From the series “Why You Can’t Retire…and what you can do about it!” from Will Parrish, Dental Planning Expert
You’ve spent years in school. You may have a lot of student and business debt. You work too hard, and probably don’t get enough time for yourself and your family. You’re a dentist, and over the last decade I believe I’ve figured out why dentists find it difficult to retire.
I believe the ADA statistic about 96% of dentists not being able to retire comfortably is a travesty and a shame. Dentistry is a great profession, and one that can potentially help a lot of people become more healthy, and allow a lot of doctors to provide a great life for themselves and their families. So why is it difficult for dentists to retire comfortably?
Eliminate the blood, sweat, and tears of budgeting for your dental office
There are a lot of reasons, but in this article I will focus on the effects of taxes on your future. Let me say right out of the gate, I’m not a CPA, and nothing I say in this article should be considered tax advice. Your situation may be similar to things discussed here, but that would be a manifestation that dentists lead similar lives and face similar challenges. You should seek specific advice from a qualified tax attorney or CPA.
I can, however, highlight the tax issues I’ve seen over the years that I believe stymie dentists’ efforts to have a comfortable retirement.
First of all, most dentists make just enough money for taxes to be painful. Think about this — in 2014 the tax bill on income up to $226,850 amounts to $51,174 before deductions. Now most doctors will have deductions, but the starting point of over $51K is pretty painful. If you’re married, filing separate due to a divorce (which has a shockingly high rate in the dental profession), or filing single, taxes are even more painful.
As you build your practice and increase production, your personal income should increase. When you reach $405,100, your taxes in 2014 should be $110,132. It takes a LOT of work to get from $226,850 to $405,100 in personal income to effectively net $294,968 before deductions. Dentists with few deductions could actually find themselves working to make $405,100, only to net about $68,000 more in personal income.
Health Savings Account – A second retirement plan?
Read Forbes’ article on tax table comparisons for 2013 and 2014 here.
The first point is that most dentists working full time fall into the $226,850 to 405,100 range, right where taxation becomes painful.
Secondly, dentists tend to be reactive about taxes as opposed to proactive. I describe dentists as the “blue-collar, white-collar profession” because a lot of hard work goes into every dollar made. That’s not to say that other medical professionals don’t work hard. But I believe dentists see their income an un-impressive compared to other medical professionals. Additionally, many dentists come from a “do-it-yourself” mentality, and work goes hand-in-hand with “do-it-yourself.”
So what is the second point? Doctors who make over $1 million a year know they have to be proactive in tax planning, or they must decide that they make enough after taxes not to worry about it. Doctors who make between $226,850 and $405,100 might not believe or feel they need to be more proactive, while in fact, those that fall into that range need to be MORE proactive.
Tax planning should be a year-around, proactive strategy that doctors pay as much attention to as they do production and collections. Most hard-working Americans see tax planning as gathering their “stuff” for their accountant to prepare before April 15. Dentists in the range discussed here should take advantage of a great deal more strategies to reduce their tax burden, strategies that cannot be leveraged during tax season and must be implemented throughout the year.
Some examples (with the blessing of your CPA or tax attorney) might include:
• Home office deduction
• Actual cost of auto as opposed to mileage
• Proper corporate structure
• Structuring activities for improved deductibility
• Extending return deadlines to Oct. 15
None of these concepts can be used to a dentist’s advantage on April 15. Each must be thought out and implemented as part of an overall tax plan. Which brings us to the third reason taxes impact a dentist’s ability to retire comfortably — tax planning between Dec. 1 and April 15.
Most Americans begin to pay attention to their income taxes when their W2 and 1099 reports show up in the mail between Dec. 1 and Feb. 15. The balance of their attention comes between then and April 15, the regular deadline.
This is not tax planning. It is tax reacting.
Preparing taxes this way provides a look back at the last year, and at this point it is generally too late to take many meaningful actions to reduce one’s tax burden. Tax planning is a year-round activity that requires an investment of time and team.
By team I mean the team of advisors dentists have that help them deal with taxes. Your CPA, attorney, and financial planner, among others, can work together to help create a comprehensive strategy to help reduce your tax burden. This team can help elevate you to a higher level of decision-making in many areas, including taxes. More importantly, the team can help create proactive strategies implemented throughout the year.
I hope these ideas about how taxes impact dentists’ ability to retire are helpful. If you do not currently have a CPA, attorney, or financial planner, contact me. I’ve created a team of professionals to help dentists address many of the challenges they face today, including taxes. I’m confident I can help you gain some direction.
If you think a conversation with a professional who specializes in dentistry would be helpful, feel free to call me at 865-357-7373 or visit my website at southeastdentaladvisors.com.
Will Parrish is a founding partner of Slate, Disharoon, Parrish and Associates, LLC, located in Knoxville, Tenn. Contact Will with questions at [email protected] or (865) 357-7373. Visit the website at sdp-planning.com. Connect with Will on Linked In at linkedin.com/in/willparrish/.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisers, Inc., a Registered Investment Advisor. Slate, Disharoon, Parrish & Associates, LLC and Cambridge are not affiliated.
