5 Smart Strategies for Doctors to Optimize Tax Savings

By: Scott Sturgeon, JD, MBA, CFP®

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Introduction

For doctors, taxes are as much a part of life as RVU’s and taking call, but with careful planning and strategic financial decisions, there are ways to reduce your tax liabilities and retain more of your hard-earned money. In this article, we will explore five smart strategies that doctors can employ to save money on taxes, allowing you to make the most of your income and put that money to work in growing and maintaining wealth.

 

1. Plan Ahead: Leveraging Tax Deductions

One of the most effective ways for doctors to save money on taxes is by taking advantage of tax deductions. Tax deductions reduce your taxable income, which in turn lowers your overall tax liability. Here are some key deductions that physicians should consider:

Deductible Business Expenses: If you are self-employed working as a contractor or own all or a portion of your medical practice, you may be eligible to deduct business-related expenses such as office rent, equipment, supplies, and employee salaries. Keep accurate records of all business expenses and work with a qualified accountant to ensure that you are maximizing your deductions while staying compliant with tax laws.

Required Licensing Expenses: As a healthcare professional, you may have substantial expenses that are required in order to allow you to continue practicing. Continuing education, licensure fees, malpractice insurance, and medical supplies just to name a few. If your employer isn’t reimbursing you for these costs or if you’re practicing on your own, many of these costs may be deductible from your taxes. Be sure to keep detailed records of all your expenses and consult with a tax professional to determine what qualifies as a deductible expense.

 

2. Maximizing Retirement Plans: Tax-Deferred Savings

Retirement plans not only help you save for the future but can also provide substantial tax savings. Consider the following strategies:

Maximize Contributions: Contributing to a workplace retirement plan, such as a 401(k) or 403(b), not only helps you save for retirement but also provides tax advantages. Contributions to these plans can be made on a pre-tax basis, thereby reducing your taxable income for the year and lowering your tax bill. Additionally, some retirement plans offer catch-up contributions for individuals aged 50 and older, allowing you to save even more on taxes. Additionally, for doctors working at more than one hospital or doing contract work on the side, you may be able to make contributions to more than one workplace retirement plan, thereby increasing tax savings even more.

Contributing the maximum annual amount to these types of plans allows you to lower your taxable income, resulting in reduced tax liabilities. If you’re in your highest earning years, it likely makes sense to allocate all of those contribution to a pre-tax, traditional 401(k) or 403(b) versus a Roth 401(k), but your approach may vary based on a variety of other factors.

Consider a Roth Option: Some retirement plans offer a Roth option, where contributions are made with after-tax dollars, but qualified withdrawals are tax-free. This can be beneficial if you expect to be in a higher tax bracket during retirement. Whether it makes sense to contribute to a Roth IRA or Roth 401(k) is going to depend on your particular situation. For example, if you earn too much money in a given year you’re unable to directly contribute to a Roth IRA. However, there is a strategy called a Backdoor Roth IRA contribution which still allows you to make contributions indirectly to a Roth IRA. For high income earners with excess income, this can be a good strategy to save and invest additional tax-advantaged funds.

Explore Other Retirement Plans: In addition to traditional retirement plans like a 401(k) or IRA, consider other retirement plans such as a SEP-IRA, SIMPLE IRA, or a defined benefit plan. These plans may offer higher contribution limits or different tax advantages, depending on your practice’s size and structure. Working with a qualified financial planner, wealth advisor or tax professional can help you determine the best retirement plans for your needs.

 

3. Maximizing Spousal Retirement Contributions

For married doctors, it’s important to remember that the IRS doesn’t care which spouse earned what amount if you’re filing your taxes jointly. That opens up several planning opportunities when it comes to contributing to and investing retirement accounts. 

Spousal IRA Contributions: A spousal IRA allows a working spouse to make contributions to an IRA on behalf of a non-working or low-earning spouse, as long as certain eligibility requirements are met. To make spousal IRA contributions, the working spouse must have earned income equal to or greater than the total contributions made to both their own IRA and the spousal IRA. The non-working or low-earning spouse must be married and file a joint tax return. By maximizing retirement savings for both spouses, you can create a more secure financial future and potentially reduce tax liabilities in retirement. This strategy becomes especially valuable if the non-working or low-earning spouse does not have access to an employer-sponsored retirement plan.

Maxing Out a Spouses Workplace Retirement Plan: Similar to the strategy above, if one of the spouses has lower earnings and might not max out their 401(k) or 403(b) contributions if they were on their own, maxing out contributions to those accounts can provide significant tax benefits. The major consideration here is making sure you have adequate cashflow as a married couple, but if you’re able to max out both partners available retirement plans, you can markedly increase retirement savings and by extension, save on taxes as well.

 

4. Timing is Key: Strategic Income and Expense Planning

Strategic income and expense planning can play a significant role in saving money on taxes. Consider the following tips:

Income Timing: Timing the receipt of income can impact your tax liabilities. If you have the flexibility to defer income to a later tax year, it may be advantageous to do so especially if you expect to be in a lower tax bracket in the future. However, if you anticipate being in a higher tax bracket next year, accelerating income into the current tax year may be beneficial. Consult with a tax professional to develop an income timing strategy that aligns with your financial goals.

Expense Timing: Similar to income timing, strategically timing tax deductible expenses can also impact your tax savings. For instance, if you anticipate higher expenses in the upcoming year, it may be beneficial to accelerate those expenses into the current tax year to offset your taxable income. However, if you expect lower expenses in the future, deferring expenses to a later tax year may be more advantageous. Again, consulting with a tax professional or wealth advisor with tax planning knowledge can help you devise an expense timing strategy that aligns with your unique financial circumstances.

Combining the Above: A thorough tax plan is going to incorporate both income and deductible expenses to determine the best timing for when those things may occur. If you know you’re going to have a high-income year for example, it might be advantageous to recognize expenses or depreciate assets in those years to offset and potentially reduce your taxable income. Conversely, strategies like Roth IRA Conversions might make sense in lower income years as it may increase our taxable income for that tax year. Answers may vary on what makes the most sense for your specific situation, making it important to consult with a professional with experience in tax planning.

 

5. Stay Abreast of Tax Law Changes

Tax laws are subject to change, and staying updated with the latest developments can help you proactively plan for tax savings. Consider the following strategies:

Regularly Review Tax Laws: Make it a habit to stay updated with the latest changes in tax laws that may impact your practice. Follow reliable sources, such as the Internal Revenue Service (IRS) or reputable tax publications, and seek guidance from a qualified tax professional to understand how the changes may affect your tax situation. You don’t need to know all the intricacies and verbiage of a new tax law, but it’s important to understand at a high level how it may impact your personal tax situation.

Seek Professional Assistance: Tax laws can be complex, and seeking professional assistance can help you navigate the ever-changing landscape. A qualified tax professional, such as a certified public accountant (CPA) or a tax attorney, can provide expert guidance and help you stay compliant with tax laws while maximizing your tax savings. Additionally, working with a wealth advisor with tax experience and understanding can also be helpful in putting together a comprehensive picture of what strategies might make sense in the context of your finances overall.

 

Frequently Asked Questions (FAQs)

Q: How much can I contribute to a Health Savings Account (HSA)?

A: The contribution limit for an HSA in 2023 is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. Additionally, individuals aged 55 and older can make an additional catch-up contribution of $1,000. Contributions to an HSA are tax-deductible and grow tax-free, making it a valuable tool for high income earners looking to save on taxes. Learn more about whether an HSA makes sense for your financial situation here.

Q: Can I claim home office expenses as tax deductions?

A: If you have a dedicated space in your home that is used exclusively for your medical practice and meets the requirements set by the IRS, you may be able to claim home office expenses as tax deductions. However, it’s crucial to understand the specific rules and regulations regarding home office deductions and work with a tax professional to ensure compliance. If you have some kind of “side hustle” that you do out of your home that’s in addition to actually practicing medicine, this might be worth looking into.

Q: Can I claim meals and entertainment expenses as tax deductions?

A: Maybe, but remember this is typically going to apply to those who own their own practice. The tax deduction for meals and entertainment expenses has changed significantly due to recent tax law changes. As of 2023, most entertainment expenses are no longer deductible, and the deduction for business meals is limited to 50% of the expense. It’s crucial to understand the updated rules and regulations surrounding meals and entertainment expenses and work with a tax professional to ensure proper deduction.

 

Conclusion

For physicians, taxes are unavoidable and likely one of the largest ongoing expenses you’ll incur over your career. That doesn’t mean they can’t be managed though, and being proactive in your tax planning can help you save money and optimize your financial situation. By maximizing retirement plans, timing your income and expenses, staying updated with tax law changes, and seeking professional assistance, you can ensure that you are taking advantage of all the available tax-saving opportunities.

At Oread Wealth Partners, tax planning is a key component of our client’s financial plans. We work with you to determine what opportunities may exist to mitigate taxes where possible, and help you to actually take action in implementing strategies that may be available. With careful planning and guidance, you can optimize your tax strategy and keep more of your hard-earned money in your pocket. If implementing these tax-saving strategies seems daunting, consider subscribing to our newsletter or reaching out for a consultation today on how we can partner with you to align your finances with what’s important in your life.

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