The Beginner’s Guide to Tax Planning for Doctors

When you’re a high-income earner with lots of expenses, like a doctor, tax season is an all-year thing. The earlier and more consistently you plan, the easier the quarterly and annual filing deadlines become.

Maximizing your tax deductions could save you substantially this year and compound those savings into the future.

No, there’s no magic trick to make these tax savings happen. It’s all in how you approach tax planning.

This beginner’s guide to tax planning for doctors will show you how you, too, could maximize your deductions and optimize your financial goals.

What Are Tax Deductions?

Any deduction of expenses means more money in your pocket. This is essential when you’re paying taxes in a higher tax bracket.

The term “tax deduction” refers to any benefit or advantage that lowers your taxable income and, therefore, reduces the amount of taxes you’re liable for. Brackets are broken into seven tax rates, with the taxable amount ranging from 10% to 37%.

The lower your income, the lower you fall on the ladder of tax rates. For example, a single taxpayer making up to $11,000 must pay the IRS 10% of their taxable income. Conversely, any taxable income of more than $578,126 is taxed at the 37% rate (as of 2023’s federal income tax rates).

Understanding Taxable Income

Yet, these rates are determined by your taxable income, which takes your total income minus your deductions. At the lower thresholds, most people only have standard and itemized deductions available to them. But as your income increases, and if you have business income, you may benefit by taking advantage of other deductions that reduce your taxable income.

Tax Deductible Expenses

Many personal deductions are things you do without considering their impact on your tax bracket, such as paying your student loans and mortgage. (Read: Should I Buy a Home or Rent?) What you might not realize is that the interest on those debts is often a tax-deductible expense.

Other common deductions include charitable donations (with receipts), self-employment expenses, and medical or dental expenses that total more than 7.5% of your adjusted gross income.

If you’re a business owner, various other expenses will minimize your tax responsibility, such as:

• Payroll
• Rent
• Leases (including equipment)
• Utility costs
• Other operational costs

Hiring a knowledgeable CPA is a vital step toward maximizing your tax deductions. You may already have a bookkeeper who handles your accounts, but if you only talk to your accountant when it’s time to file your taxes, you could miss out on valuable advice.

Bookkeepers vs. CPAs

Is having a certified public accountant (CPA) on retainer necessary if you already have a full-time bookkeeper?

Knowing the difference between the two roles will help you make this decision.

A bookkeeper’s job is to maintain your accounts, recording transactions, handling accounts receivable and payable, and reconciling bank statements. This person is in regular communication with you as a business owner, assisting in managing payroll and keeping track of receipts to ensure tax filing time goes smoothly.

A CPA has more of a hands-off role in day-to-day transactions. They are on the scene when it’s time to prepare and file your tax returns. At that point, they’ll take the financial information the bookkeeper has prepared and analyze it before filing your taxes.

However, when you’re consulting with a CPA, they can offer valuable advice on best practices in finances and compliance to follow throughout the year. These steps are designed to maximize your tax deductions while remaining compliant with federal and state income tax rules.

Financial Advisor Roles

Not every doctor needs a bookkeeper. If you’re not a business owner or independent contractor, your finances may be simple enough to handle yourself. A reliable, trustworthy CPA, though, can be essential.

But what about a financial advisor? If you have a CPA, is yet another person guiding your money decisions necessary?

Let’s look at what someone in this role does for you.

A financial advisor’s job description includes guiding people into the best ways to manage their money and plan their future finances. While a CPA helps reduce your taxes each year, a financial advisor can:

• Work with you to determine your personal and business goals and suggest strategies to help you meet them
• Collaborate on a budget that allows you to save for major purchases, such as cars, weddings, and retirement
• Offer investment strategies that match your risk preferences and financial goals
• Track and manage your portfolios
• Assist with tax planning
• Guide you as you plan your estate

It’s also the role of a financial advisor to keep their finger on the pulse of the current economy. With their help, you can make decisions using up-to-the-minute market activity and predictions. Physician-focused financial advisors like OJM Group understand the challenges and goals of someone in your career and can provide suggestions based on your unique needs.

In short, while a CPA handles your annual taxes, a financial advisor takes a holistic view of your finances, offering key advice to give you the best short- and long-term results.

What Are the Basic Tax Planning Expenses?

Financial planning is a marathon, but it starts with the basic income tax strategies that nearly everyone can use.

Your tax-deductible expenses depend on the type of work you do. Are you an employee or self-employed? Do you own a home and have a mortgage or do you rent? These answers will determine whether you take basic itemized deductions (or the standard deduction) or can add more, such as home office expenses.

Standard and Itemized Deductions

As an employee, itemized or the standard deduction may be all that is available to you. However, if you have other deductible expenses and losses, your CPA may recommend deducting these expenses from your eligible business income.

As of 2023, the standard deduction set by the IRS is $27,700 for Married Filing Jointly or Qualifying Surviving Spouse. Head of Household standard deduction is $20,800, and the Single or Married Filing Separately deduction is $13,850.

If the following expenses exceed these amounts, consider itemizing deductions on your tax return. Per the IRS, itemized deductions include:

• Donations to approved charities
• Gambling losses (to the extent you had gambling income)
• Interest paid on your home mortgage
• Income, sales, real estate, and personal property taxes
• Losses from disasters or theft
• Medical and dental expenses (over 7.5% of your adjusted gross income)

Your tax professional can guide you as you collect the receipts and evidence of these expenses throughout the year. A bookkeeper is often a valuable asset when it comes to keeping these receipts organized and accessible.

Still, sometimes, your personal and business expenses aren’t enough to cushion the tax liability of being in a higher income bracket. When that happens, digging deeper into more advanced deductions is the next step.

What Are Some More Advanced Ways to Maximize Deductions?

When you’re a doctor, utilizing proper allowable business deductions can mean a difference of thousands of dollars if it takes you into a lower tax bracket.

To make that happen, you may need to get proactive (while staying compliant) with how you spend your money.

But if you maintain your records well, you can take advantage of thousands of dollars in qualified tax deductions.

Retirement Plan Contributions

Depending on your retirement plan contributions, you may be able to increase your contributions to decrease your taxable income. The basic elective deferral limit for a 401(k) or 403(b) plan in 2024 is $23,000 or 100% of the employee’s compensation (whichever is less).

Catch-up contributions are permitted for those 50 or older. If your retirement account has an employer-matching contribution, increasing your share boosts your profits exponentially.

Elective deferral contributions are usually a percentage of your compensation before tax. However, you may take advantage of a Roth IRA or a Roth 401(k), which, unlike the traditional elective plans, is included in gross income but has the benefit of tax-free distributions during retirement.

Traditional IRAs act similarly to 401(k), 403(b), and 457(b) plans but have lower allowable annual contribution amounts. Simple IRAs permit the employee and the business owner or sole proprietor to contribute to the plan. An SEP-IRA is a plan to which only the employer contributes. Both SEP and Simple IRAs allow self-employed physicians and sole proprietorships to contribute to their retirement savings.

Homeowner Deductions

Mortgage interest isn’t the only tax advantage for homeowners. You can also deduct a portion of your property taxes. Property taxes along with other state and local taxes (SALT), have a deduction limit of $10,000 or $5,000 for married couples filing separately.

If part of your home is dedicated to your business, some of those costs may be deducted against your business income.

Selling your house soon?

Your taxable capital gain is lowered if you include selling costs, such as:

• Real estate agent commissions
• Legal fees
• Administrative costs
• Other expenses

In addition, if it has been your primary residence for two of the last 5 years, you may also exclude some or all of your gain from the sale.

Education Contributions

Do you have someone in your family who will need a college education in the future?

A 529 education savings plan is the ideal way to reduce your tax liability while providing for your beneficiary since the growth within the plan is not taxed as long as the plan is used to pay for qualified expenses.

A 529 plan is sponsored by the state you’re in but offers federal benefits. You don’t have to use your home state’s choice of plan. Your financial advisor can help you determine the best type of plan and state to house it in.

529 plans provide tax benefits to you with no income phaseout. You can’t deduct them from your federal income tax, but contributions may be used as deductions in many states. Your earnings are tax-free when distributed for qualified education expenses.

You (as the account owner) retain control of the funds and determine how withdrawals are used. The beneficiary (usually your child) has allocated funds to help them focus on their education instead of taking out a loan. Should the intended beneficiary decide not to attend school, the funds can be allocated to another eligible person.

Although contribution limits are high, the amount of annual contributions deducted is capped by the state.

Charitable Donations

Tax deductions for charitable organizations include any gift of money or goods given to tax-exempt organizations. When you do a “good deed” by donating to any of these places, you can claim a deduction for the value of the gift if you itemize your deductions.

You’ll need evidence that you donated to a charity recognized as tax-exempt by the IRS and received nothing but a receipt in exchange for your gift. Most charitable cash deductions are limited to 60% of your adjusted gross income (AGI).

Tax-Loss Harvesting

Tax strategies like tax-loss harvesting are often overlooked. This particular method involves selling investments at a loss in the same year that you have sold other investments at a gain. Doing so allows you to then offset the realized capital gains you have during the tax year and thus reduce your capital gains tax liability.

This strategy must be carefully planned, as in addition to the tax savings aspect, you must also consider whether it is the right time to sell the investment. Discuss the pros and cons of selling in order to harvest losses with your financial advisor.

Employ Your Children

Creating a solid financial future for your children could start with employing them while they’re under 18. Following child labor laws, you can turn your child into an employee — provided they have real work to do.

With this strategy, you pay your child reasonable wages to complete work-related tasks. You’ll complete payroll withholding as usual and file your taxes with this qualified business expense deduction.

Other Tax Advantages Could Be Waiting For You

The more knowledgeable you become about qualified tax deductions, the greater your ability becomes to lower your taxable income.

Your CPA and financial advisor may suggest ways to deduct things like your malpractice insurance, income made while working as a locum tenens, or taking full advantage of depreciation deductions.

Conclusion

Tax planning is more than deciding whether to be an S-Corp or an LLC or saving medical expenses and other receipts. With the help of your CPA and financial planner’s tax advice, you may be able to find lesser-known tax breaks that work in the medical professional’s favor.

What tax advantages are you not using right now that could lower your tax bill?

Save those continuing education receipts, your health savings account (HSA) contributions and expenses, real estate rental property expenses, and anything else that could reduce your business tax responsibility.

Staying on top of state and federal tax laws can be challenging. Let your bookkeeper handle your daily transactions, and contact OJM Group to learn how you can employ better financial strategies to become more tax-efficient with your funds.