage of Maryland Dentists and MSDA members.  If you work with Tongue | GERNER Financial Services, LLC and me now or plan to do so in the future, thank you.  For everyone else who reads this message, I offer some free analgesic for the sting of tax season.


1. Establish and fund a qualified or tax-advantaged retirement plan

If you are an employee dentist at a practice that offers a group retirement plan, chances are that you can make tax deductible contributions of at least $12,500 per year to that plan.  Even better, most employer-sponsored retirement plans will offer some amount of matching contribution to your account.

If your employer offers no group retirement plan, you can establish an IRA and contribute $5,500 ($6,500 if you’re age 50 or older) on a pre-tax basis.

Are you an independent contractor?  If you are, you can establish a SEP IRA and contribute as much as 20 – 25% of your adjusted earned income up to $53,000 on a pre-tax basis.  For a dentist in the highest marginal income tax bracket, the maximum SEP IRA contribution could save him or her nearly $21,000 in federal income tax for the year of the contribution.

Are you an employer?  If your personal taxable income, including profit from the practice is under $150,000, a SIMPLE IRA plan is a generally inexpensive and relatively easy-to-administer way to make tax-deferred retirement contributions of $12,500 annually ($15,500 if you’re age 50 or older)

If you are a practice owner with more than $150,000 of personal taxable income, a 401(k) profit-sharing plan may be a great option.  Such plans allow pre-tax deferrals of $18,000 ($24,000 if you’re age 50 or older).  On top of deferrals, employer matching and profit-sharing allocations can allow up to a maximum of $53,000 of tax-deferred contributions.

If you have sufficient income, need to catch-up on your retirement savings, and are looking for even more tax-deferral on retirement contributions, a defined benefit pension plan, when properly designed and administered, can allow up to an additional $210,000 of tax-deferred contributions.


2. Implement active tax management in your taxable investment account

If you have brokerage investment accounts or even savings accounts or CDs with sizeable balances, you will generally pay earned income-tax rates on interest. Qualified dividends and capital gains from brokerage accounts are typically taxed at more favorable rates.  Does your financial advisor offer tax management programs designed to lower the effective rate and amount of tax due for the gains and income in your accounts?  If you have $500,000 or more in brokerage account assets, you may be able to benefit from a reduction to the amount of tax due on income and gains in your taxable accounts by utilizing tax management strategies.
3. Hold a portion of your assets in life insurance or an annuity

To the extent that you have a need for the insurance, holding a portion of your investable assets in life insurance or annuities generally provides the benefit of tax-deferral on income and gains, which can help lower your tax liability every year.  Of course, insurance policies provide certain guarantees and charge additional expenses.  A financial professional, and preferably a fiduciary such as a CERTIFIED FINANCIAL PLANNER TM can help you navigate the complex landscape of hybrid insurance/investment products.


4. Consider alternative investments with unique tax features

Certain alternative investments, in addition to providing diversification, can offer tax benefits.  Oil and gas development programs, for instance, usually provide for deductibility of the initial amount invested due to payment of intangible drilling costs.  Real Estate Investment Trusts (REITs) with cost segregation features may pass capital depreciation deductions along to investors, thus reducing the tax that would otherwise be due on income derived from the REIT.  It should be noted that many of these programs involve significant risk of loss of principal and are therefore only suited to sophisticated and accredited investors.


5. Consider a strategic Roth conversion

If you have significant positive cash-flow but are showing very little taxable income due to a recent practice purchase or start-up, and you have traditional IRA assets, you may be an ideal candidate for converting traditional IRA assets to a Roth IRA.  Such a conversion requires current payment of ordinary income tax on the value of the converted investment assets, but once in a Roth IRA, no additional income tax is due for withdrawals after normal retirement age.

Want more information about any of the topics discussed in this article?  Contact the author:





Neither Woodbury Financial Services, Inc., nor its registered representatives or employees provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.  Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA/SIPC and Registered Investment Adviser. Additional Insurance Services offered through R.K. Tongue Co., Inc., independent of Woodbury Financial. Tongue | GERNER Financial Services, LLC and Woodbury Financial Services, Inc., are not affiliated entities.