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How Can I Reduce My Tax Liability?

Tax reduction is the result of comprehensive planning. All too often, doctors will make a financial decision primarily for the purpose of reducing taxes. But the tax tail should never wag the dog.

For example, taking 100% section 179 deductions in the year of purchasing new equipment. This will, undoubtedly reduce your tax bill for the current year. If your primary focus is immediate tax minimization, then taking a full 179 deduction would make the most sense. However, there are two reasons why this may not be beneficial, and it depends on context:

1. You’re already in a lower tax bracket this year relative to future years. Therefore, the tax benefit from claiming the 179 deduction is diminished since you’re ALREADY in the lower tax brackets.

2. You financed the purchase and will be paying debt over five years. By taking 100% of the depreciation today through a 179 deduction, you receive virtually no deduction during the years of making the loan payments. This can cause a financial squeeze if you don’t properly manage your cash flows. Any cash outflow that doesn’t provide a tax deduction hurts!

Bottom Line: Good tax planning is couched in a comprehensive understanding of your financial situation.

By understanding your cash flow, your projected level of income, your marginal tax brackets, your 401K goals, your tax basis, and the current tax law, one can tax plan in a much broader, more meaningful way. And since taxes are a significant erosion on wealth accumulation, this level of tax planning is critical
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