Tax time can be nerve-wracking for doctors. After all, you've worked hard all year for your income; nobody wants to pay more in income taxes than they absolutely have to. However, it's just as important to make sure you're not falling victim to potentially risky schemes marketed as "tax shelters" in your search for available tax credits and deductions.
Here are legitimate ways you may be able to lower your income tax bill come April 15:
Business Deductions
If you're a self-employed physician (which includes being a partner in a practice or an independent contractor), there are a number of tax deductions you should explore. You'll need to have records to substantiate your deductions, but you may be able to realize significant savings by claiming some or all of these deductions:
Clothing, including scrubs, white coats and work shoes
Medical and DEA licenses
Board examination fees
CME expenses
Work-related travel expenses, including meals, accommodations and travel itself
Mileage and business-related automobile expenses (but not associated with commuting)
Office equipment and supplies
Medical equipment
Patient refunds
Malpractice insurance
Cell phone and pager expenses
Fees paid for tax preparation, accounting and retirement plans
Home office expenses
Payroll taxes
While self-employed physicians have to pay both the "employer" and "employee" portion of self-employment taxes, the employer portion can generally be deducted too.
If you wear a white coat but are a W-2 employee instead of being self-employed, unfortunately, you will probably not be able to take advantage of these deductions because there is a 2% floor for unreimbursed work expenses.
One option to talk to your tax professional about is the possibility of establishing a side business in addition to your "day job," so you could lower your taxable income through deductions.
Retirement Accounts
Retirement planning through tax-deferred retirement vehicles is one of the biggest ways doctors can reduce their tax bill while at the same time saving more for retirement.
Surprisingly, many physicians simply aren't taking full advantage of the opportunity. When you set aside money in a tax-deferred account, you're reducing the amount of your taxable income, dollar for dollar. And, the opportunity for savings is significant.
If you're self-employed, you can contribute as much as 25%, up to $54,000, to an SEP-IRA or 401(k) this year, in addition to your own individual salary deferrals of up to $18,000. And, if you're age 50 or older, you can make "catch-up" contributions of an additional $6,000. Other ways to save on a tax-deferred basis include taking advantage of SIMPLE IRAs and profit-sharing plans.
While W-2 employees don't have the same opportunity, they can still set aside up to $18,000 this year in an employer-sponsored 401(k) plan (plus "catch-up" contributions) for those over age 50.
While after-tax vehicles like Roth IRAs won't give you any tax savings this year, it's worth exploring whether setting aside money for future tax savings makes sense for your personal situation.
To explore your options for retirement savings more fully, work with a financial professional/team that understands and has experience with financial planning for doctors.
Health Care
While your job is providing health care services, don't forget that you are also a consumer of those types of services. Your health insurance premiums are pre-tax (don't forget that deduction if you're self-employed!).
If you incurred personal medical expenses, you might also be able to take a deduction. Even if you don't qualify for a federal deduction, a deduction may still be available for state income taxes.
Doctors who choose high-deductible health insurance plans may also benefit from setting aside funds in a health savings account (HSA) on a pre-tax basis. The funds you accumulate can be used later for your health care co-pays and deductibles.
Once you reach age 65, you can use your accumulated HSA dollars for anything, treating it like any other IRA account. Your contributions to an HSA are deductible, and there's no income limit for being able to take a deduction, unlike with traditional IRA contributions.
Charitable Deductions
If you donate your financial resources, assets or talents to charitable organizations or causes, you can take a tax deduction for it.
Keeping track of your charitable contributions throughout the year takes a little bit of work; in addition to documenting the dollar value of the contribution (or the asset you donated), you should also keep track of mileage and related to the deduction. However, a little bit of organization and work can pay off come tax time.
Mortgage Interest
While many doctors make too much money to take advantage of deductions like interest on student loan payments, the interest you pay on your home mortgage is not currently subject to income limits.
Because of this, it pays to be deliberate about which kind of debts you pay down first. Your financial professional can help you review your overall picture and help you determine a strategy that makes the most sense for you.
Investment Tax Loss Harvesting
The aim of investing is to make money; nobody is happy when investments depreciate. The good news is that the IRS allows you to deduct up to $3,000 of capital losses to offset capital gains that would otherwise be taxed.
Other Personal Tax Credits and Deductions
Don't forget about other personal credits and tax deductions that you may qualify for, including things like:
Energy-efficient home improvements
Adoption expenses
Job search expenses
Child care expenses, so you and your spouse can work
Property taxes paid
Doctors with children in college may qualify for the American Opportunity Credit
Alimony payments
State and local income taxes paid
Casualty losses
Seek Professional Tax Services
While there is no shortage of software tools and do-it-yourself help available for preparing and filing income taxes, doctors and surgeons would be well-served by considering hiring a tax professional who regularly works with medical professionals.
We recommend working with a competent firm that understands the nuances that come with the business of practicing medicine. Doing so can help doctors get their financial houses in order and can identify additional opportunities to reduce income tax bills.
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