The COVID-19 pandemic has actually sent the world in a tailspin and it has actually straight impacted much of us in our pocketbooks. A majority of my locum tenens clients have seen their earnings drop drastically (often ceasing entirely), while others– depending upon their specialty– have actually seen their earnings increase. Your income might have dipped this year, there is a silver lining in this gloomy cloud in terms of tax planning.
Modifications to estimated tax payment due dates
The original federal income tax filing due date has actually been instantly reached July 15, 2020 for c-corps and individuals. You can still ask for an extension on or before July 15, 2020 to extend your individual and C-corp income tax return to October 15, 2020. Collaboration and S-corp tax returns are still due by September 15, 2020 if you extended them.
The extension rules mentioned above need to be taken a look at for each state you work in since they might vary from the federal.
Contributions to your HSA and pension (IRA, Roth, SEP, Solo 401k, etc.) have actually also been extended to July 15, 2020. If you extend your personal return, you can still wait to make contributions to your SEP or Solo 401k by your prolonged filing due date (HSA and IRAs require to be made by the July 15 deadline).
2nd and 1st quarter quarterly quotes have actually been extended to July 15, 2020 (3rd quarter is still due September 15, 2020 and 4th quarter due January 15, 2021).
Ok, now that we have the due dates out of the way, lets discuss three methods to structure your 2020 for additional tax savings.
Before we delve into some of the tax planning techniques offered to locum tenens with lower earnings, lets review the important modifications to 2019 income tax return and 2020 quarterly approximated tax payment due dates.
1. Roth IRA conversions.
Its likewise crucial to discuss that the contributions in a Roth will grow tax-free and be dispersed tax-free as soon as you hit retirement age (plus, there are no needed minimum circulations as in a conventional IRA!). With the stock market down, you could benefit from the growth that will take place in the coming years.
If you understand you will be in a lower tax bracket due to the fact that your income is down substantially, you might wish to consider transforming a Traditional IRA/SEP/401k to a Roth. The conversion will be taxable for 2020 but, at a lower tax bracket, meaning you can make the most of paying less tax now then you would have at retirement time. Making the most of the difference in recognizing the tax in 2020 versus at retirement age is called tax arbitrage.
2. Adjust your payroll income and withholdings.
It is necessary to reevaluate your income every couple of years however more significantly throughout huge income changes. This will help you put more money into your pocket now instead of giving the government a tax-free loan and waiting on a refund on your 2020 income tax return.
If your income has gone down substantially, ensure to adjust your payroll revenues and withholdings proportionately in order to represent the general lower income. If you typically earn $400K through your S-corp and divide your profits between W-2 (lets state you set your salary at $180K) and circulations ($ 220K), however your income goes down to $300K throughout 2020, you will desire to lower your income to show the minimized number of hours you are working.
3. Tax-loss harvesting.
Simply beware with wash-sales. The IRS does not allow you to sell Stock An and then purchase Stock A back within 30 days. Your loss will not be allowed if you do. The very best thing to do is to find a similar financial investment within the exact same market (or mutual fund/ETF) to Stock A to fill in the void Stock A left.
The initial federal earnings tax filing due date has been automatically extended to July 15, 2020 for c-corps and people. The conversion will be taxable for 2020 however, at a lower tax bracket, implying you can take advantage of paying less tax now then you would have at retirement time. Taking advantage of the difference in acknowledging the tax in 2020 versus at retirement age is called tax arbitrage.
If you have $10K of capital gains from Stock A however Stock B is currently a loss of $15K and doesnt look to continue or recuperate to be a great financial investment, you can offer Stock B to remove the gain on Stock A and still subtract $3K loss on your tax return (you are limited to $3K capital loss a year on your tax return however any loss left over is carried forward to the next year). If you would like more information about these and other techniques to lower your tax liability, please examine out my book Advanced Tax Planning for Medical Professionals: A Concise Guide to Tax Reduction Strategies or contact us at Cerebral Tax Advisors if you would like one-on-one support developing your tax strategy.
It appears hard to think that there is a silver lining with this pandemic. The methods above are just a glimpse into the wide variety of tax planning methods out there for locum tenens docs. If you would like more details about these and other strategies to lower your tax liability, please check out my book Advanced Tax Planning for Medical Professionals: A Concise Guide to Tax Reduction Strategies or call us at Cerebral Tax Advisors if you would like individually support constructing your tax strategy.
If you have $10K of capital gains from Stock A however Stock B is presently a loss of $15K and doesnt look to continue or recuperate to be a good financial investment, you can offer Stock B to get rid of the gain on Stock A and still deduct $3K loss on your tax return (you are restricted to $3K capital loss a year on your tax return however any loss left over is carried forward to the next year). Not only have you eliminated your capital gains tax however you have also decreased your taxable income by $3K.