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Take a Multi-Year Outlook on Income Tax Planning

It is essential that you know what your tax liability will be from the sale of your practice.

Once the tax liability is determined, be sure that your withholdings on compensation, and quarterly estimated income tax payments, have you meet your income tax “safe harbor.”

In most cases, a taxpayer’s “safe harbor” is 110% of their prior year income tax. Through withholdings and equal installments of estimated tax payments, a client reaches their “safe harbor” and avoids exposure to penalties on taxes due with the returns.

In the year of sale, bunching of itemized deductions is a strategy that should be considered. For those charitably inclined, accelerating next years charitable contributions into the current year, can ensure you are receiving the tax benefit at the top tax bracket.

If the allocation from the sale resulted in a large capital gain, a conversation with your financial advisor should be had to see if there are any losses in your portfolio that could be harvested and used to offset the gain from the sale of your practice.

Be sure to maximize your retirement contribution in the year of sale, especially if this will be your last year of putting money into a qualified plan.

For those selling their practice and entering into full retirement, the following tax year presents additional income tax planning opportunities.

You were likely in high income tax brackets throughout your earning years. Now in retirement, and in a much lower tax bracket, consider acceleration of income, while staying in your new lower tax bracket. This is commonly done through the distribution of IRA’s or through IRA Roth conversions.

Review your liabilities. The tax benefit of home mortgage interest might be limited now that your yearly income has changed. Working with your financial advisor and CPA, you can determine if it makes most sense to go debt free.

Gather Your Team of Advisors

Just because your practice has sold doesn’t mean you no longer need your team of advisors who have worked with you for so many years.

Your attorney should be involved to update wills and estate planning.

Your financial planner should update your financial planning summary and devise a plan for diversification in the market, and plan for future cash flow needs now that your yearly income has changed.

Most importantly, take some time to enjoy the many years of hard work, sacrifice, and daily grind that you put yourself through!