A 2018 survey conducted by FINRA showed that 71 percent of people thought they were financially literate, but couldn’t answer basic financial questions. While doctors and physicians certainly know more than the average person, even brilliant doctors can make tax blunders. In this article, we’ll discuss the best doctor tax deductions to save you hundreds or thousands of dollars per year.
How doctor tax deductions can help your practice
It’s easy for an unpleasant task like tax planning and preparation to get pushed off. However, hiring a CPA and researching the best tax deductions for doctors and physicians can make a big difference on your tax return.
Many doctors start their own practice as a sole proprietorship, after completing their fellowship or while working at a hospital. Amid the hustle of starting a practice, new doctors can overlook tax deductions that would save them thousands of dollars. In other cases, smart medical professionals unwittingly fall into a tax mess filled with questionable investments and unscrupulous “tax shelters.”
For this reason, I’ve decided to list the best doctor tax deductions, based on both my experience and my knowledge of current tax laws. It’s my hope that you find these tax deductions helpful for your specific situation. While I’ve done my best to explain each of the following deductions as thoroughly as possible, if you have questions, please call my firm. We’d love to help you reclaim thousands of dollars due to unclaimed tax deductions and tax credits.
Tax-deferred retirement plans
One of the biggest opportunities for doctors is tax-deferred retirement plans like 401k accounts or, for self-employed contractors, SEP-IRA accounts. These types of accounts allow physicians to lower their taxable income with each contribution because the accounts are not taxed this year.
Tax-deferred accounts are a popular tax planning tactic because your taxable income is reduced by every contribution you make into a tax-deferred account. Many companies offer their employees 401(k) retirement savings accounts. Public service employees and government employees are offered 403(b) accounts and 457 accounts, respectively.
In a 401(k) plan, an employer will often sponsor the plan, and match an employee’s contribution up to 2–3 percent. For self-employed contractors who don’t have access to an employer-sponsored 401(k), a SEP-IRA account is a good alternative.
A Simplified Employee Pension (SEP) Plan lets businesses of all sizes, even a sole proprietorship, establish a retirement account. SEP plans are established by adopting Form 5305-SEP or designing your own plan, and have no filing requirement for the employer. Unlike a 401(k), only the employer can contribute to the SEP-IRA plan. Also, within a SEP plan, all money is fully owned by the employee (i.e., employees are 100 percent vested).
Section 529 accounts for education savings
Authorized under Section 529 of the Internal Revenue Code, this savings plan is designed to motivate taxpayers to save for future education costs. All 529 plans, known as qualified tuition plans, are sponsored by states or educational institutions. There are two major types of 529 plans, including prepaid tuition plans and education savings plans.
In a prepaid tuition plan, you buy credits at universities and colleges to cover future tuition and fees (at current prices) for the beneficiary. Prepaid tuition plans cannot be used to prepay costs for elementary and secondary schools. They may also not be used to cover on-campus lodging at a college or university.
An education savings plan lets you contribute to an investment account designated for the beneficiary’s future qualified educational expenses. This is the most common type of 529 plans, but each one has its benefits and drawbacks.
Tax-loss harvesting is a technique that consists of selling portfolio assets that have declined in value since you first purchased them. Recognizing these losses can offset other gains realized within the same tax year, which serves to lower your overall tax bill.
Now, those who’ve been investing for a while might view this as counter-intuitive. After all, it’s a well-aged maxim for investors to “buy low and sell high.” But, in the case of tax-loss harvesting, you’re choosing to temporarily sell a stock and reduce your tax bill. Then, after a 30-day waiting period, you can buy that same stock again. If you engage in tax-loss harvesting, you can deduct up to $3000 in capital losses from your ordinary income. If you have over $3000 in losses, you can deduct the excess in following years.
Qualified Business Income (QBI) deduction
This tax deduction allows eligible business owners (including freelancers) to deduct up to 20 percent of their qualified income on their tax return. To qualify for this deduction, single-filing taxpayers must have total taxable income under $164,900 for 2021 and under $170,050 in 2022. For joint filers, the threshold for taxable income is $329,800 in 2021 and $340,100 in 2022.
As noted in the name, the Qualified Business Income deduction excludes the following types of income:
• Capital gains or losses
• Income earned outside the United States
• Interest income
• Wages and payments made to partners and shareholders
To learn more about the Qualified Business Deduction (a.k.a., Section 199A deduction), you can visit the IRS website page about it here.
Make charitable contributions and donations
Giving to nonprofit organizations is good for more than your heart: it’s a proven tax planning method. Now, there have been some changes to charitable contributions in the past couple of years:
Prior to 2021, charitable contributions were limited to 60 percent of your adjusted gross income. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and Taxpayer Certainty and Disaster Tax Relief Act have adjusted guidelines for charitable contributions. You can claim up to $300 (single filers) or $600 (joint filers) in qualifying charitable contributions.
Instead of 60 percent, you can claim deductions for any cash contributions, up to 100 percent of their adjusted gross income (AGI). As a taxpayer, you can take the standard deduction and also deduct charitable contributions made to qualifying organizations.
To learn more about charitable contributions, visit the IRS website here.
Learn more about tax deductions here!
Since 2011, we’ve been helping businesses and organizations reclaim thousands by seizing unclaimed tax deductions and tax credits. We provide managed bookkeeping services as well, so we’re able to implement many brilliant tax planning strategies for our clients.
At the heart of our firm lies a relentless focus on each client’s financial success. Whether you need doctor tax deductions or a comprehensive accounting solution, we can help you. If you’d like to discuss your tax situation with us and receive a solid tax plan for your specific needs, contact us today!