High income Pharmacists

[POCAHONTAS]

Husband and wife are both Pharmacists and file MFJ, their yearly income is over $200,000/year, they have 3 dependents, and they claim single and 0 exemptions on their W-4's. and they have the schedule A deductions, but they owe tax every year, and want some advice on how to lower their tax liability. Besides telling them to invest in an IRA what other advice can I give them???

thanks

[S T]

Wages

You say they file W-4 with Single-0,
are they also enrolled in the 401K/retirement plan through the employer or a deferred compensation? If, not they should, for the maximum, and if they are enrolled and a participant in the Employers Retirement program, they will most likely be ineligible for IRA accounts.

Sandy

[JoshinNC]

Just because they owe tax every year

Husband and wife are both Pharmacists and file MFJ, their yearly income is over $200,000/year, they have 3 dependents, and they claim single and 0 exemptions on their W-4's. and they have the schedule A deductions, but they owe tax every year, and want some advice on how to lower their tax liability. Besides telling them to invest in an IRA what other advice can I give them???

thanks

doesn't mean that they are paying a high rate of tax as a representation of their income. You are assisting your clients in perpetuating the urban myth that if you owe at year end something is wrong and if you get a refund everything is great. Your clients need holistic financial planning that includes tax, investment and insurance planning that you may just not be capable of providing. I recommend that you partner with a local CFP to work together on these types of clients so you can add a valuable service to your clients and they can get the benefits of working with a group of professional advisors.

[Uncle Sam]

High Income Pharmacists

Pocahontas -
You didn't say whether or not they have reportable income on which they DO NOT pay taxes during the year - like interest, dividends, capital gains. So the fact that they withhold S-0, doesn't tell us the whole story.

[Burke]

Your post indicates that they are employees, not self-employed, so their options are the same as anyone who is paid a salary. High income persons do get hit with reduced deductions (haircuts on itemizing), maybe on exemptions, AMT, and suspended rental losses, for example, which limits what they can do in the immediate year. It's hard to lower salaried income for tax purposes, unless they have access to a deferred comp plan, 401k plan, etc. They have other options for tax-exempt or tax-deferred vehicles after they receive that income to lower future taxes. It is pertinent to maximize what your particular state may exclude from tax as well, especially if the clients are in a high-tax state. They could invest in tax-sheltered 529 plans for the 3 kids, for example. Need to contact a financial planner. I would recommend fee-only, but that doesn't guarantee they are any more knowledgable than others.

[Black Bart]

Husband and wife are both Pharmacists and file MFJ, their yearly income is over $200,000/year, they have 3 dependents, and they claim single and 0 exemptions on their W-4's. and they have the schedule A deductions, but they owe tax every year, and want some advice on how to lower their tax liability. Besides telling them to invest in an IRA what other advice can I give them???

thanks

While I wouldn't worry about spreading it around that refunds are "right" and tax due is "wrong" (probably every other person in the U.S. already thinks this), there's probably not much you can do to help/keep them. Many six-figure folks are true believers in the Helmsley theory ("Only the little people pay taxes") and sincerely expect to "write it (everything) off their taxes."

My advice to the "little people" (that includes me) is usually to buy rent houses, but $25K is peanuts to high-rollers and they regard the IRA stuff as band-aids (they want deep cuts), so I generally (as others have said) kick them upstairs to a heavy-duty CPA or CFP.

In past years I lost a doctor and a factory CEO to the "no tax due" mentality, but one later returned from CPA-land saying "They don't have any magic" and understanding that even the gods occasionally pay some tax right along with mere mortals.

[taxxcpa]

My take on it

If someone always owes tax and doesn't like it, then all they need to do is to change their W-4 to have extra amounts withheld.
Option 2 would be to file 1040ES or use EFTPS to pay additional money to cover the tax due.

Getting a big refund is not good financial management since it is based on lending the IRS your money interest-free.

The best approach would be to pay nothing until December and draw interest on your tax money all year until December. This is not generally possible, but if you have a large RMD from an IRA, you can draw it in December and have a high enough withholding percent to cover all or part of your taxes. If you have income other than the IRA and, for example, your bracket is 25%, it might take 40% or 50% or more withheld from the IRA.

[gkaiseril]

Paying a large amount in December assumes the taxpayer has W-4 withholding. Also the taxpayer would need to have an employer that can handle the additional withholding in the December payroll. If the employer misses the additional withholding, the taxpayer and not the employer is responsible. It might be better to adjust for an October or November payroll to make sure the monies are withheld and paid.

[DaveinTexas]

I've been going at this the wrong way

I usually tell my clients to buy a $60,000 10,000lb Ford dually diesel every year, 179 the thing and then buy another one next year.

My second piece of advice is to buy a huge house, specifically one they can't afford, and get that big tax write off on the interest only loan!

Only kidding. The others are right. There are no magic tax deductions. I love it when people look at the ceiling and say, "I'm trying to think of something else we can deduct."

My advice is similar to Josh's. I have a buddy of mine who is a financial adviser, CFP, and I tell my clients if they are looking to spend money on a tax deduction, beyond what they are sheltering in a 401K or IRA, to rather look at ways of putting their "extra money" to work for them. Encourage your clients to meet up with a financial adviser; they can provide advice that will help with future goals and needs, kids college funds; the important stuff.

And don't forget to not let the business use of the dually diesel to drop below 50% business use; nasty!