5 Ways Physicians Can Reduce Their Tax Bill
Running a successful physician practice comes with many great benefits: a great income, meaningful work, and clients who appreciate your service and expertise. Yet it also comes with some headaches. Chief among them are the high tax bills that many physicians pay.
In our experience, taxes are one of the biggest expenses you will face during your professional career. To reduce that tax burden and improve your financial situation, here are five strategies to consider.
1. Diversify Your Tax Strategy
For decades, the conventional wisdom in the financial world has been to take full advantage of your tax deductions, reducing what you owe on your current year’s tax bill. This included contributing to a traditional IRA as well as a traditional 401(k) or 403(b). As a result, most physicians have the bulk of their savings in these types of accounts, which they will be taxed on when they distribute from them.
One problem with that strategy is that if tax rates rise in the future (and we are currently in a period of historically low tax rates), then the tax owed on these distributions will also rise. Just as you would expect to diversify your investment strategy, we believe you should diversify your tax strategy. That includes having some in tax-deferred accounts like a traditional IRA or 401(k), but also add in tax-free type accounts like a Roth.
Here are two ways you can do this:
- First, you can consider a backdoor Roth IRA. If you are a high earner, you likely cannot contribute directly to a Roth IRA. However, there is a workaround that allows you to contribute directly to a traditional IRA, and then convert it to a Roth IRA. Even though you are over the Roth contribution limit, you can still get funds into a Roth IRA. This is a rather complex process, however, so I recommend working with an expert to get this done correctly.
- Another option to add to your tax free accounts is contributing directly into a Roth 401(k) or a Roth 403(b). Unlike an IRA, there are no income limits to these types of accounts, and the contribution limit is much higher. In 2022, you can contribute up to $20,500 into a 401(k) or 403(b).
When it comes time for you to retire, having your investments diversified among a variety of account types will add more flexibility and allow you to take advantage of tax opportunities along the way.
2. Take Advantage of Losses
While going through bad market returns isn’t fun, they do provide opportunities to save on your tax bill. One such opportunity is called tax-loss harvesting. This strategy involves selling an investment that you own that’s currently trading at a loss. When you realize that loss, you can then use that loss to lower your taxable income the next time you file your tax return.
3. Set Up a Defined Benefit Retirement Plan
Most people are familiar with a 401(k), which offers employees of a company the ability to make contributions into their own retirement accounts. While there are some benefits to these types of plans, an alternative option that might offer more benefits is a defined benefit retirement plan. In these types of plans, the contributions are usually funded entirely by the employer, and those contributions would be tax-deferred, lowering taxes in the current year. Investment gains in the plan are also not taxable while in the plan.
In the future, the employer and employees will be able to realize a retirement benefit from the plan, which is typically based on a formula that includes salary, age, and time spent at the company. While the details are nuanced, a defined benefit plan can lower your tax bill while increasing your retirement savings.
4. Utilize Business Expenses
Running a successful practice entails numerous responsibilities which require a lot of attention and detail. Since physicians are highly focused on their clients and delivering exceptional service, we have noticed that there are times when some of the business operation responsibilities don’t get the attention they deserve. For instance, there are a number of deductions physicians can utilize yet often fail to do so, resulting in a higher-than-necessary tax bill. Our experience in this area allows the physicians we serve to take full advantage of every deduction possible.
5. Maximize Your Tax Savings
At Handwerk Consulting, we take great pride in diligently understanding the tax situation of every family we advise. We want to know what happened in the prior year, the current year, and any other pertinent information that will help us. Unfortunately, we haven’t always seen this level of due diligence in other professionals, including accountants. As a Family CFO, we take great pride in going above and beyond the level of detail that you may experience from other professionals. Our focus is not to serve 200 families an inch deep and a mile wide; instead, we pay high attention to the select families we serve, and know their financial lives deeply.
Paying Too Much in Taxes?
If you feel like you’re paying too much in taxes, we’d love to see if we can help lower that bill. At Handwerk Consulting, we take a holistic and deep-dive approach to all areas of tax planning for affluent physicians and their families. If you think we can help, please contact us by phone at 215-393-0700 or email at email@example.com for a complimentary consultation.
Matt Handwerk is the head of operations for Handwerk Consulting, which offers a variety of financial planning services for physicians and senior medical professionals in the state of Pennsylvania. Matt spends his days making sure everything is done correctly behind the scenes to provide a perfect presentation for families. Every idea that comes out of a meeting usually requires 10 steps to implement—and that’s what Matt does on the back end. He enjoys seeing the strategies implemented successfully and knowing the family’s interests are being fully expressed, while helping them save money and better understand the complex accounting, legal, and financial framework in which we live.
Primarily in the accounting industry and helping clients with tax returns, Matt is also the owner of Advanced Accounting and Tax Solutions, a full-service accounting and consulting firm out of Lansdale, PA. Matt has a bachelor’s degree from Penn State, an MBA from Lehigh University, and is currently pursuing his financial licenses. Outside of work, Matt and his wife enjoy traveling, meeting up with friends, visiting local favorites in surrounding towns, and spending time at home with their cat-dog (a cat that goes outside on walks). To learn more about Matt, connect with him on LinkedIn.