Tax Tips For Doctors – Money Saving Strategies for Physicians
You became a doctor so you could help people but, honestly, the money doesn’t hurt either — until tax time. As someone who makes a good living, you’re also someone who can acquire a hefty amount of tax liability throughout the year. Fortunately, there are many things you can do to reduce that liability, giving you more money to put back into your practice or to retire with. It’s your money, and we’re here to help you keep as much of it as you can.
Why Tax Planning is Important
Planning ahead for your taxes is an important but easily overlooked process. Honestly, it’s also kind of boring. As such, a lot of people simply keep their head down and just keep plugging away at work, letting the chips fall where they may come tax time. This is an expensive approach to taxation.
It’s especially costly for doctors who make more than $200,000 a year and find themselves in a pretty high tax bracket. At this income level, the deductions for doctors and the self employed can save literally thousands of dollars, if properly planned for and applied. You wouldn’t go into a surgery without trying to plan ahead, and you shouldn’t enter tax season without a plan either.
Perhaps, for example, this is a good year to make that large charitable donation you’ve been considering. Doing so can help others and reduce your taxable income at the same time. Maybe now is a good time to replace your old x-ray machine or stash a little more money in your retirement account. Planning and looking ahead allows you to determine your most beneficial and least taxable path going forward.
When making your plans, remember that the goal of tax planning is not to cheat the IRS or behave dishonestly in any way. You’re not trying to get your tax liability down to zero or find a way to avoid paying the tax you legitimately owe. The goal is to legally and honestly figure out how to pay less tax so you don’t pay more than you should.
New Pass Through Tax Discounts
Thanks to the 2017 Tax Cut and Jobs Act, pass-through entities like sole proprietorships, LLCs and some S corporations get a substantial tax break. In these business structures, the business and the owner are viewed as one single entity rather than two. As a result, you personally pay any tax liability incurred by your business.
Under the new law, these pass-through entities get to chop 20 percent off the top of their income before calculating their tax liability. It’s easy to see how this can result in significant savings come tax time.
This is an excellent deduction to take, but physicians beware. Tax laws are never quite that simple. The law contains a special provision for people working in professional services, including doctors. For you, the tax credit starts to reduce and phase out at certain income levels. In 2020, those levels were $163,300 for single filers and $326,000 for joint filers. You should still absolutely take this credit if you can, but be aware of the rules when doing so. Taking a 20 percent reduction when you’re only eligible for 10 percent can lead to fees and penalties that will quickly wipe out any savings.
Alternative Minimum Tax Explained
In the past, the alternative minimum tax (AMT impacted an incredibly large percentage of physicians. The AMT is designed to serve as a counterbalance between tax deductions and tax liability. The IRS allows doctors tax deductions but also tries to make sure that they pay at least some tax.
In 2020, the exemption limits for the AMT increased significantly to $113,400 a year for married taxpayers and $72,000 for individual filers. This increase in the income threshold is good news for doctors, since now fewer of them will need to pay the AMT. As an added bonus, if you had to pay the AMT in the past but you don’t have to this year, you may be eligible to take a tax credit.
8 Top Tax Savings Write Offs & Tactics For Physicians
There are a few beneficial deductions that physicians often overlook come tax time. The mileage deduction is a common one. You can’t claim the mileage you drive from your home and practice if that is your primary workplace. You can, however, claim mileage incurred going to the hospital to see patients, making house calls and picking up medical supplies.
Depreciation in real estate
If you own the building your office is in, you may be eligible for a depreciation deduction. In some cases you can even accelerate this depreciation deduction and claim it over as few as five years. This can provide massive savings at tax time.
Food expense deduction
Although the change may prove temporary, the IRS is now far more generous when it comes to deducting meals as business expenses. Previously, you deduct only 50 percent of the costs you paid for business meals. In the wake of COVID, however, the government is allowing you to deduct 100 percent of your meals in 2021 and 2022. The goal is to encourage more business dinners in restaurants that have struggled during the pandemic.
Health savings account (HSA) and IRA contributions
As a self employed physician, you probably provide your own heath insurance. Unfortunately, getting a decent rate on your own may mean settling for a policy with a large deductible. If so, the IRS allows you to create a deductible health savings account to help offset your premiums. You can do the same with IRA account contributions since you don’t have an employer matching your contributions. Naturally, you can still deduct your medical expenses, as well.
Student loan payment deduction
As you are well aware, medical degrees don’t come cheap. A lot of physicians carry heavy student loan debt for a long time. To help, the IRS offers a student loan payment deduction of up to $2,500 a year. This deduction applies to the interest paid on the loan, though, and not the principal, so be careful what you deduct.
Home office deductions
Of course, there is also the home office deduction. During COVID, many physicians converted a space in their home into an office where they could have video appointments with patients rather than in-person visits. If you’re one of them, you may be able to take the home office deduction. Remember though that this deduction only applies to an area of your home now reserved for business only. Setting up shop in your kitchen doesn’t count.
Continuing education expenses
Continuing education expenses can provide large tax deductions, too. You want to give your patients the best care possible, and that means staying up to date on the latest medical breakthroughs and practices. You can certainly read up on a lot of this information in medical journals, but sometimes you need to take a class or get a hands-on look at a new device or technique. If so, you can deduct the costs related to your continuing education.
Self employment tax deduction
Last but certainly not least is the self-employment tax deduction. As people who often work for themselves, many physicians have to pay self-employment tax on their earnings. There is a way to reduce this tax liability if your medical practice is set up as an S corporation, so be sure to research this possibility if it applies to you. There is no way to eliminate self employment tax altogether. Still, you can deduct half of this tax on your return, which eases the sting of self-employment tax at least a little.
Bonus Advanced Tax Planning Strategies
There are also a few other potential deductions that can benefit physicians, and you may be eligible for quite a few. Again, planning ahead helps you consider these deductions, know what paperwork you need to keep to back them up, and determine the best times to take certain actions. Here are a handful of additional tax credits that may be able to reduce your tax liability somewhat:
- Professional dues and subscriptions
- Investment losses
- Professional fees in excess of 2 percent of your AGI
- Home mortgage interest
- Stock market losses and loss harvesting
- Education savings deductions
- Malpractice insurance expenses
- Scrubs and other work attire
- Patient refunds
- Office equipment and supplies
Being a physician can put you in a pretty high tax bracket, but it also allows you access to a number of tax deductions and planning strategies. With a bit of financial planning, you can find yourself uniquely poised to save a significant amount of money on your taxes, and who doesn’t want to keep more of their money and give Uncle Sam less? At Picnic Tax, our friendly and knowledgeable tax pros stand ready to help you. They can craft a plan to strategically minimize your tax debt in a variety of safe, legal and worry-free ways. Get in touch today and we’ll get right to work giving your taxes a checkup.