February 27, 2025

When it comes to “tax-time,” most if the strategies that can reduce your tax liability had to have been done in the prior year.

An effective tax strategy requires you and your tax advisor to get out of the compliance-deadline mentality. If you have a tax plan at the beginning of the year, you can make the appropriate changes to your plan, project an accurate range of tax to pay in by EOY and understand that filing an extension allows you more flexibility.  

Unfortunately, many tax-preparation-focused accountants cannot immediately switch from a tax compliance mode to a strategic tax-planning mode. Make sure that you have an advisor who can see & understand the big picture of your life and not just the prior year’s tax forms and receipts.

A strategic approach to tax planning ensures that you optimize your financial outcomes rather than simply focusing on compliance deadlines.

Using these five key tax strategies can enhance cash flow, allow you to reinvest in your practice, and reduce your overall tax liability.

1. Understand Your Current Tax Situation

Your tax situation is dynamic, requiring forward-thinking strategies rather than reactive measures. A well-defined tax plan over a 1-5-year period can provide greater financial clarity and efficiency.

• Analyze your tax bracket with precision. Many dentists assume they understand their tax obligations, but additional revenue streams, deductions, and credits can alter their marginal and effective tax rates.
  
  
• Prioritize economic efficiency over tax benefits. While tax deductions matter, they should not dictate financial decisions. A business investment must provide real economic value beyond its tax implications. Remember, a tax deduction is not the same thing as a tax credit; avoid conflating the two. Most importantly, never let an aggressive sales rep tell you what tax savings you will get (after all, they do not know your tax situation, so how could they know this?).
  
  
• Integrate tax planning into your broader financial vision. Consider how each financial move affects your practice's long-term success and stability.

Strategic tax planning enables you to make financial decisions that align with both your personal and professional goals.

2. Identify Your Tax Profile

Understanding your tax profile is crucial for long-term financial planning. Dentists typically fall into one of six tax categories, and these classifications can shift as their income and circumstances change:

• Single – High Income: Requires aggressive tax planning to reduce liability.
  
  
• Single – Low Income: Limited deductions may provide opportunities for credits.
  
  
• Married – High Income/High Income: Higher risk of an elevated effective tax rate.
  
  
• Married – Low Income/High Income: Potential for income splitting and strategic deductions.
  
  
• Married – High Income/Low Income: Requires tax optimization to balance earnings.
  
  
• Married – Low Income/Low Income: Lower tax burden but fewer available deductions.
  
  

Your tax strategy should adapt as your earnings grow, ensuring tax efficiency as you transition from associate to practice owner.

3. Focus on High-Impact Tax-Saving Strategies

Avoid getting caught up in minor tax deductions and instead concentrate on impactful, recurring tax-saving strategies that strengthen your financial foundation.

Key Strategic Areas:

• Retirement Plans: Maximize tax-advantaged accounts such as 401(k), SEP IRA, and defined benefit plans. A properly structured 401(k) and cash balance plan combination can allow tax-deductible contributions exceeding $100,000 annually.
  
  
• Payroll Optimization: Employing your children and spouse in your practice can create tax opportunities.
  
  
• Business-Use Vehicle Deductions: If a vehicle is used for business purposes, putting it into practice can lead to significant savings.
  
  

Prioritizing these tax-saving opportunities ensures long-term financial efficiency rather than one-time, short-lived benefits.

Strategic reinvestment in your practice enhances operations and reduces taxable income in a way that aligns with business growth.

High-Value Investment Areas:

• Hiring Key Personnel at Strategic Intervals: Expanding your team at the right time can provide tax advantages while positioning your practice for growth.
  
  
• Enhancing Employee Benefits: Offering health insurance or a 401(k) improves employee retention while yielding significant tax deductions.
  
  
• Structuring Performance-Based Bonus Systems: Employee bonuses can be structured to reduce your taxable income while driving team motivation and productivity.
  
  

For example, at a 32% marginal tax rate, a $50,000 practice investment effectively costs $34,000 after tax deductions.

5. Align Your Tax Strategy with Your Business Phase

Tax planning becomes even more crucial for dentists transitioning from an associate position to a practice owner. Ensuring your tax strategy aligns with the economic structure of your growing practice can make a significant financial difference.

For example, many dentists will continue to work at their associate side hustle while building their own practice. Yet their associate W-4 only accounts for earnings at that job and does not reflect their new practice's financial dynamics. Thus, there is an opportunity to reduce withholding at their associate job to free up much-needed cash flow for the new practice. This is because their taxes will likely be low due to the deductions from the new practice. Adjusting estimated tax payments now means they don't have to wait until they get their tax refund and can free up the cash flow in a high-expense period.

Rather than viewing taxes as an unavoidable expense, approach them as a strategic business consideration for your practice. A well-planned tax strategy ensures greater financial flexibility, allowing you to reinvest in your practice, enhance cash flow, and reduce unnecessary tax burdens.

Not sure where to start? Contact us today!