10 Tax Deductions for Doctors

Written by: Corey Janoff

With the tax deadline looming, many of you out there may be scanning through every detail of your financial plan to come up with some final tax deductions. It is also a time where you reflect on ways you can find more tax deductions in your financial plan as a doctor. This post is not meant to be specific tax advice, but rather information only. Consult with a tax professional for tax advice pertaining to your specific circumstances.

Today, we will look at some of the most common and effective tax deductions for doctors and physicians (and everyone for that matter) can potentially utilize. We will also wrap things up by discussing what is tax planning. Depending on your employment status (salaried physician at a group or hospital versus self-employed), some tax deductions are more available to you than others.

In no particular order, here are some things you can do to potentially lower your tax bill as a doctor.

1. Contribute to Pre-Tax 401(k)/403(b) Retirement Accounts

Contributing to retirement accounts is a no-brainer that all doctors should be doing. If you are in practice, there are very few reasons why you shouldn’t contribute the maximum allowed each year (currently $23,000 salary deferral limit to a 401(k)/403(b) type account, plus $7,500 if age 50 or older in 2024).

If you make pre-tax contributions, your taxable income is reduced by the amount you contribute. For an overly simplified example, if you earn $250,000 and contribute $23,000 to your 401(k)/403(b) at work, the IRS only taxes you on $227,000 of income. Pretty cool! We get to save for retirement and get a tax-deduction!

The IRS increases the contribution limit every few years, so be sure that you are aware of the percentage of income that you put into your retirement plan each pay period and do the math to ensure that you are on pace to reach the maximum during the year. Your employer will not allow you to over-contribute, so feel free to crank up that salary deferral percentage as needed to maximize your contributions.

Also, we are seeing a lot more employer sponsored retirement plans offering Roth and Pre-Tax options, so be sure that you are selecting the plan that is most appropriate for your financial situation.

If you are self-employed, or own your own practice, you can contribute up to $69,000 this year to a 401(k). That can all be pre-tax. If you have a Solo 401(k), the salary deferral can also be Roth contributions. There are some additional requirements that must be met in order to contribute that much, but that is a great way to save on taxes while simultaneously saving for retirement.

2. Contribute to a Solo 401(k) or SEP IRA for any 1099 Self-Employed Income

As mentioned above, if you are self-employed, you can contribute up to $69,000 to a 401(k) or SEP IRA. The “employee” contribution limit is $23,000 and the “employer” can contribute additional monies up to $69,000 combined total for 2024. As a self-employed doctor, you are both the employee and employer.

The employee contribution limit of $23,000 is a combined total for all 401(k)/403(b) type accounts. So, if you have multiple employers that offer you a 401(k), you can only do $23,000 total.

If you have 1099 earnings outside of your regular W2 job, you can set up a solo 401(k) for that income stream and make the “employer” contributions of approximately 20% of earnings to it per year pre-tax, up to the $69,000 limit. For example, if you work at a private group, but make $100k/year taking call at a hospital and the income from the hospital is 1099 income, you could defer approximately $20k of that into a Solo 401(k) each year.

With a SEP (Simplified Employee Pension Plan) IRA, you are not able to make employee contributions ($23,000 for 2024), but you can contribute pre-tax on the employer side if you have 1099 income, up to around 20% of wages or $69,000, whichever is less. For a SEP IRA, you have until the tax deadline of the current year to contribute for prior year. Therefore, you can still contribute for 2023 by the 04/15/2024 tax deadline. That said, if you have not done contributions for 2023, still some time left!

For each of these plans, speak to a CPA to confirm your income and how much you are able to contribute to each of these plans.

If you would like to speak with a financial planning professional regarding which of these plans may be right for you and what is needed to get an account open, please reach out to us and we would be glad to get an initial consultation scheduled.

3. Contribute to a Cash Balance Pension Plan

Cash balance pensions are typically set up in addition to a 401(k) at your company. Some larger companies have them and set a fixed company contribution rate. If you are self-employed, or own your own practice, you could implement one of these too. I won’t go into the ins and outs of cash balance plans today, but they can potentially allow you to contribute upwards of $100,000 per year pre-tax (upwards of $400,000 if you are in your 60’s)!

There are many rules and nuances to cash balance plans. Depending on the number of employees you have and your company cash flows, this may or not make sense to implement, as your company will have to contribute some money to all employees’ accounts. As a self-employed physician, they can be pretty fantastic if you are looking to save a lot of money for retirement.

4. Roth IRA / Backdoor Roth IRA / Mega Backdoor Roth IRA

While Roth accounts do not give you tax deductions today, all money and investment earnings can be withdrawn from the account tax free in retirement. Roth accounts are like tax deductions for your future self. You can contribute $7,000 to an IRA in 2024 ($8,000 if over age 50).

You also still have time to contribute to a Roth IRA for 2023 if you have not already. The 2023 contribution limit is $6,500 and the deadline is 4/15/2024. Be sure you are aware of income limits to Roth IRA contributions and use the Backdoor Roth IRA as needed.

The Mega Backdoor Roth is where you contribute after-tax dollars to your 401(k)/403(b) at work, on top of the standard $23,000 employee contribution limit, and then convert those after-tax dollars into a Roth account (either within the 401(k)/403(b) or into a separate Roth IRA). No different than the Backdoor Roth IRA, except you can contribute a lot more.

Between employee salary deferrals ($23,000), employer matching/profit sharing contributions, and employee after-tax contributions, the total 401(k) contribution limit in 2024 is $69,000. For example, if you contribute $23,000 from your salary pre-tax and your employer contributes $15,000, that amounts to $38,000. You can contribute another $31,000 after-tax and convert that into a Roth account. Pretty fantastic.

Not all employers offer this provision in their workplace retirement accounts, but we are starting to see it allowed at more and more places.

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. If your itemized deductions exceed your standard deduction, you will elect to itemize. The big items you can deduct when itemizing are:

Mortgage interest
Property taxes
State income/local taxes
Charitable contributions
Others (miscellaneous)

Do not buy more house than you can afford, just because the interest is tax deductible if your total itemized deductions exceed your standard deduction. If you are in the 35% marginal federal tax bracket, you are paying $100 in interest in order to save $35 in taxes. Not exactly a profitable formula.

6. Own Rental Properties

With income generating rental properties, there are a number of tax deductions you can claim, including depreciation of the property, that can be used to reduce the taxable amount of your rental income. You can also sell a property and immediately reinvest the proceeds into another property without paying capital gains taxes via a 1031 exchange. 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 (under current rules).

Owning and managing rental properties is not for everyone and the tax rules can be very complex. You also must make sure that your rental property is profitable based on numerous factors.

Make sure working with a tax professional who is familiar with taxes surrounding rental properties.

7. Sell Investments at a Loss

This is known as tax-loss harvesting. Anytime you have an investment outside of a retirement account that is worth less than you bought it for, you can sell that investment and capture that loss on paper for tax purposes. If you sell an investment for a gain, you have to 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.

In a perfect world our investments only go up in value and we happily pay taxes on our investment earnings, but the world is not perfect, so let’s make lemonade when the investment gods throw us lemons.

Questions on your current retirement savings plan, please contact us for a review of your current situation and ways we can improve on your plan moving forward.

8. Contribute to Charity

If your itemized deductions, which include charitable contributions, exceed your standard deduction, then the amounts above the standard deduction are tax deductible. For those who give to charity or want to give to charity, it is an added little bonus that it might save you some money on taxes. I would like to think you give to charity out of the goodness of your heart, rather than solely for the tax benefits (because you’re giving away $100 to save $35 in taxes at the 35% marginal rate), but I doubt the charities receiving the donations care either way.

You can also donate appreciated stock (or other investments) to charity and are allowed to deduct the fair market value of the shares and avoid paying any applicable capital gains taxes on investment gains.

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’s deductible. You have work-related travel? Write it off. You have to purchase office equipment and supplies? The government will pay for a chunk of that.

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.

10. 529 College Savings Plan Contributions

Not everyone can deduct contributions to 529 college savings accounts, but some states offer a state income tax deduction if you use an eligible state-sponsored 529 plan. Every state is different. Some states cap the amount you can deduct, while a few allow you to deduct an unlimited amount of contributions. Some states don’t offer any state-tax incentives for college savings.

It is only deductible from income for state taxes (not federal), so the tax savings likely isn’t huge, but we’ll take what we can get. Also, similar to Roth accounts, all money in 529 accounts plus investment earnings can be withdrawn tax-free if used for eligible education related expenses.

What is Tax Planning?

What is tax planning, you ask? Tax planning is the mere act of planning ahead for things you can do to benefit you from a tax standpoint.

I encourage people to have a mid-year tax checkup between May and August, to ensure withholdings and/or quarterly estimated payments are accurate. Also, discuss any tax-saving measures that could be implemented before the end of the year.

It is good also to touch base in the fourth quarter of the year, in case there are any last-minute things to do to improve your tax situation and avoid any surprises in April. This is also a good time to talk about a tax planning game plan for the upcoming year.

It is no secret that the tax code is an evolving beast. Every time we get a new president, they want to change taxes around. That is why working with a tax professional and a financial advisor who can stay on top of this stuff is beneficial.

Best of luck with your taxes this year and in years to come!

Related Blog Posts:
Related Podcasts:
- Tax Planning for Doctors Podcast

Disclosure: This is information only and should not be construed as individualized tax advice. Consult with a licensed tax professional to understand the specific tax implications for your individual circumstances.