As 2023 fades away, our focus inevitably shifts to those annual, end-of-year activities including end-of-year tax planning. Consulting pharmacists and independent contractors have plenty of considerations to make for taxes that may not have been relevant in the past. While we strongly recommend working with a tax professional, it never hurts to have a basic understanding of what you should know.
What’s new in taxes for 2024?
Effective in 2024, there will no longer be Required Minimum Distributions for Designated Roth Accounts (i.e., Roth 401(k) or 403(b) plans). Also effective in 2024 is the requirement for high-wage earners to use a Roth option for catch-up contributions. If you’re 50 or older and want to make a catch-up contribution to your retirement plan, you’ll have to put that money into a Roth option if your wages from the prior year were over $145,000.
Finally, one of the biggest tax law changes taking effect in 2024 is the ability to move 529 account money to a Roth IRA via transfer. So, all parents who are worried about having too much money saved in a 529 account and being unable to use it all, are now provided with some relief due to their ability to transfer that unused money to a Roth IRA. One caveat is that the Roth IRA receiving the money must be in the name of the beneficiary of the 529 account.
What can consulting pharmacists do to prepare for the new tax year?
First, and by many metrics, the most important is the evaluation of a Roth conversion. A Roth conversion is when you take money that is currently sitting in a tax-deferred account, like a traditional IRA, and transfer that money into a Roth IRA. All the money transferred into a Roth IRA would be taxable as ordinary income in the year that the transfer is made. This is where in-depth tax planning can help you understand whether performing this type of tax move is appropriate or not. The goal is to pay the least amount of tax over your lifetime while retaining as much of your net legacy as possible.
Does a Roth conversion make sense?
A big, and often overlooked, component is what future tax rates will be. In 2026, existing tax cuts are set to sunset. This means that Federal income tax brackets will increase starting in 2026. If this were to happen, it could make Roth conversions in 2023, 2024, & 2025 even more valuable. However, each individual situation is different. You need to look at it comprehensively. If planned correctly, you could find yourself with hundreds of thousands or millions in tax savings in your lifetime. That makes an annual Roth conversion analysis worth every penny.
Review your withholdings
Especially important for the self-employed, is to review your current annual withholdings. Many times for self-employed individuals, income can be inconsistent throughout the year. This means that keeping track of your tax withholding requirements can get confusing. Taking time at the end of the year to review your current withholdings and expected annual tax liability can be a big money saver. Making sure you meet federal safe harbor withholding criteria can be the difference between a year-end penalty or not. This can be especially important if you experienced a large income windfall during the current or previous year.
Monitor income limits to make sure you qualify for the maximum savings
You’ll want to monitor any income limits you might exceed by year-end that would prohibit you from taking advantage of any savings options, tax credits, or tax deduction opportunities. The most commonly confusing is the Roth IRA contribution income limit. In 2023 for a married couple filing a joint tax return, the Roth IRA contribution income limit ranges from $218,000 to $228,000. So, for those who have been making Roth IRA contributions throughout the year but have earned more income than expected, now is the time to reverse those contributions before the year ends. Other common benefits affected by income limit thresholds that should be monitored are the Child Tax Credit, American Opportunity Credit, and IRA contribution deductibility limits for covered and non-covered spouses.
Keep the future in mind
Finally, the last piece of tax planning that should be accounted for is future age milestones. For example, if you hope to start Medicare in two years, your income in 2023 will affect those future premium amounts. Other age milestones like social security eligibility, qualified charitable distribution (QCD) eligibility, and penalty-free retirement account access should be evaluated. They all could result in negative tax consequences if done incorrectly or inefficiently.
Taxes: the elephant in the room
For many individuals, taxes can be a subject that you want to outsource to an accountant. Most accountants are paid to prepare your tax return, however proactive tax advice is rarely provided. That means that these meaningful tax-related decisions fall on your shoulders.
Consulting pharmacists, are usually on their own when it comes to determining withholding and more. Keeping track of finances, expenses, and more will be invaluable to you and your tax preparer when the time comes.
When planning to file your taxes, set some time aside to think about what opportunities are available to you from a tax planning standpoint. Your thoughtful actions today may have the ability to produce meaningful future tax savings. That’s a tradeoff that’s always worth it.