We’ve all heard the expression “the more you make, the more they take,” and it’s true. The more income you earn, the higher your tax bracket and the bigger your tax bill. For physicians earning high salaries, that can add up to hundreds of thousands of dollars over the course of their career.
As a physician you work under great pressure and have huge responsibilities, and you deserve to keep as much of your hard-earned salary in your pocket as you can. Fortunately, there are multiple ways — legal ways — to reduce your tax liability and increase your savings at the same time.
Ready to learn how?
Here’s our physician’s guide to minimizing taxes and increasing savings so you can save and invest a greater percentage of what you earn.
Contribute the Maximum Amount Allowed to Retirement Accounts
Whether you have your own IRA or a 401k or 457b through your employer, every dollar you contribute to a retirement plan reduces your taxable income. By contributing the maximum amount allowed you can take full advantage of this tax-savings strategy.
The more you contribute, the more you can deduct from your taxable income, up to a point. For 2023, the 401k max contribution is $22,500 for people under the age of 50 and $30,000 for people 50 and older.
Invest in Disability Insurance
Disability insurance is income insurance. If you become too ill or injured to work, you can collect up to 60% of your current income with an individual long-term disability insurance policy, and it can pay benefits for decades.
Even if your employer offers a disability insurance plan, it’s best to purchase an individual policy of your own as well. When you pay for individual disability insurance premiums from income you’ve already paid taxes on, the benefits you receive are tax-free.
Depending on your policy’s definition of disability and benefit period, you could earn disability “income” for years, without ever having to pay taxes on any of the benefits you earn. Check out this article from Physicians Thrive to learn more about the definition of disability, policy riders, and more.
Consult Your CPA About Tax Loss Harvesting
Investing always carries some level of risk. If you find yourself in a position where you’ve lost money on an investment, you can sell off the losing investment to offset your income and reduce your tax burden.
Tax loss harvesting is a strategy that allows you to sell off an asset with a recognized net loss. Currently, individuals can claim up to $1,500 per year in losses. If you lost more than that in a poor investment, you can carry the loss balance over on future tax returns.
This may not seem like a massive tax break, but because you can carry the loss forward, it can add up to significant tax savings over time.
Invest in a Health Savings Accoun
Investing in a health savings account offers a triple tax benefit.
One, you won’t be taxed on the money you contribute to the account, so this is yet another way to reduce your taxable income. Two, the amount you invest in your HSA grows tax-free. Three, when it’s time to withdraw from the account to pay for healthcare expenses, you won’t be taxed on withdrawals either.
Keep in mind that once you hit age 65 you can withdraw the funds in your HSA for any reason. If you don’t withdraw them to pay for medical care, you will have to pay income tax on those distributions.
Work As a Self-Employed Physician
When you own your own practice or become a partner in a practice you can deduct every business-related cost from your earnings. That includes everything from the cost of a white coat to expensive new medical equipment.
Medical practices are businesses, and the IRS allows you to deduct legitimate business expenses and operating costs from your gross earnings to determine your net profits. Self-employed individuals are often able to deduct a wide range of expenses from their taxable income, known as self-employed allowable expenses. These deductions can significantly reduce their tax liability, as they lower the amount of profit subject to taxation.
Work Locum Tenens
Owning your own practice isn’t the only way to reap the tax-savings advantages of being self-employed. Any physician that receives a 1099 can deduct a wide variety of business expenses, including those that work locum tenens.
As a locum tenens physician, you can deduct all sorts of business expenses from your earnings, providing that your agency doesn’t already cover them. These include:
- Travel costs, including airfare and hotel accommodations
- Insurance premiums on health insurance, dental insurance, and malpractice insurance
- Licensing fees to maintain state licenses and DEA licenses
Working locum tenens isn’t just for physicians who want a flexible schedule or a nomadic lifestyle. It’s also perfect for physicians looking to work a side job or pick up extra shifts where they can earn supplemental income, which can also boost your savings.
In Conclusion
From CPAs that know all the best tax-efficient strategies to financial advisors that can help you make tax-advantaged investments, it’s always wise to seek the help of a financial professional. Financial experts stay abreast of the laws and best practices, so hiring the right pros can help you pay less in taxes this year, next year, and throughout your career.
