Save Big Before Year-End: Essential Tax Moves for Law Firm Owners (Ep. 89)

As the year draws to a close, many law firm owners find themselves grappling with the complexities of tax planning. Could a few smart moves before December 31st help you keep thousands more in your pocket? Let’s dive into some essential end-of-year tax strategies that could significantly impact your bottom line.

Maximize Retirement Contributions

One of the most effective ways to reduce your taxable income is through retirement contributions. These contributions not only secure your future but also offer substantial tax advantages. Consider these plans:

SEP IRA: Allows up to 25% of your income contributions, with a maximum of $66,000 for 2024.
Solo 401(k): Offers the ability to contribute more than SEP IRA due to its employee and employer portions.
Traditional IRA and Roth IRA: Contribution limits are $8,000 if over 50, and $7,000 for everyone else.

Consider Roth Conversions

If your income has been lower than usual this year, it might be the perfect time for a Roth conversion. This strategy involves moving money from your traditional pre-tax retirement accounts to a Roth IRA, paying the taxes now so your retirement withdrawals will be tax-free.

Take Advantage of Charitable Contributions

High-income years are an excellent opportunity to think about giving to charity. Donations to qualified charities are tax-deductible:

Donor-Advised Fund: This allows you to get an immediate tax deduction while deciding later which charities to support.
Qualified Charitable Distribution (QCD): If you’re of retirement age, this allows you to meet your RMD requirements without it counting as taxable income. Ensure this is done directly from your IRA to the charity.

Optimize Income and Expenses Timing

Balancing your income and expenses can be a strategic move:

Defer Income: Delay collecting income by moving invoicing to January or asking clients to hold off on payments until after December.
Accelerate Expenses: Prepay expenses like office rent or subscriptions to push deductions into the current tax year.

Don’t Overlook Deductions

Several underused deductions can give you significant tax savings:

Home Office Deduction: If you have a home office exclusively for business, you can deduct a portion of your rent/mortgage, utilities, and internet.
Business Expenses: Ensure all business expenses are on business cards for accurate record-keeping and deductions. This includes software subscriptions, office supplies, marketing costs, and client meals.
Health Insurance Premiums: If you’re self-employed, you may deduct these premiums for increased savings.

Avoid Common Pitfalls

As a law firm owner, staying on top of estimated tax payments is crucial to avoid penalties, especially as IRS interest rates have increased. Also, consider:

Depreciation: Take advantage of the current tax law’s bonus depreciation before its potential expiration at the end of 2025.
Employee Benefits and Bonuses: Decide whether these should be given out before year-end or deferred to manage your tax liability effectively.

Conclusion

Taking a few proactive steps now can make a massive difference in your tax bill and overall financial wellbeing. Smart tax planning is a vital part of your wealth-building strategy.

Resources:

Transcript:

Darren Wurz [00:00:00]:
Could a few smart moves before December 31st help you keep thousands more in your pocket? Welcome to the Lawyer Millionaire, where we deliver financial planning and business planning insights for ambitious law firm owners so you can enjoy more time, more abundance, and less stress, even if you’re still growing your law practice. As the year draws to a close and it’s coming fast, tax season is just around the corner. Are you ready to maximize every possible deduction and reduce your tax burden? End of year tax planning can be a game changer, but many law firm owners miss out on strategies that could significantly impact their bottom line. So today we’re going to break down some end of year things that you can think about and some effective tax moves that you can make.

Intro [00:00:49]:
Right now, we are on a mission to help lawyers and law firm owners maximize wealth and achieve financial independence. Welcome to the Lawyer Millionaire with Darren Wurz from Wurz Financial Services.

Darren Wurz [00:01:05]:
Okay, let’s start with some tax saving opportunities that you might want to take advantage of before the year wraps. Up. As a financial planner, the biggest one that comes to mind is retirement contributions. And you may already be familiar with retirement contributions, but these are one of the most effective ways to reduce your taxable income. You know, with your retirement plans, you have a little bit extra time beyond the end of the year for your traditional IRAs and Roth IRAs, even your SEP IRAs and Solo 401ks, you have until the tax deadline and that can get pushed back even further. For most folks, that’s, you know, April 15th. But if you file for an extension, that can get pushed all the way back until October. So if you’re a solo practitioner, you have a small firm, you might be eligible for a SEP IRA or Solo 401k.

Darren Wurz [00:01:56]:
Those tend to be very, very popular. As you get larger, you’re looking at maybe a 401k, you know, traditional 401k, or even a defined benefit plan. And all these different plans offer substantial tax advantages. The SEP IRA is often the go to among tax advisors. It allows you to contribute up to 25% of your income, your W2 income, up to a maximum of $66,000 for 2024. So that reduces your taxable income by that amount and basically defers that income into the future when you go to take that money in retirement. The Solo 401k actually is my personal favorite. I like it a lot better because it gives you the ability to contribute more than the SEP IRA because it doesn’t have that pesky 25% on all of it, it’s a little complicated in the breakdown, but there’s a chunk that you can contribute whether you know, up to 100% of your income is the employee portion and then there’s an employer portion.

Darren Wurz [00:03:01]:
So we’ll jump into that on an upcoming episode and dive into more of the specifics of the Solo 401k. But that is definitely one of my favorites. Now, the IRA traditional IRA, you can put up to 8,000 if you’re over 50, 7,000 for everybody else. And that allows you to defer that money into the future, right? So that amount that you contribute is not taxable in the current tax year. But like I said, you’ve got some extra time on that. But that is one of the go to ways top of the list for reducing your taxable income. Now on the other hand, you may be thinking about actually increasing your taxable income. So this is where end of year tax planning becomes really, really important.

Darren Wurz [00:03:47]:
Because as a law firm owner, your income fluctuates up and down. And as you come into the end of the year, the biggest question you want to ask yourself and you want to figure out is how has the year been for us in terms of profit? Has this been a great year? Are we up in terms of income? Are we ahead of the game? Is this an abnormally high year? Is this an average year or is this a below average year? Is this a year where our income is lower than expected? And if your income is lower than expected, rejoice or your profit, because this opens up an opportunity for you in the possibility of doing a Roth conversion. So let’s talk about Roth conversions. As a financial planner, this is one of the biggest things I think about as it come, as we come into the end of the year, the Roth conversion allows you to take money from your traditional pre tax retirement accounts and convert it over to your Roth IRA. So there are no limitations or no minimums, maximums or no income eligibility requirements. You can do as little or as much as you like. Basically, you take a certain amount. Whatever amount you take from your traditional IRA, you’re going to pay the taxes on now and then you’re going to convert that over to your Roth IRA.

Darren Wurz [00:05:03]:
That’s the cost. The cost is paying the tax, income tax. So let’s say you convert 10,000, you’re going to move 10,000 from your traditional IRA over to your Roth IRA. You’re going to pay tax on that $10,000 today. But being in the Roth IRA, it’s going to grow tax free and then withdrawals in retirement are tax free. So you’re basically shifting income into the present year. If it’s a low tax year, a low income year, a low tax bracket, that might be a great, smart thing to do. We also want to think about some other things as we come into the end of the year.

Darren Wurz [00:05:36]:
Charitable contributions comes to mind. Right. If this has been an abnormally high year in terms of your income, you may be thinking about giving to charity. Donations to qualified charities are tax deductible. And if you want to make a significant gift but aren’t sure where, like let’s say you want to give to charity but you’re like, I don’t know where to give it or who to give it to. Here’s a great idea. You can set up a donor advised fund. With a donor advised fund, you get the tax deduction in the current year.

Darren Wurz [00:06:07]:
So you could give a million dollars to charity. Right. Put a million dollars in your donor advised fund. I’m going to get a million dollar deduction this year or however, you know, wherever you, however much you qualify for. Right. Okay. And then, but then the money’s there in the donor advised fund and then I can choose when I actually give it, when I actually distribute it from the donor advised fund to charities of my choice. And it can be now, it can be down the road.

Darren Wurz [00:06:32]:
So this is a way of kind of bunching those contributions together. If you give to charity, what you might want to do is consider a donor advised fund so that you can bunch your deductions into those high income years and maximize the impact of those charitable deductions. Also, if you’re at retirement age, you’re taking your RMDs. You also, you can also qualify for making a qualified charitable distribution directly from your ira. This allows you to meet your RMD requirement without having it count as taxable income. The only way to do this is to get, you know, to actually have, you know, without actually qualifying for the, you know, charitable deduction, you got to do it directly from the IRA as a qualified charitable distribution. Right. And that allows you to count that our arm to basically not have that RMD count as income for you at all.

Darren Wurz [00:07:32]:
And you don’t have to worry about whether or not you are itemizing or can qualify or how much you know of a deduction can I get? That allows it to basically skip right over you. So that’s a great thing to think about. If you are, if you’re retirement age and you’re coming into the end of the year and you’ve Got to take your rmd. Think about a qualified charitable distribution. Again, it doesn’t work if you take your RMD and then give it to charity. I mean, that can work, but you got to worry about, you know, itemizing and how much you actually can give to charity and get as a tax benefit. If you do it as a qualified charitable distribution that goes directly from your IRA automatically, it’s not going to count as income. But you got to make sure that you communicate that with your accountant and that they’re familiar with that strategy.

Darren Wurz [00:08:23]:
So something to think about as well. Now maybe you’re, you know, not quite there. You know, RMD age is 73 now for those who have not reached it. So it might be a while before you get there. The other thing, the biggest thing as a law firm owner for you to think about are ways that you can either defer your income or accelerate your expenses. So you know, it’s a high income year. Maybe what we want to do is push income into next year. How would you do that? Well, basically, you might delay collecting income, right? Delay sending out invoices until January, or ask certain clients to hold off on payments until after December.

Darren Wurz [00:09:06]:
This way, you’re pushing income into next year, lowering your current tax liability. Just make sure that this approach fits with your cash flow needs. Now, on the other end, you could also accelerate expenses so you can push expenses into this year. Maybe you have things you’re going to pay for in January. Why don’t we prepay them in December so we can move that deduction into the current tax year. Think like office rent. You know, maybe you could pay that early. Equipment, supplies, maybe there are subscriptions that you pay for.

Darren Wurz [00:09:39]:
Maybe you could pay those upfront. Maybe sometimes they give you a discount for doing that. So that’s going to allow you to basically play around with the end of the year deferring income, even maybe accelerating income. Let’s say it’s a low income year, right? Then you want to maybe accelerate income into this year, take advantage of the low tax rate, encourage clients to pay upfront in December, you know, prepay for next year, or even deferring expenses into next year as well. There are some deductions that you want to really pay attention to closely as we come into the end of the year. Your home office deduction is one that is one of the most frequently overlooked, but it can provide substantial savings. To qualify, you need to use a portion of your home exclusively for business. If you have a home office, you might be able to deduct a Percentage of your rent or mortgage, utilities, even your Internet or phone if you have a landline.

Darren Wurz [00:10:39]:
Expenses based on the size of your office as it relates to the size of your house. Even if you’re working from home only part time, you might still be able to qualify for this even if you have a real office somewhere else. Just make sure that you’re following IRS guidelines and work with a tax advisor to help you with that. Business Expenses in General here’s another one. Number two, just all the business expenses. As I have worked with many law firm owners over the years, one of the things that we find is that there are some business expenses that are winding up on the personal cards. So you want to make sure this is, you know, good cash flow planning. Number one, put all the business expenses on the business cards.

Darren Wurz [00:11:29]:
That way you don’t have a hot mess to deal with when it comes tax time. You’re looking through all of your accounts trying to find all the business expenses and that’s very difficult. And the problem is you end up missing some and then you’re not getting some of the deductions that you could get. So make sure that all those little things you’re paying for, you’re paying for those on your business cards. Software, subscriptions, office supplies, marketing costs, meals with clients. Make sure that you are deducting all of those to the fullest extent that you can. Another thing to think about potentially are your health insurance premiums for self employed law firm owners. Your health insurance premiums can also be a tax saving opportunity.

Darren Wurz [00:12:15]:
So that’s another one to talk about with your tax planner as well. Let’s talk about avoiding some pitfalls as well. It’s important to make sure that you’re watching out for a few things. The biggest thing a lot of law firm owners struggle with are their estimated tax payments. Make sure you’re up to date on those estimated tax payments as we come into the end of the year. Your next one is going to be in January. The IRS requires individuals who are self employed or owners of businesses as well who are not having their taxes withheld to make quarterly tax payments. And missing those payments can result in penalties.

Darren Wurz [00:12:54]:
It used to not be so bad, but as interest rates have gone up, so have the penalties. The IRS has raised the interest costs that are charged to missing those payments. You also have to be careful about the timing of those payments. So if you have a lot of income in the beginning of the year, but you don’t make your payments until the end of the year, then the IRS is going to penalize you based on the timing. So even if you pay all that you should pay, if you haven’t paid enough each quarter, right, then you can get penalized. So be extra careful about those estimated tax payments. Depreciation is another thing to think about. You know, we still have a couple years left on the current tax law.

Darren Wurz [00:13:39]:
And the current tax law is set to expire at the end of 2025, but it could be getting extended here as Republicans have come back into control of Congress. One of the things they’ve talked about is extending the current tax law. A big part of that is bonus depreciation. Basically, when you buy equipment for your office, you have to depreciate that over time. You don’t get the full tax benefit upfront. But bonus depreciation allows you to get, you know, depreciate it faster, basically, so you get more of the tax benefit earlier. So, you know, let’s say, you know, you have a piece of equipment and the depreciation timeline is 10 years. You buy it, you’re going to, you’re going to write off or deduct a tenth of it each year.

Darren Wurz [00:14:28]:
That’s straight line depreciation. But the current tax law has provisions for accelerated depreciation, so you can deduct more of it upfront, essentially. So how does this affect you? Well, maybe you’re thinking about buying a new car for the business. By the way, if you’re a business owner, is your car, is your vehicle owned through the business or leased through the business? That’s a great idea. You can make an argument for using it as a business vehicle if you do a lot of traveling, meeting with clients, going to conferences and events and things like that. So that could very much be a business asset. And then you can depreciate that. If you own it through your business, you can depreciate it over time and get some of that tax benefit over time.

Darren Wurz [00:15:20]:
So maybe you had a really killer year. Maybe you want to buy a new car, right, and then accelerate a little bit of that depreciation up front and get some tax benefit there. Employee benefits and bonuses. You think about that as well. If you’re giving out bonuses this year, maybe if you had a really great year, give those out before the end of the year, before December 31, and get that tax benefit this year. Or maybe it wasn’t such a great year, maybe you’re going to defer those into January, you know, so your employee bonuses and benefits can be something you can use as a tax planning area or Opportunity as well for you. Okay, so we went through a bunch of different ideas. You know the biggest thing as I look back through here is the, the are the charitable contributions, especially thinking about those RMDs, if you are of RMD age and you’re taking required minimum distributions from your pre tax accounts, the ability to make a qualified charitable distribution directly to a charity.

Darren Wurz [00:16:34]:
And by the way that could go directly to your donor advised fund because the donor advised fund is, is under a 501C3 and so you could do that as well. And then the Roth conversion, I think that is just like cream of the crop. That’s the top thing everyone needs to be thinking about as you come into the end of the year. And because you have through the Roth conversion and through all of these different things, essentially you have the ability to control the timing of your income and it makes a huge difference. Because if you had a killer year and your tax rate is 35% this year, but normally it’s 22, pushing some money income into next year can save you that difference, right? You know 35 -22%, right? What is that? 10, 13%. So 13% in taxes you might not have to pay on your marginal rate if you’re able to shift income into a lower tax year. So really, really critical things to think about. You don’t think about.

Darren Wurz [00:17:37]:
It doesn’t really seem like it can make that big of a difference when you first start talking about when you actually break it down. That can make a huge impact on your bottom line. So the takeaway here, don’t let tax season sneak up on you. Taking just a few proactive steps now can make a huge difference in your final tax bill and your overall financial wellbeing. Set aside some time to tackle your tax planning. It’s a smart investment in your future. A little bit of context here. You know, smart tax planning is just one piece of the puzzle when it comes to creating long term wealth.

Darren Wurz [00:18:14]:
And it’s a big part of what we do here at the Lawyer Millionaire. We provide year round tax planning, proactive tax planning to our clients because your taxes represent your largest expense in most cases. So if you can reduce some of that expense, you can really save a lot of money. Every dollar you save on taxes is then money you can reinvest in your business, in your retirement, or in experiences that bring you joy. And this is what we do, helping law firm owners like you keep more of what you’ve earned and build a financial future that aligns with your goals. So if you need help with this, please reach out Schedule a call with us. I’ll put the link to Schedule a Call with me in the show Notes I’d be happy to chat with you about how you can save more on taxes both in the current year, both now and long term, by creating an optimized tax strategy. This has been the Lawyer Millionaire podcast.

Darren Wurz [00:19:16]:
I’m your host Darren Wurz. Thank you so much for joining me on this journey to expand your business, maximize your profits and secure your financial future. I can’t wait to connect with you again next time. Until then, take care and keep pushing forward.

Outro [00:19:35]:
Thank you for listening to the Lawyer Millionaire. Click the Follow button below to be notified when new episodes become available. This content has been made available for informational and educational purposes only. This content is not intended to represent investing or tax advice. Always seek the advice of a qualified investment or tax advisor with any questions you may have regarding your own financial circumstances.