Here we are in the heat of tax season when many dentists are sitting by the phone or monitoring their email for bad news from their CPAs.
Benjamin Franklin said,
If you fail to plan, you are planning to fail!
Planning ahead for taxes is not difficult but one must overcome the CPAs’ stereotypical characteristic of “historian” and be proactive by asking their CPA for a mid-year projection of income and taxes – ideally with a year-end update.
The Internal Revenue Service announces Cost of Living Adjustments each year for everything from tax brackets, the standard deduction & personal exemptions, various phase-outs, to IRA & pension plan limits (see the chart below).
There were very few changes from 2015 to 2016, but 2017 is another story. While not much has changed on the income tax front, there is a significant increase in Social Security tax and there are modest gains in retirement planning.
While the 2017 will not affect one’s 2016 tax return, it will mean an increase in quarterly estimates or payroll withholding going forward.
Incorporated dentists will not feel the increase in their payroll tax as the rates do not change, but Social Security taxes will be withheld longer as the dollar amount has increased.
Unincorporated dentists will feel a hit on April 15th when 1st quarter 2017 estimated tax payments are due – along with any tax owed for 2016.
The Social Security Wage Base has increased from $118,500 in 2015 & 2016 to $127,200 in 2017!
Social Security tax is 12.4% of wages up to the base with half paid by employees and half paid by their employers – 6.2% each.
For employees earning at least $127,200, this means a $539 increase in Social Security tax with an equal amount paid by the employer – an increase of $1,079.
Self-employed dentists (independent contractors) pay 100% of the Social Security tax. Remember that there is no ceiling on wages for Medicare tax which is 2.9%, or 1.45% each for employee and employer.
Regardless of whether there are changes in the tax code, it is always critical to stay ahead of the curve.
Once one gets behind with taxes it is very difficult to get caught up, so planning ahead is the key. Don’t sit back waiting for the historian CPA to call with bad news.
Rather, be proactive in your planning and make sure your CPA provides you with a detailed projection of your tax liability before it is too late to take action to save for or lower it (December 31st).
Of course, for a CPA to help with tax planning, they need accurate income information.
I’ll make that a topic for another time.