Last week, we explored how the common practice of rushing to make year-end purchases for tax deductions might be costing your firm more than you realize. As we approach the end of December, many law firm owners feel pressure to spend money on their business just to lower their taxes.
Instead, let's explore smarter alternatives to this traditional year-end spending strategy.
Consider a hypothetical scenario: Imagine a law firm owner spending $50,000 on new office furniture in December because their CPA suggested they need to "lower their taxable income." In this case, with a 37% tax bracket, they'd be spending $31,500 of their hard-earned money just to save $18,500 in taxes.
This type of decision could impact a firm's cash flow for years to come.
Let that sink in for a moment.
Every dollar spent unnecessarily is a dollar that could be growing your personal wealth instead. Consider this: that $31,500 spent on premature office upgrades, if invested at a modest 8% annual return, could grow to over $68,000 in just ten years.
The opportunity cost of these hasty year-end purchases extends far beyond their initial price tag.
But here's what smart financial planning looks like: True financial success isn't about minimizing taxes – it's about maximizing after-tax wealth. The most strategic approach focuses on planning rather than last-minute spending sprees.
The game-changer? Shifting your focus from spending to strategic planning. This mindset shift could transform how you approach year-end tax planning while building lasting wealth.
Consider these powerful tax-planning opportunities that don't require unnecessary spending:
1. Maximize retirement vehicles
Have you maxed out contributions for the current year?
Have you outgrown the limitations of your SIMPLA IRA plan and are now in need of a more robust offering such as the 401(k) plan?
Is it time to layer on a Cash Balance pension plan for additional savings opportunities?
2. Review your business entity structure
Is your income approaching a level where electing S-Corp status makes sense? (Potential savings on payroll taxes)
3. Review charitable contributions
Would you benefit from donating appreciated securities as opposed to cash?
Would “Lumping” several years worth of contributions into a single tax year allow you to qualify for an itemized deduction?
4. Maximize your HSA
Is your healthcare plan eligible for the Health Savings Account? Strategic planning here may not only provide a tax deduction today, but may also help you fund future medical liabilities while minimizing tax exposure.
These are just 4 examples of many moves that can dramatically reduce your tax burden without requiring unnecessary spending.
For instance, a small firm owner could save significant tax dollars through strategic entity structuring and retirement planning alone – without any year-end spending spree. Many firms may discover they can substantially reduce their tax liability simply by optimizing their compensation strategy and maximizing available retirement vehicles.
Think about your goals for the next decade. Maybe it's growing your firm, securing your family's future, or planning for a comfortable retirement. These goals require capital – capital that shouldn't be tied up in unnecessary office upgrades or prepaid expenses. Every dollar saved through strategic planning is a dollar that can be invested in your future.
I'm committed to sharing more strategies like these throughout the coming year. Make sure you're subscribed to receive these weekly insights directly in your inbox. Your financial future is too important to leave to chance, and there are always new strategies to explore and implement.
Happy (Planning) New Year!
Disclosure:
First Light Wealth, LLC (“FLW”) is a registered investment advisor offering advisory services in the State[s] of Pennsylvania and in other jurisdictions where exempt. Registration does not imply a certain level of skill or training.
The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.
For our complete website disclosure please visit our Disclosures page.
