One of the questions I get a lot from my clients is when should I pay off my student loans? Should I pay them off before setting up my professional corporation? Or should I incorporate and practice and worry about student loans later? My name is Junaid Usmani and I’m a partner at SRJ Chartered Accountants. In this video, I’m going to tackle that question and give you some guidelines on how best to approach the student loan dilemma.
What Are The Benefits of Incorporation?
For starters, let’s quickly recap the benefits of incorporation. If you didn’t catch this one, we did an entire video that you can check out as well. To summarize, having a corporation will allow you to pay less tax today and to defer a portion of your tax to another year.
Furthermore, if you can income split with a family member such as a spouse, a parent, or an adult child, this can reduce your overall income tax burden significantly as well. In a nutshell, incorporation can save you in taxes.
Misconceptions and Solution
A lot of doctors have this misconception that they shouldn’t bother incorporating the practice until they’ve paid off their student loans completely. The problem with this approach is that, if you don’t incorporate, most of you will end up paying the highest possible tax rate on every additional dollar you earn. In fact, you may end up paying more in taxes, and as a result have less money left over to pay off those very student loans.
Whereas if you incorporate, you will control the amount of money that you take out of your corporation and thus allow you to defer some tax to another year, and reduce your overall tax by strategically only taking out as much money as it make sense to do so.
Why pay the top tax rates when you don’t need to? Having a corporation can lead to more tax savings over the course of a few years that it might take you to pay down those student debts. Look at it this way, would you prefer paying three percent in interest on a student loan for an extra year knowing that you’re looking to pay 30 percent less in taxes? I would hope so.
Should you Incorporate?
So to answer this question, it’s pretty simple. Incorporate your medical practice (doctors or dentists) as soon as possible. You can continue to pay off those student loans strategically while making more money in the long run.
Still have questions?
If you’re struggling to balance these priorities and still have questions, feel free to schedule a call with one of our partners. 30 minutes, no obligations, we’d love to help.