As a dentist, your finances are a little more complex than most. You’re juggling personal and business interests, which means life events like marriage or selling a practice can have ripple effects on your tax strategy, retirement planning, and overall financial health.
And it’s not just the obvious stuff like filing status changes. These life changes can impact everything from deductions to state-specific tax laws to how much you can contribute to your retirement accounts.
Understanding how major life events can impact your taxes is crucial for dental professionals. Here are some key statistics to consider:
- Marriage: Combining incomes through marriage can potentially move you into a higher tax bracket, affecting your overall tax liability.
- Childbirth: The Child Tax Credit offers up to $2,000 per qualifying child under 17, with up to $1,400 being refundable.
- Homeownership: Mortgage interest on loans up to $750,000 is deductible, and state and local taxes up to $10,000 can also be deducted.
- Retirement Contributions: For 2023, workers can contribute up to $22,500 to their 401(k) plans, with an additional $7,000 in catch-up contributions for those aged 50 or older.
These numbers underscore just how much life’s milestones can shape your financial reality. As a dentist, your financial landscape is already complex, balancing personal and business obligations. When big life events occur—like getting married, having a child, or selling your practice—it’s essential to understand their ripple effects on your taxes, retirement planning, and overall financial health.
Let’s break it down.
Why Life Events Matter for Dentists
As a dentist, your finances are a little more complex than most. You’re juggling personal and business interests, which means life events like marriage or selling a practice can have ripple effects on your tax strategy, retirement planning, and overall financial health.
And it’s not just the obvious stuff like filing status changes. These life changes can impact everything from deductions to state-specific tax laws to how much you can contribute to your retirement accounts.
Common Life Changes and Their Financial Impact
- Marriage or Divorce
- Why It Matters: Marriage or divorce affects your tax filing status, potentially altering tax brackets, deductions, and credits. For dentists, it may also impact retirement plan contributions, estate planning, and how business ownership is structured.
- Pro Tip:
- After marriage, review how combining incomes affects your tax bracket and eligibility for credits like the Child and Dependent Care Credit. If your spouse earns significantly less, consider whether “married filing separately” might minimize your tax liability.
- Post-divorce, update beneficiary designations on retirement accounts and life insurance policies. Also, ensure your practice ownership structure reflects any changes in marital property division.
- Having a Child
- Why It Matters: Adding a dependent can provide tax benefits, such as the Child Tax Credit, but also introduces long-term financial responsibilities.
- Pro Tip:
- Open a 529 plan to start saving for college early. Contributions grow tax-free, and withdrawals for education expenses avoid federal taxes.
- Claim the Child Tax Credit (up to $2,000 per child in 2025) and consider a Dependent Care FSA to save on childcare costs.
- Update your will and estate plan to include guardianship instructions and set up a trust to ensure your child’s financial security.
- Buying or Selling a Practice
- Why It Matters: The financial and tax implications of buying or selling a dental practice are substantial, involving capital gains taxes, deductions for acquisition costs, and strategic timing.
- Pro Tip:
- When buying, maximize deductions under Section 179 for equipment purchases and amortize goodwill over 15 years.
- When selling, work with a CPA to structure the deal to minimize capital gains taxes (e.g., allocating more of the sale price to equipment rather than goodwill).
- Plan ahead for any state-specific taxes on the transaction and ensure proceeds align with your retirement goals.
- Buying or Selling a Home
- Why It Matters: Real estate transactions can impact your tax liability and financial flexibility. Dentists relocating for better opportunities or lifestyle upgrades often face added complexity.
- Pro Tip:
- Claim deductions for mortgage interest and property taxes if you itemize.
- If selling, exclude up to $500,000 in gains (if married) under the IRS’s home sale exclusion, provided you meet ownership and use tests.
- When buying, ensure your mortgage payments align with your long-term financial plan, particularly if you’re also managing practice-related loans.
- Relocating to a New State
- Why It Matters: Moving to another state can impact your tax obligations, from income taxes to property taxes and how your practice is taxed.
- Pro Tip:
- Research the tax environment in your new state—some states don’t tax income, while others might tax business goodwill.
- Update your practice’s legal and tax registration to reflect your new state.
- Confirm whether your new state requires additional licensing or continuing education for dental practice compliance.
- Health Changes or Disability
- Why It Matters: A disability can affect your ability to practice, requiring income replacement and strategic planning to cover medical costs.
- Pro Tip:
- Invest in an “own-occupation” disability insurance policy tailored for dentists, as it ensures benefits even if you can no longer perform dental-specific duties.
- Consider a Health Savings Account (HSA) for tax-free savings on medical expenses. If you own a practice, look into key-person insurance to cover operational costs if you’re unable to work.
- Retirement or Transitioning Practice Ownership
- Why It Matters: Retirement or selling your practice requires coordination between income planning, taxes, and estate considerations.
- Pro Tip:
- Gradually transition ownership over a few years to smooth out tax liabilities and maximize retirement contributions during the process.
- Review your SEP IRA, Solo 401(k), or defined benefit plan to align with your projected income in retirement.
- Update your estate plan to reflect any new income streams or property divisions related to your retirement or practice sale.
- Inheritance or Large Financial Gifts
- Why It Matters: Receiving or giving substantial assets triggers gift taxes, estate planning considerations, and potential state-specific inheritance taxes.
- Pro Tip:
- Use the $18,000 annual gift tax exclusion ($34,000 if married) to give tax-free gifts to children or other beneficiaries.
- For larger gifts, establish a trust to transfer wealth tax-efficiently while maintaining control over asset distribution.
- If you receive an inheritance, consult with a CPA to determine if state inheritance taxes apply and to align the assets with your financial strategy.
- Death of a Spouse or Partner
- Why It Matters: Losing a spouse often changes your tax filing status and can impact retirement accounts, estate planning, and income streams.
- Pro Tip:
- File for the estate tax portability election within nine months to preserve your spouse’s unused federal estate tax exemption.
- If you’re the surviving spouse, consider consolidating accounts and updating your financial plan to reflect a single-income scenario.
- Adjust your practice ownership and operational plans to account for the absence of your spouse if they were involved in the business.
When to Notify Your CPA
The short answer: immediately after a major life event. Why? Because proactive planning saves you from scrambling during tax season or worse—missing out on deductions entirely.
Here’s how to make the most of the conversation:
- Be Specific: Share all relevant details about the life event.
- Ask Questions: How will this impact your filing status, deductions, or long-term plans?
- Plan Ahead: Work with your CPA to adjust your tax strategy for the year.
Don’t let unexpected life events erode the wealth you’ve worked so hard to build. Your financial health is just as important as your patients’ oral health—both require expert care and attention to thrive. The truth is, no one becomes financially secure by chance. It’s the result of intentional, strategic moves—and that starts with planning ahead.
Let’s make sure you’re prepared for life’s milestones. Contact Engage Advisors today to schedule a consultation.