When it comes to income tax planning, attorneys and lawyers have unique considerations due to their income and payment structures. By understanding these nuances and implementing strategic tax planning techniques, you can significantly reduce your tax burden and keep more of your hard-earned money.
The Power of Timing
One of the most critical aspects of tax planning for attorneys is timing. Unlike many professions, lawyers often have the flexibility to defer income to the following tax year and accelerate expenses in the current year. This strategy can lower your taxable income for the current year and potentially move you into a lower tax bracket.
Here are some ways to leverage timing for tax savings:
- Delay invoicing clients: Instead of sending invoices immediately, consider waiting until January of the following year. This pushes the income recognition into the next tax year.
- Prepay expenses: Pay deductible business expenses like subscriptions, software licenses, and marketing costs in December. This reduces your taxable income for the current year.
- Make estimated tax payments strategically: Pay your estimated tax payments for January of the following year early in December. While there’s a $10,000 limit on deductible state and local taxes, this can still provide some tax benefits.
Remember: This strategy works best if your income remains relatively stable year-over-year. If you anticipate a significant increase in income next year, consider accelerating income and deferring expenses to avoid a substantial tax liability in one year.
Maximizing Business Meal Deductions
The Tax Cuts and Jobs Act temporarily increased the deduction for business meals from 50% in 2020 to 100% for 2021 and 2022. This means you can deduct the entire cost of qualifying business meals, including meals with clients, opposing counsel, and even meals for employees working late.
Before the rules revert to 50% deduction in 2023, take advantage of this opportunity to:
- Host client lunches and dinners.
- Order takeout for late-night work sessions.
- Treat opposing counsel to meals during case discussions.
Important notes:
- Keep separate records for business meals and employee-related meal expenses for clarity during tax filing.
- This increased deduction applies only to food and beverages purchased from restaurants. Entertainment and extravagant meals are not fully deductible.
Leveraging Depreciation
Attorneys frequently use various equipment, software, and vehicles for their practice. Fortunately, these assets depreciate over time, offering potential tax deductions. The Tax Cuts and Jobs Act also introduced 100% bonus depreciation for qualified business property placed in service after September 27, 2017, and before January 1, 2023. This allows you to deduct the entire cost of the asset in the year it’s purchased, instead of spreading the deduction over multiple years.
Remember:
- 100% bonus depreciation ends in 2022, reverting to 80% in 2023 and decreasing further in subsequent years.
- Consult with a tax advisor to ensure you claim depreciation deductions correctly and comply with IRS regulations.
Additional Tax Planning Tips for Attorneys
- Contribute to retirement plans: Consider maximizing contributions to retirement plans like SEP IRAs, Solo 401(k)s, or traditional IRAs to reduce your taxable income.
- Track business expenses meticulously: Maintain detailed records of all business-related expenses to maximize deductions.
- Seek professional guidance: Consulting with a qualified tax advisor can help you develop a personalized tax plan and ensure you’re taking advantage of all available deductions and credits.
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