By Mike Gibbons, RICP®
As a pharmaceutical professional, you’re likely no stranger to busy schedules and the pressure of deadlines. But when it comes to your taxes, year-round planning shouldn’t be left to the last minute. Keeping track of your complete financial picture throughout the year helps you fine-tune your tax strategy, reduce your tax burden, and improve your overall financial well-being.
In this article, I walk you through why year-round tax planning is crucial for professionals like you and offer simple tips to seamlessly incorporate it into your financial routine to keep you on top of your tax situation.
Why Year-Round Tax Planning Matters
There are several upsides to tax planning throughout the year. With just a little bit of preparation, you can significantly lessen the stress traditionally associated with tax season. Planning ahead helps you eliminate any uncertainty you have about the deductions you qualify for as well as how much you might owe.
Tips for Year-Round Tax Planning
While it may seem daunting to plan for taxes year-round, it doesn’t have to be. Here are some easy ways to develop good tax-planning habits all year long.
Optimize Tax-Incentivized Accounts
Health savings accounts (HSAs), 401(k)s, and other tax-incentivized funds are your friends when it comes to taxes. It’s good practice, if you can, to contribute as much as possible to these accounts since it reduces your taxable income and helps you save for the future.
Deferring Income
In years when you are earning a higher income, you may want to consider deferring some of that income to future years, especially if you’re nearing retirement. This strategy is available to employees whose company offers a nonqualified deferred compensation plan, which allows you to defer a portion of your current compensation to a later date.
The deferred income becomes taxable only when you receive it, typically after a triggering event, such as leaving the company, retiring, or reaching a specific age. This approach can reduce your current taxable income and potentially lower your tax liability, but you’ll need to weigh the benefits of deferring income against your cash-flow needs and future tax expectations.
Accelerating Income
During lower-income years—such as after job transitions, layoffs, or business downturns—consider accelerating income. This may include increasing work hours or strategically converting traditional retirement accounts into Roth IRAs. The goal is to take advantage of your lower tax bracket by recognizing income sooner rather than later.
Taking Required Minimum Distributions (RMDs)
Once you reach age 73, you’re required to take RMDs from traditional retirement accounts like IRAs and 401(k)s. (Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) These withdrawals are subject to income tax, and missing them can result in hefty penalties. Managing RMDs effectively requires looking ahead to determine how they might impact other income sources and trigger additional taxes or higher Medicare premiums. One tax strategy to consider is spreading your RMD over the year or converting a traditional IRA to a Roth IRA.
Tax-Loss Harvesting
If you hold investments in taxable accounts, tax-loss harvesting can be a valuable strategy to offset capital gains by selling investments at a loss. This helps lower your taxable income for the year. It’s essential to be aware of the wash-sale rule, which prevents repurchasing substantially identical securities within 30 days of the sale, ensuring the tax loss is valid.
Bunching Deductions
Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chance of going above the standard deduction amount and being able to itemize your deductions in that year, leading to more significant tax savings.
For example, instead of donating $1,000 to your favorite nonprofit each year, you might donate $10,000 in one year, allowing you to itemize in that year and potentially benefit more from the deduction. Bunching can apply to other expenses as well, such as medical expenses, business expenses, or even contributions to a 529 plan. Just be mindful of certain caps or limitations on deductions so that you can take full advantage of this strategy.
Keep Thorough Records
Pay stubs and receipts shouldn’t be kept in a shoebox. It’s important to know how much you made during the year and how much you’ve spent on items that qualify for tax deductions. Technology is on your side here. Apps and software help you keep track of deductible expenses and can automatically organize and track your budget.
Maintain Receipts for Deductions and Credits
Maintain a record of the money you spend on your business, charitable contributions, and any educational costs. All these expenses are potentially deductible, so it’s important to know the largest amount you can claim.
Modify Your Withholding and Estimated Payments
If you have a job, check your withholding to confirm the amount being deducted matches what you anticipate owing. If you’re self-employed, paying estimated quarterly taxes is a smart way to avoid large and unexpected expenses when tax season rolls around.
Get Ready for Filing Early
This final tip makes tax time significantly less stressful. Know in advance the types of tax documents you receive and start collecting and filing them as soon as possible. Once you’ve organized all your documents, you can go ahead and file your taxes. You don’t have to wait until the last minute!
Work With a Trusted Advisor
Year-round tax planning doesn’t have to be overwhelming, especially when you’re juggling a demanding career in the pharmaceutical industry. At Gibbons Financial Group, we understand the unique challenges you face and provide a comprehensive approach to taxes that goes beyond traditional financial planning.
Our team combines our experience in tax laws with personalized wealth management to optimize your finances. We work with you to craft a strategy to help reduce your tax liabilities, specifically tailored to your situation. This seamless integration of tax-saving strategies into your financial plan has helped our clients, including those in the pharmaceutical field, save significantly over the years—and in some cases, across generations.
Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.