3 Tips For Attorneys With Their Own Practices Who Want To Save On Taxes
Tax time doesn’t have to be stressful or dreadful. Attorneys already know quite a bit about interpreting the law, but accounting can be a whole other beast. Thankfully, these three tips will help any attorney save the most on their taxes.
Above all, it is important to use effective tax deductions for lawyers that you can. When you are trying to make the most of your tax deductions, speak to a financial advisor. They will look at your firm or practice and give you personalized advice.
Tax-Saving Tips For Attorneys
There are actually quite a bit more than three ways that attorneys can save on their taxes. By keeping good records and making the smartest investments, you may be able to keep more of your hard-earned income.
These are the three best tips. Follow them and start saving more money each year.
Keep Hard Copies Of Books
Even though it might free up space to keep eBooks instead of hard copies, your physical books might be worth a tax deduction.
This is because as long as the books are usable, you can claim them as a tax deduction. The depreciating value of hard copies of legal books qualifies as a tax deduction. This is very similar to the way you can claim the depreciated value of your work computers or luxury work vehicles.
By selling or donating those legal books, you could be giving away money.
Set Up Effective Retirement Plans
Another way lawyers can save money on taxes is to set up effective retirement accounts for themselves and their employees.
Law firm owners have three options - SIMPLE IRA, SEP IRA, or 401(k). Choosing the most efficient one for you and your firm is imperative because it could mean immediate tax savings.
Here is a quick rundown of the differences between them so you can make the best decision for you.
SIMPLE IRA
This stands for Savings Incentive Match Plan for Employees. Employers can choose to make non-elective contributions of 2% of their employee’s salary to it each year.
This can save the law firm money on taxes because as of 2019, the government gives a $500 tax credit per year to employers that create a SIMPLE IRA plan for their employees.
SEP IRA
This stands for Simplified Employee Pension. It’s a popular choice for lawyers that are self-employed. The IRS gives tax deductions for contributions made to the SEP IRA.
They are basically a cross between a traditional IRA and a 401(k).
401(k)
The 401(k) is one of the most commonly used retirement plans. It is literally named after the tax code that describes it.
Employers set it up and agree to place a percentage of the employee’s paycheck into the 401(k) account. The employee can also contribute funds to it on top of these base additions.
There are two types of 401(k)s - traditional and Roth. Employees’ contributions to a traditional 401(k) are deducted from their gross income, which lowers their taxable income.
With a Roth, the contributions are deducted with post-tax income. This means they cannot claim these contributions as tax deductions. The good thing about a Roth 401(k) is that taxes are not due on the money that the employee withdraws from it.
Utilize Effective Tax Deductions For Lawyers
One way to save money on taxes is to make sure you are using effective tax deductions for lawyers. Here are three effective choices that you should be making.
Home Office Expenses
Do you ever work from home? If you ever spend time at home responding to emails or doing research, then you could claim your home office as a tax-deductible expense.
This might even include a portion of the mortgage, house insurance, electric bill and home office furniture and electronics.
There are two options, safe harbor or depreciated value.
Safe Harbor - Claim up to $1,500 per year based on $5 per square foot, up to 300 feet of home office space.
Depreciated Value - Claim the depreciated value of the portion of your home that you work in.
Charitable Deductions
Charitable giving not only spreads good throughout the world and comes with a few public relations benefits, but you can get tax deductions too.
Depending on your taxable income, you might even be qualified for the 199A 20% pass-through deduction for charitable gifts.
Legal Education
Investing in your education even after you pass your bar exam benefits doesn’t keep your license to practice law active, it is also a tax deduction.
Here is what the IRS has to say about continuing education classes for lawyers. “An attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law.”
Keep track of which classes you take and how you paid for them so that you can claim them as a tax deduction for lawyers.
Speak To A Financial Advisor
Above all, one way to save money on taxes is to speak directly with a financial advisor for lawyers. They will look at your financial situation and be able to give advice tailored to your financial goals.
No two people have the same exact financial situation, knowledge, or factors. There are so many things that affect finances and wealth. That is why it is so important to speak to someone that can take a close look at your investments, assets, and liabilities, and make recommendations that will propel you closer to your financial goals.
