Understanding the Key Planning Levers in the Private Practice Owner’s Tax Return

Your federal tax return isn’t just a formality – it’s a roadmap. And now that tax season is wrapping up, it’s the perfect time to begin proactively planning for this year. Understanding the key points, or levers, of your return can help you and your professional team proactively see planning opportunities throughout the year.

Your Tax Return: More Than Just Numbers

Imagine your tax return as a funnel. All sources of income flow in, deductions reduce the total, taxable income runs through brackets, credits offset the tax, and payments determine if you owe or receive a refund. Each stage is a chance to evaluate and optimize.

1. Income Sources – What’s Fueling Your Tax Picture?

As a practice owner, income may come from wages (W-2), business profits (Schedule K-1), investment income, rental income, and more. Each source faces different tax rates (ordinary vs. long-term capital gains rates) and rules for offsetting losses (e.g. rental losses). 

Review how much income your taxable investment accounts generate. Can we improve it? Should you hold taxable bonds or REITs in pre-tax retirement accounts instead? Are actively managed mutual funds triggering excess taxable income?

2. Adjusted Gross Income – The Key Leverage Point

Your AGI – or a modified version of it – is one of the most important numbers. It impacts your eligibility for certain deductions, tax credits, Roth IRA contributions, and even additional taxes like the Net Investment Income Tax). It’s also the default starting point for student loan income-driven repayment plan calculations.

Pre-tax retirement contributions, HSA deposits, depreciation, and business deductions can all reduce AGI. All things equal, we’d like to see deductions above this “line.”

 3. Itemized vs. Standard Deduction – Strategic Choices

You’ll take either the standard deduction ($30,000 married, $15,000 single) or itemized deductions – whichever is higher. Itemized deductions include donations, state and local taxes (up to $10,000), and mortgage interest.

Strategies like, bunching charitable donations every few years, can help you exceed the standard deduction, while taking it in off years.

4. Qualified Business Income (QBI) Deduction* 

The QBI deduction allows eligible practice owners to deduct up to 20% of “qualified business income” – a modified version of business profit. As optometry is generally considered a “specified service trade or business” (SSTB), your deduction phases out based on taxable income before the deduction. 

Managing income can help you increase or qualify for this deduction. Practices taxed as S Corporations also balance owner wages (not eligible as QBI) vs. profit.

*Note: After 2025, the QBI deduction is currently set to end, and many aspects of personal taxes will revert back to pre-2018 tax law. It’s believed by many that Congress will take action to extend, but ultimately we won’t know for sure until a law is passed. 

5. Taxable Income – Understanding Your Tax Brackets

This is the income left after deductions — the amount that actually runs through the tax brackets. It reveals your “marginal” tax rate — the rate your last dollars of income are taxed at — helping to frame how impactful deductions or income changes will be.

Not all of your income is taxed at the “marginal” tax rate you see. Brackets fill progressively, starting with the lowest, and taxing only the portion of income that lands in each bracket.

Keep an eye on where you fall and what opportunities come. For example, if you’re creeping from the 24% bracket into the 32%, we might favor pre-tax contributions or other deductions to keep income away from that 8% jump in tax rate. Other times, we may add income, or sell investments for a 0% capital gains tax rate.

6. Tax Credits – The Hidden Gems

Tax credits reduce your tax liability dollar-for-dollar. One of the most valuable for families is the Child Tax Credit, with a max of $2,000 per kid under 17. This starts to phase out at $400,000 AGI for joint filers.

7. Tax Payments and Withholdings – Eliminate Unwanted Surprises

Were you surprised by a tax bill — or refund? That’s often a sign of misaligned tax payments. Review your W-2 withholdings and quarterly estimated tax payments. A goal is to at least meet IRS safe harbor thresholds and avoid an underwithholding penalty: 90% of this year’s tax or 110% of last year’s if your AGI exceeded $150,000.

Case Study: Pulling the Tax Levers

Projecting these levers shows opportunities to improve outcomes at each point.  

Consider married practice owners with two young kids. The practice is taxed as an S Corporation, and both spouses work in it full time. The practice profit is expected to be about $280,000 and projected taxable income is around $431,264. In this scenario, they are:

• Into the 32% tax bracket
• Only partially eligible for the QBI deduction (~40%)
• Not eligible for the Child Tax Credit

They decide to make a $70,000 profit-sharing contribution to their practice’s 401(k) plan. With wages set strategically, they’re able to get a profit sharing allocation favoring their accounts.

What are the results?

The result is an effective federal tax deferral of 39.5% – higher than even the 32% starting marginal tax rate. We can then project and discuss whether we expect those retirement dollars to be taxed at a lower rate in retirement.

The deferral lowered AGI enough to qualify for most of the Child Tax Credit. And, while lower net profit can reduce the QBI deduction, in this case they phased into a higher amount. 

Targeting those key levers on the tax projection helped them to make a strategic decision around when and how to pay or defer taxes. It’s a simplified example for education, but indicative of how good planning can have a big impact.

Wrapping Up

As you map out the year, take time to review these key levers with your financial planner and tax advisor. Proactive tax planning isn’t just about saving taxes—it’s about guiding your practice and personal finances with purpose.

As you project the year out, some questions to ask are:

• What types of income are we working with?
• What tax brackets apply, and how close are we to lower or higher brackets?
• What deductions or credits are we phasing out of?
• What extra taxes are being triggered, and why?
• How would additional income or deductions affect all these factors?

Happy planning!