Tax Reduction for Physicians by Midwest Legacy Group
For more information reach out today: P. 630.541.5958 or E. firstname.lastname@example.org
Many of our clients work in the medical field, so of course, we get a lot of inquiries specific to tax deductions for physicians and we are happy to oblige. We just want to point out that this article isn’t tax advice, we are not accountants, and it is meant for an information only type article. It is not tax specific advice. We do advise you to speak with a tax professional for further clarity as it relates to you and your specific needs.
We do want to focus on some of the most common and effective tax deductions that are not only for medical providers but can really apply to anyone reading this article. A lot of this is contingent upon your employment status. Are you a salaried physician at a hospital or medical group or are you self-employed? These things make a difference, and some tax deductions may be more available to you than others.
Please note that these are not in a particular order, but we did want to provide some things you can do that may lower your tax bill as a doctor.
1. Contribute to Pre-Tax 401k/403b Retirement Accounts
We believe all physicians should be contributing to retirement accounts. Are you in practice? If so, then there are not a lot of reasons why you shouldn’t try and contribute the maximum allowed each year. As it currently stands: $20,500 salary deferral limit to a 401k/403b type account, plus $6,500 if age 50+ in 2022.
Here’s the deal, if you make pre-tax contributions, that reduces your taxable income. An example of that would be – you make $250K and you put $20,500 into your 401k, the IRS will only tax you on $229,500.
Those of you that are self-employed, or own your own practice, your contribution can be even higher. You can contribute up to $58,000 a year to your 401k. And guess what, that can all be pre-tax. Additional requirements do come in to play here if you want to contribute that much, but in the end it’s an effective way to save on taxes and save for retirement at the same time.
2. Add to a Solo 401k or SEP IRA for 1099 Self-Employed Income
When you are both the employee and the employer you are eligible to contribute a combined total of $58k. Keep in mind that the employee contribution limit is $20,500. The employer can then add additional monies to reach that higher combined total.
If you have more than one employer, keep in mind that the employer contribution limit of $20,500 is a combined total for all 401k/403b type accounts.
Many physicians have 1099 earnings. Did you know that you can set up a solo 401k for that revenue stream? You can make employer contributions at around 20% of your annual earnings per year pre-tax, with up to a $58,000 cap.
3. Contribute to a Defined Benefit Plan or consider the Cash Balance hybrid Pension Plan
Your company usually can set up a defined benefit plan or a cash balance strategy. If you are self-employed or a high-income owner in a small business, you could possibly implement one of these too. At the end of the day, they can potentially allow you to contribute upwards of $100,000 per year pre-tax. That number is upwards of $300,000 when you reach our 60’s. If designed correctly, could include spouse and/or children for 100’s of thousands of dollars in tax savings.
There are a lot of rules and even subrules to defined benefit and cash balance plans. How many employees you have coupled with your company’s cash flow, defines whether this option may or may not make sense. Your company could have to make contributions to selective employees’. To better access the fit, we work hand-and-hand with a certified ‘Third-Party Administrator’ who will run an analysis for you from a completed census.
4. Roth IRA / Backdoor Roth IRA / Mega Backdoor Roth IRA
You may not deduct today but with Roth accounts all the money and investment earnings in retirement can be withdrawn from the account tax free. Think of Roth accounts as tax deductions for your future self. You can contribute $6,000 to a Roth IRA/Backdoor Roth IRA in 2022 ($7,000 if over age 50).
It’s ‘The Mega Backdoor Roth’ where you can contribute after-tax dollars to your 401k/403b at work. Here’s the deal: on top of the standard $20,500 employee contribution limit, you can also then convert those after-tax dollars into a Roth account. The biggest exception here is that you can potentially contribute a lot more.
The total 401k contribution limit in 2022 is $58,000. This is between employee salary deferrals ($20,500), employer matching/profit sharing contributions, and employee after-tax contributions. The good news here is as that not all employers offer this provision, but we are starting to see a lot more.
- Traditional IRA income phase-out ranges for 2022 are:
- $68,000 to $78,000 – Single taxpayers covered by a workplace retirement plan
- $109,000 to $129,000 – Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan
- $204,000 to $214,000 – A taxpayer not covered by a workplace retirement plan married to someone who’s covered.
- $0 to $10,000 – Married filing a separate return. This applies to taxpayers covered by a workplace retirement plan
- Roth IRA contributions income phase-out ranges for 2022 are:
- $129,000 to $144,000 – Single taxpayers and heads of household
- $204,000 to $214,000- Married, filing jointly
- $0 to $10,000 – Married, filing separately
5. Own Your Home
Owning a home used to be more beneficial from a tax standpoint before the standard deduction was increased several years ago and SALT deductions were capped at $10,000. Electing to itemize occurs when your itemized deductions exceed your standard deduction. Here are the big things you can deduct when looking into itemizing: mortgage interest on a balance up to $750k, property taxes, charitable contributions and more. State, local and property taxes cap at $10k.
Tip–Don’t buy more house than you can afford! The reason being is the interest it tax deductible if your total itemized deductions exceed your standard deduction.
6. Own Rental Properties
Rental properties generate income and there are quite a few tax deductions you may be able to claim as a result. Some of those include depreciation of the property. That can be used to reduce the taxable amount of your rental income. If you leave the properties to your heirs when you die, they get a step up in basis to the fair market value of the properties on the date of death.
Listen owning and managing rental properties isn’t for everyone. The tax rules can begin to get very complex. Make sure you hire a tax professional who is familiar with taxes surrounding the rental property space.
7. Sell Investments at a Loss
Also knows as tax-loss harvesting, this occurs anytime you have an investment outside of a retirement account. The investment must be worth less than you bought it for. Then you can sell that investment and capture that loss on paper for tax purposes. If you sell an investment for a gain, you must pay taxes on your investment gains each year. However, losses offset equivalent gains, so anytime you lose money, it can be beneficial to you from a tax standpoint.
8. Contribute to Charity
When itemized deductions exceed standard deductions, then the amounts above the standard deduction are tax deductible. This includes your charitable contributions. For those who give to charity it is an added little bonus that it might save you some money on taxes.
You are allowed to deduct the fair market value of the shares and avoid paying any applicable capital gains taxes on investment gains. That happens when you donate appreciated stock (or other investments), to charity, which you may be eligible to do.
9. Eligible Business Expenses
If you own your own business, or have self-employed 1099 income from consulting or something, you can potentially write off eligible business expenses. You paid for CME out of pocket? That may be deductible. You have work-related travel? You may be able to write it off. You must purchase office equipment and supplies? The government may pay for a chunk of that in the form of a tax deduction. Any other expenses that are essential to operating your business can potentially be deducted from your revenues to reduce your taxable income. Be sure to work with a qualified tax professional to learn what you can and cannot deduct as a business expense.
“Legacy planning, leave the world a little better than you found it.” ~Christopher Gandy, LACP, Founder
To find out more reach out today: P. 630.541.5958 or E. email@example.com
*These concepts were derived under current laws and regulations. Changes in the laws or regulations may affect the information provided. This information is not intended to be used – and cannot be used – to avoid penalties under the Internal Revenue Code.
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