As a mental health professional, managing your practice can be demanding, but don’t let year-end tax planning fall to the bottom of your to-do list. If you miss out on implement key tax-saving strategies before December 31st, it could mean missing out on valuable deductions. These are the essential tax strategies that private practice therapists, psychologists, and other mental health professionals should consider to reduce their tax liability and keep more money in their pockets.
1. Maximize Retirement Contributions
One of the most effective ways to reduce your taxable income is by contributing to retirement accounts. If you have a 401(k) or SEP IRA, you can make tax-deductible contributions that lower your taxable income.
For instance, the 2024 contribution limit for a 401(k) is as the employee is $23,000 for 2024. $30,500 if you are over 50. The employer contribution portion of the 401k can be up to 25% of the owner’s wages. Combined, the maximum contribution to the 401k can be up to $69,000 in 2024, or $76,500 if over 50.
For a SEP IRA, you can contribute up to 25% of your net earnings from self-employment, capped at $69,000 for 2024.
2. Utilize the Home Office Deduction
If you run your practice from home, you may be eligible for the home office deduction, provided you meet the IRS requirements. The deduction can be claimed using the simplified method (a standard deduction of $5 per square foot, up to 300 square feet) or the actual expense method, where you calculate a percentage of your home-related expenses such as mortgage interest, utilities, and repairs. This is a great way to lower your taxable income if you maintain a dedicated space for business use.
3. Defer Income and Accelerate Deductions
If you’re close to reaching a higher tax bracket, consider deferring income into the next year and accelerating deductions for this year. For example, if you’re expecting a large payment from a client, delaying it until January could keep you in a lower tax bracket for 2024. At the same time, prepay expenses that will occur in early 2025, such as office rent, insurance premiums, or subscriptions, to increase your deductions for the current year.
4. Track and Deduct Business Mileage
For mental health professionals who travel between locations for client appointments, don’t forget to track your business mileage. The IRS allows you to deduct mileage at a standard rate of 67 cents per mile for 2024, which adds up quickly if you’re regularly commuting to different offices or client sites. This deduction can reduce your taxable income and is often overlooked by professionals.
5. Review Your Business Expenses for Potential Deductions
Make sure to review all your business expenses before the year ends to maximize your deductions. Expenses such as office supplies, professional development courses, software subscriptions, and marketing costs are all tax-deductible. For mental health professionals, continuing education and professional licensing fees are also essential expenses that should be deducted. Ensure you have proper documentation for these expenses in case of an audit.
6. Consider Hiring Your Kids
If you’re looking to reduce your tax bill, consider hiring family members to work in your practice. Paying a child a reasonable wage for legitimate work performed (e.g., managing your practice’s social media, handling scheduling, or filing paperwork) allows you to deduct their wages as a business expense, reducing your taxable income. Additionally, for children under 18, they may not be subject to Social Security and Medicare taxes.
7. Maximize the Section 179 Deduction for Equipment Purchases
If you’ve made significant purchases of business-related equipment this year—such as office furniture, computers, or therapy tools—you can benefit from the Section 179 deduction. This allows you to deduct the full cost of qualified equipment purchases (up to $1,220,000 for 2024) rather than depreciating it over several years. Taking advantage of this deduction can significantly lower your taxable income.
8. Don’t Forget Your Health Insurance Premiums
As a self-employed mental health professional, you may be eligible to deduct your health insurance premiums, including premiums paid for yourself, your spouse, and your dependents. This deduction applies whether or not you itemize deductions on your tax return, but only if you’re not eligible for a health plan through a spouse’s employer.
With the end of the year approaching, now is the time to implement these tax-saving strategies for your mental health practice. Every deduction you claim can help reduce your taxable income and keep more of your hard-earned money in your business. Be sure to consult a tax advisor that specializes in helping mental health professionals, like our team here at Flax CPA, to tailor these strategies to your unique situation and avoid missing out on valuable deductions.