Strategies for minimizing tax liabilities for physicians

Jenny Handwerk |

Strategies for minimizing tax liabilities for physicians

Physicians are among the top-paid professionals in the United States compared to professionals in other industries. Additionally, as all American workers know, income taxes increase with one's salary.

You risk accruing a significant tax liability each year if you are well-paid. Thankfully, there are  various ways to lower that burden, providing you with more funds to retire or reinvest in your practice.

Choosing retirement and investing strategies that will result in a more stable financial future is part of tax preparation. The objective is always the same, regardless of your chosen approach: reducing your tax obligation and generating as much tax-free or tax-beneficial income as possible for retirement.

Tax preparation is crucial but frequently needs to be addressed. The process might be tedious. Because of this, many individuals just keep working hard and keeping their heads down, hoping that things work out when tax time rolls around. This method of taxing is costly.

Doctors who earn over $200,000 annually and fall into a high tax rate find it particularly expensive. If correctly handled and prepared for, the deductions for doctors and self-employed individuals can save thousands of dollars at this salary level. 

Tax Strategies Physicians Should Take 

Combine the deductions you make for charities

For married physicians, the standard deduction has increased to $27,700 (2023), so you might be unable to take advantage of lesser charitable contributions. Consider contributing a single, higher sum every other year to circumvent this. To receive a big tax benefit this year, consider contributing appreciated stocks to a donor-advised fund. In the ensuing years, distribute smaller gifts from the fund to charitable organizations.

Health savings account (HSA) and IRA contributions

You likely offer your own health insurance as a self-employed doctor. Regretfully, opting for coverage with a high deductible may be necessary to obtain a reasonable premium. In such a case, you can establish a deductible health savings account with the IRS to partially offset your premium costs. Since your company does not match the contributions you make to your IRA, you can do the same with those contributions. Of course, you can still write off the costs of your medical care.

Diversify Your Investments

Tax preparation involves more than just lowering your current year's tax obligations. It also consists in making the most of your retirement tax efficiency. Diversifying your investments is one approach to do this.
Examine all of your financial accounts to diversify your money. Make sure to review your taxable, tax-favored, and tax-deferred accounts. You can maximize your retirement tax status by distributing your investments across multiple accounts.

Continuing education expenses

Expenses for continuing education may also qualify for significant tax benefits. Providing the best treatment possible to your patients requires you to be abreast of the most recent developments in medicine. 

Many of these details are available for reading in medical publications, but occasionally, you must attend a class or get a firsthand look at a novel tool or method. If so, you can write off the expenses associated with your further education.

Use your 529 college savings plan to pay for private school

The recently passed tax reform permits families headed by physicians to utilize their Section 529 assets to pay up to $10,000 annually for each child's private K–12 education. You can contribute money to your 529 plan to pay for private schools in places where such donations are tax deductible. Elderly physicians may think about establishing 529 plans for their grandchildren, intending to cover their schooling costs before college.

Self-employment tax deduction

Many physicians must pay self-employment tax on their earnings because they are self-employed. If your medical business is organized as an S corporation, there is a way to lower this tax liability, so look into this option if it pertains to you. The self-employment tax cannot be completely removed. Even so, you can deduct half of this tax from your income, which lessens the pain of self-employment tax.

The best action for tax preparation is to work with qualified experts. Be sure to begin organizing your taxes on April 15th. Instead, engage a group of professionals at this early stage to assess your tax circumstances for the current year and start the following year with a well-defined strategy. Feel free to contact us to guide you and get the most out of your tax deductions.