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An Inside Look at My Personal Tax Plan

When I started The Prudent Plastic Surgeon, my promise was (and continues) to be 100% transparent and genuine in sharing my journey to financial well-being and independence. After all, what would be the point otherwise? That’s why this post will share my 100% real and actual personal tax plan!

Taxes are a bit of a black box

…For just about everyone. Physicians are no different. Often, we don’t know how taxes work or the best strategies to minimize them. Because remember, you have to pay exactly your fair share, but you don’t have to leave a tip.

my personal tax plan

My understanding of taxes started to change when I began to look at them as incentives. The government is setting out a bunch of rules that tell us, as citizens, how they want us to live.

Get married…tax credit.
Have kids…tax credit.
Invest in real estate…tax advantages.

And so on…

With this new perspective, I started to read and learn a bunch about a topic I previously found immensely boring…taxes. As an aside, I think Mike Piper’s books on the topic are fantastic and easy to read/understand if you are interested.

And last year, I filed my own taxes.

personal tax plan

But this year, things got more challenging

Selenid and I started two side businesses. Both of which began to grow significantly. Our gross W2 income also increased significantly for tax purposes as we both made full employed salaries for the whole year compared to 2020 when half of the year we were still in training.

So, we used the “Who Not How” principle and found some help!

We found and started working with Alexis Gallati who runs Cerebral Tax Advisors. She subsequently helps us to create our personal tax plan for 2021 which will continue to evolve in 2022.

We loved her so much that she even became a sponsor of the blog!

My personal tax plan in its entirety

This is obviously a HUGE topic. That’s why I’ve broken it down below.

However, you can see every detail of my plan as well as expert explanations from Alexis by watching the below video recording reviewing my entire actual personal tax plan:

Breaking down my personal tax plan

In developing our tax strategy, Alexis focused on these main areas of tax savings opportunities:

  • First,  she looked at the issue of entity selection with my current business
  • Second, she discussed my post-tax retirement contributions
  • Third, she looked for any tax deductions we were qualified for but may have missed in previous years
  • Fourth, she discusses tax reduction strategies to reach our charitable goals. We will take a look at each of these areas individually to help you understand the recommended strategies.

1. Entity Management

Alexis recommended I elect S-corporation status for Prudent Plastic Surgeon beginning in 2022. 

In Alexis’ words:

“By structuring the business as an S-corporation, Jordan can pay himself a salary equal to his gross revenue in 2022 for reasonablecompensation and maximum retirement contribution purposes. 

While you will still pay employment taxes (social security and medicare) on the salary, the distributions will be exempt from self-employment taxes creating substantial savings as earnings increase over time. 

Alexis recommends having a Reasonable Compensation Analysis Report on file for your future reference and to substantiate your salary in front of the IRS.”

An important note is that New York State does not recognize the federal S-corporation election. So, in addition to the federal S-election form, you must also file a New York election form.

Bottom Line

Changing my business from a sole proprietorship to an S-corporation will save me approximately $10,467 a year.

2. Retirement Contributions – Defined Benefit Plan

Using the S-corporation structure for the Prudent Plastic Surgeon will allow me to open a retirement plan (cash balance plan with 401K Profit Sharing Plan) to contribute more to retirement than I would with any other retirement plan. 

The goal would be to contribute about $89,679 on an annual basis to Jordan’s retirement plan according to the Funding Illustration created by ERISA Services (third party administrator).

This is the current estimated maximum contribution. However, you do not have to contribute the maximum amount to realize tax savings.

It is important to point out that I will need to fund your defined benefit plan for a minimum of three years and keep the plan open for a minimum of five years. 

The estimated cost to set up the plan is $2,500 and the annual maintenance is $3,750 through ERISA Services.

Bottom Line

Implementing a defined benefit plan and contributing the maximum amount will result in an estimated annual tax savings of $36,623.

3. Augusta Rule

The 14 day home rental rule, also known as the Augusta Rule, allows homeowners to rentout their home for up to 14 days per year without needing to report the rental income on their individual tax return. 

So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return. 

The rent you charge must be reasonable and in line with what the rental market supports; charging $1,000 per night when comparable houses rent for $200 per night is not reasonable! 

We would rent our home to our business for various business-related purposes, such as company parties or monthly and annual corporate meetings. It is critical to document the meetings for business intent. 

Bottom Line

Assuming a $167 per day fair rental value, you will save approximately $875 a year in tax by implementing this strategy.

4. Hidden Business Deductions

“Hidden business deductions” are deductions for your business. They involve identifying potential business expenses and using them as deductions in your corporation.

Suggestions for hidden business deductions are home office deduction, travel per diem, charitable contributions, and meal per diems.

For any business expenses you paid for out of personal funds that will need to be reimbursed by your business, you will need to establish an Accountable Plan.

You will need to submit receipts and a reimbursement form on a monthly or quarterly basis and your business will reimburse you for your business expenses paid out of your personal accounts.

Bottom Line

This strategy results in an estimated tax savings of $5,439 per year.

5. Land Conservation Easements

To align with our charitable endeavors, Alexis recommended we consider investing in land conservation easements (LCE) depending on your risk tolerance.

LCEs are listed transactions and on the IRS’s “radar” for tax abuse. It is important to work with a vendor who follows therules although those rules have been loosely defined by the IRS.

Alexis recommends finding investments that include LCEs but also other alternative investments within the same partnership.

LCEs allow you to invest in land which will be conserved from being developedand provide you a charitable contribution that lowers your taxable income by up to 50% of youradjusted gross income and, thus, lowers your taxable liability.

However, by combining it with other alternative investments within the same partnership, you create potential residual income from those other investments. This helps to alleviate the argument that the partnership was only created with the charitable deduction in mind. 

Bottom Line

By maxing out our LCE investment, it will produce an additional $33,113 a year in tax savings depending on the passing of new tax proposals.

What is not included in this personal tax plan

You will notice that certain aspects of a typical tax savings plan are not included here. Things like:

  • Maximizing our 403b retirement accounts
  • Claiming standard child tax credits
  • Etc.

That’s because these are standard pieces of advice that you probably don’t need the services of a tax management strategist for. We were doing all of these things before!

Selenid and I also are using Real Estate Professional Status (REPS) to take advantage of accelerated depreciation of our rental properties to generate tax savings.

Again, Alexis left this out since we were doing this before we enlisted her services although she will be helping us to document and utilize these tax benefits!

You can read all about how REPS will help us with tax savings with even just one rental property here.

The advantage of utilizing tax strategists like Alexis

I love personal finance. I even loved reading about taxes. But advanced tax strategies like this are very complicated. I understand them. But that is no guarantee that they get implemented or reported correctly.

And the stakes are high. And that is where Alexis and her services come in!

Do I think every physician needs a tax strategist? Absolutely not! If you are a W2 employee looking to take your basic credits and move on, honestly you should be able to file your own taxes.

But, if you are looking to use more advanced strategies or have more complicated tax structures in your practice, then Alexis and her team can really help you out like she did for me!

Looking for more basic tax strategies?

You can also learn more about ways that W2 physicians like me can manage our tax burden here!

What do you think? Do you have a personal tax plan? What does it include? Do you have someone help you? Why or why not? Let me know in the comments below!

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    The Prudent Plastic Surgeon

    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

    11 thoughts on “An Inside Look at My Personal Tax Plan”

    1. Hi Jordan. Great post! Is a tax strategist a separate person you work with in addition to the CPA filing your taxes or are they often times the same person. I have never heard of a tax strategist but it seems very useful.

      Reply
    2. Great article! Can you elaborate on your conservation easement strategy? You said you saved $33,113 from this donation. However, how much did you have to donate to get this deduction? Thanks!

      Reply
        • But I’m confused, you are giving away $50k In order to get tax savings of $33k…why not just get taxed on the $50k which would be around $15k in taxes and you would net around $35k? It just feels like you are moving chairs around with a similar result. I’m not criticizing I am just trying to understand this deduction because it never made sense to me, am I wrong in my numbers?

          Reply
          • Kai, great question!

            So this is just an estimated number and any deductions will vary on the exact deal but with LCEs, your deduction isn’t based on the amount of money you donate but rather on the appraised value of the LCE, which should be much greater (in a good deal). This is also where abuse of the deduction can come in which is why it’s so important to work with someone experienced and reputable.

            For example: You own a 100-acre farm that you bought 20 years ago when it was out in the middle of nowhere. Now the highway has come, and developers are eyeing your property. But you prefer to preserve the green space rather than make a quick buck selling lots for new McMansions. You put an easement on the property prohibiting any future subdivision or development. Your appraiser tells you that the property is worth $3 million to the developers — but only $1 million after the easement is placed. Your deduction is the $2 million
            difference.

            If you don’t own suitable property to create a conservation
            easement, you can still take advantage of the strategy by investing
            in a conservation easement partnership. In these cases, a
            syndicator buys a suitable property, generally from a
            conservation-minded seller who doesn’t have enough income to
            take full advantage of the deduction they could create. These
            arrangements essentially let the original property owner “sell” the
            deduction they can’t use to outside investors.

            Traditionally, investments in conservation easement partnerships
            will yield tax savings that are actually greater than the capital you
            invest. However, in early 2017 the IRS declared that conservation
            easement partnerships offering tax deductions that equal or exceed
            2.5 times the investment will be treated as “listed transactions”
            subject to special disclosure.

            Reply

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