Tax Tips for New Associates and Solo Practitioners

Whether or not you file(d) taxes as a law student depends on several variables, including your desire to claim education credits and deductions, whether your parents claim you as a dependent, and whether you make more or less than the standard deduction threshold for the year, as just a few examples. You may be a non-traditional student who already manages the tax strategy for your household, or maybe this is the first time you’ve ever had to think about this unavoidable financial obligation.

As a newly-minted legal professional launching your career after graduation, you’ll likely face some significant changes in your tax situation. You may be earning a higher income, paying off your student loans, starting your own practice, or moving to a different state. All these factors can affect your tax liability and planning. Aim to incorporate a proactive tax strategy that can help you minimize your tax bill and maximize your peace of mind. 

Here are some tactical tax tips to get you started:

Tip One: Understand your tax obligations and options.

You need to know how your income is taxed, depending on whether you are an employee of an established firm, company, or government entity, or a self-employed lawyer. If you are an employee, you will receive a W-2 form from your employer at the end of the year, and you will have taxes withheld from your paycheck to cover what you owe to the IRS throughout the year. You may also be eligible for certain employee benefits that could lower your adjusted gross income, such as employer-sponsored retirement plans and health savings accounts. Your employer also covers half of what you must pay into Social Security and Medicare (FICA) taxes for the year, a little-known fact.

On the other hand, if you are a solo practitioner, you must maintain your own accounting system to track revenue (usually from client fees) and expenses to determine your practice’s net profit – the amount your tax liability for the year will ultimately be based on. You will also have to pay self-employment taxes, which includes the full amount of Social Security and Medicare taxes owed. And since there is no employer withholding taxes for you throughout the year, you will be required to submit quarterly taxes – another step to plan carefully for with your tax pro.

A big perk of self-employment is your ability to deduct your business expenses, such as office rent, supplies, travel, or professional fees, from your income. The total of these expenses can often be larger than the standard deduction, compelling many self-employed workers to itemize deductions.

The nuances of tax management for solo practitioners also depend on how the business is structured and whether it’s considered a “pass-through” entity for the purposes of taxation, or a separate legal entity, responsible for its own tax return and separate from your personal return.

Regardless of whether you’re self-employed or employed at an established firm, be aware of the deductions and credits that you can claim – such as student loan interest, continuing legal education, or charitable contributions, and how they can reduce your tax owed – and the tax deadlines and penalties so that you file your tax returns on time and accurately.

Tip Two: Plan ahead and make tax-smart decisions throughout the year, rather than waiting until the end of the year.

To lay the groundwork for an efficient tax strategy, you can:

• Make sure your withholdings are correct through your employer by adjusting your Form W-4. A tax refund at the end of the year means your employer withheld more than necessary. On the other hand, if you find yourself sending even more money to the IRS at tax time, it might be time to increase your withholding.
• Reduce your taxable income by maximizing your contributions to tax-advantaged retirement accounts, such as your work-sponsored 401(k) or 403(b), or Individual Retirement Accounts (IRAs). If you are self-employed, you have more options and flexibility to choose your retirement plan, such as SEP IRA, SIMPLE IRA, or solo 401(k), but you’ll also be the one establishing the plan and navigating its administration.
• Lower the tax rate on your taxable account investment profits by taking advantage of long-term capital gains rates, which are lower than ordinary income rates but require you hold an investment for more than 12 months before selling.
• If your income is lower now than you project it will be in the future, it can be a good time to explore converting some of your traditional IRA or 401(k) funds to Roth IRA or 401(k) funds, respectively, which are tax-free in retirement. Just be sure to have enough saved to pay the taxes on the converted amount outside of the account.
• Increase your tax savings by itemizing your deductions if they exceed the standard deduction or by claiming credits, such as the child tax credit, the earned income tax credit, the Lifetime Learning Credit, among others, if you qualify.
• Avoid or defer taxes by using other tax-advantaged accounts such as 529 plans, health savings accounts, or flexible spending accounts to save for education, health, or other expenses.

Tip Three: Seek professional help and advice.

As you can tell, taxes are complex and dynamic, and they may vary depending on your specific situation and circumstances. Many filers benefit from hiring a qualified tax professional, such as a certified public accountant (CPA), an enrolled agent, or a tax attorney, to help you with your tax planning, preparation, and special circumstances. A tax professional can help you identify and take advantage of tax opportunities, avoid or resolve tax problems, and comply with tax laws and regulations. It is advisable to consult with a tax professional before making any major financial decisions, such as starting a business, buying or selling a property, or retiring, as these may have significant tax implications.

Having a tax strategy is not only a smart financial move, but also a legal and ethical obligation.

Keeping these tips in mind can help you develop and execute a tax strategy that effectively minimizes your tax liabilities and maximizes the money in your pocket, both now and in the future.

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