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Tax Strategies for 37% Tax Bracket

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  • Tax Strategies for 37% Tax Bracket

    Looking for best practices and advice to reduce tax liability. I’m a nurse anesthesiologist and provide exclusive anesthesia services to an ASC. Business is very good and I will be way into the 37% tax bracket...i’m Grateful for the success I am seeing, but the tax liability I am facing is daunting. Annually, I move up to 32%, then 35%, and this year, well into 37% tax bracket.

     

    Married, wife stays home. max 401k each ($56k each), backdown ROTH ($12k total), and the rest to taxable account. I have an S-Corp.

     

    What can I do to reduce tax liability? Open to all options...have considered Real Estate, Defined Benefit Plan, etc....Looking to best practice on folks who have walked this route before.

     

    Thanks in advance!

  • #2
    how is your S corp paid? Gross amount from ASC yearly?

    First thought would be a DBP on top of the 401k.

    How does your wife stay at home and max a 401k?

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    • #3
      S-Corp revenue is the professional services fees generated (Medicare and private insurance reimbursement)

      I hired my wife as a business manager and pay her $148k annually to get $56k in her 401k.

       

      I was thinking DBP too, but am concerned on the cost to setup and maintain...maybe it’s a mute issue. Thanks!

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      • #4
        Business manager for your S Corp of one person with simple professional service income? What business is being managed for $148k?

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        • #5
          looking at things purely from a tax, end-result standpoint, you may want to run numbers on whether paying her that much makes sense. Sure you get the 401k filled but you also pay the FICA taxes, 15.3% up to the SS wage base then 2.9% after that. And of course her salary contributes toward family gross income.

          Where as if she only earned enough to maximize salary deferral but not profit sharing. There would be significant FICA tax savings. Then you add a DBP plan and max that out. I would bet that your gross tax deferred dollars would go up, FICA tax outlay would go down, gross income would go down.

          If you still wanted her to get 56k into a plan you could customize the plan to allow voluntary after tax contributions. She could defer 19k pretax. Then contribute the remainder up to 56k after tax, and convert that to Roth in plan. You would have to pay her a salary of probably around 60k to do that.

          DBP's are not that expensive. Schwab offers a CBP that can co exist with their solo 401k. Maybe it'd cost you $5k per year or something. Maybe less. That would not allow for after tax voluntary contributions if you wanted to go that route.

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          • #6
            Did you have professional input advising you that paying your wife that much is ok?

            Any thoughts on how to defend it if the IRS comes knocking? Or just counting on that not happening? Or accounting folks here can attest that it’s a pretty standard/accepted practice for this situation?

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            • #7
              Once you’ve developed a legitimate plan to save taxes, focus your energies on wealth optimization, not tax savings. Otherwise, you’ll find yourself in the position of spending $$ to save taxes. Unless you think you can invest in a scheme that throws off better long-term returns on a consistent basis than a well-balanced equity fund portfolio, rebalanced annually, that is never a good idea.

              For starters, figure out what you need to do to become FI and then put your plan into action. You don’t get to FI by paying the lowest taxes possible (otherwise, you’d just work less), you get there by maximizing wealth. That typically (although not always) involves consistently remaining in the top tax bracket. Making $$ and following a plan is primary while lowering taxes is secondary.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                someone in your position could reasonably have a business manager. Tasks that I would want my business manager to do. Manage schedule. Coordinate with surgical scheduling. Interface with accountant, presuming you use one. Or handle the accounting. Track expenses, document. Manage payer contracts. Negotiate. Credentialing. Licensure. Assist with maintenance of certification. Billing, collections? Perhaps that's outsourced. Manage benefits. Health, dental insurance. Paperwork associated. Interface with retirement account provider. Probably a hundred other things I'm not thinking of. Maybe wash and press scrubs and make coffee. Hopefully your manager handles lots of those things.

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                • #9




                   I’m a nurse anesthesiologist
                  Click to expand...


                  What is a nurse anesthesiologist?  Never heard of it

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                  • #10
                    Nurse anesthesiologist? Hahaha

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                    • #11
                      let’s try to be helpful.

                      there is/was a bylaw amendment being proposed for consideration by the AANA membership to change the association’s name from American Association of Nurse Anesthetists to American Association of Nurse Anesthesiologists

                      I only know this because of google

                      Folks can start a new thread if they are compelled to discuss

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                      • #12
                        Manages billing, contractors, and other managerial tasks...income is market rate

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                        • #13
                          Thank you! This is exactly what I was thinking too re: FICA...I may cease from paying her more this year because it ends up costing me ~20k in tax to put it in the 401k plan....not worth it.

                           

                          I will look into the CS DBP. Much appreciated.

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                          • #14
                            My cpa said this was OK...he works with a lot of physicians. But I may reduce her compensation to avoid FICA.

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                            • #15
                              Yes but the wife has to actually perform that work. And she doesn’t - she is a SAHM. Even if she was doing some or all of that work that salary isn’t even close to market - it appears to have been set for the sole purpose of maxing her 401k for the tax deduction. To me it seems the OP is not complying with the rules for the wife’s 401k and could get in serious trouble with the IRS. So in his shoes I’d worry more about complying with our tax laws than reducing tax liability because he appears to have taken that too far already.

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