Attorneys face unique challenges in tax planning and in reducing their tax burden each year. Most attorneys are high-income earners with accompanying higher tax bills, but attorneys also carry enormous amounts of debt (law school ain’t cheap) and have to save more for retirement to maintain the lifestyle they currently enjoy.
To help you navigate these unique challenges, here are 3 tax-savings tips for attorneys looking to pay off debt faster, save more for retirement, and achieve more income security for yourself and your family.
1. Increase Contributions To Tax-Advantaged Accounts
No matter your income level, saving for retirement is a challenge. High-income earners may struggle to save enough because the contribution limits on tax-advantaged accounts are low—much too low for you to save enough each year for the retirement lifestyle you’ll want.
But this doesn’t mean you shouldn’t be maxing out those contributions when you can. Tax-advantaged accounts lower your taxable income and thereby your tax bill. If you have access to the following types of tax-advantaged accounts, you could contribute a sizable amount to these accounts and reduce your taxable income substantially. Tax-advantaged accounts and their contribution limits for 2020 include:
- 401(k): $19,500 (plus an additional $6,500 per year if over age 50)
- Traditional IRA: $6,000 (plus an additional $1,000 per year if over age 50)
- Health savings account (HSA): $3,550 for self-only, $7,100 for family coverage
- 529 plans: No limit, but contributions above $15,000 per year come with other consequences
Here’s a simplified example: Let’s say you’re a married 45-year-old attorney with 2 children who each have their own 529 plan. It’s been a good year at your firm, so your taxable income increased significantly and you’ll be expected to pay a higher tax bill because of it.
If you contribute the maximum amount to both your 401(k) and an IRA, that’s $25,500 off your taxable income. If you have access to an HSA with family coverage and you contribute the maximum $7,100, you lower your taxable income by $32,600.
And if you plan to pay for your children’s college expenses in full, why not make sizable contributions to their 529 plans as well? Contributing $15,000 to each account lowers your taxable income by an additional $30,000 ($62,600 total), and likely won’t count against your lifetime estate and gift tax exemption amount. These contributions are just savings, so you and your family will lower your tax bill for the year and have access to this money later on.
2. Convert Student Loan Interest To Mortgage Interest
On average, lawyers have to take out more than $145,500 in student loan debt for their education. (1) Paying back these student loans can be an enormous burden, especially if the interest rates on the loans fall between 4-6%. One way to lower the interest rate on loans and save on taxes is to convert student loan debt into mortgage debt.
Here’s why: Imagine you have $100,000 in student loans with a 5% interest rate. You also own a $600,000 home and carry a $400,000 mortgage on it with a 4% interest rate. So let’s say you consolidate your student loan debt and your mortgage debt by refinancing your mortgage to $500,000.
Mortgage interest rates are usually lower than student loan rates, so you’ll gain there. In today’s market, it’s quite possible that a refinance on your mortgage will result in an even lower mortgage interest rate, so you gain there as well.
But the real advantage is that mortgage interest is tax-deductible. That’s a possibility of triple the savings with this strategy (lower interest rate on student loans, lower interest rate on mortgage, tax-deductible interest).
3. Tax-Loss Harvesting
Above, we discussed the challenges high earners face in saving for retirement. Because contributions to tax-advantaged accounts are so low, you probably have taxable investments as well. Obviously, you hope these investments will grow and make you lots of money.
But the markets behave erratically and you’re always at risk to experience some sort of loss. The good news is that the government will help you absorb some loss if (and when) it happens.
Tax-loss harvesting is a strategy investors use to offset both losses and capital gains taxes on investments that have done well. To put it simply, tax-loss harvesting allows a married couple filing jointly to deduct up to $3,000 in losses either from realized capital gains or from ordinary income if no gains were realized in that year. If you experienced a significant loss this year, it’s worth consulting with your financial experts to discuss the viability of this strategy.
4. Plan Ahead
One of the most important steps to saving on taxes is proactively planning ahead. There are many strategies that attorneys can employ to reduce their tax burden. A little bit of planning can go a long way and potentially save you thousands.
Greg Critchfield, President of FinOp Group which specializes in serving attorneys, says, “It’s important to prepare for tax time by setting up meetings with your accountant throughout the year. Filing taxes can be complicated and requires careful attention, so make sure you have enough money saved to make your quarterly estimated tax payments.”
How We Help
When it comes to tax planning and tax savings, having an expert on your side is key. At Wurz Financial Services, we specifically help attorneys find solutions and strategies to achieve their financial goals. Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or email@example.com today!
Also, join us at one of our free webinars:
- Social Security 101: The 3 Rules To Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough To Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
Darren Wurz is a co-owner and financial planner at Wurz Financial Services, an independent, family-owned and operated financial services firm dedicated to helping its clients transition from their working life to a comfortable retirement with confidence. Darren received his Master of Science in financial planning from Golden Gate University and also holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. He operates the Northern Kentucky/Cincinnati office of Wurz Financial Services and is an active member of the Northern Kentucky Bar Association, the Northern Kentucky Chamber of Commerce, and the Covington Business Council. To learn more about Darren, connect with him on LinkedIn.