We All Feel The Burden
Three-fourths of you feel as though you are currently being overtaxed, according to Medscape's 2023 "Physicians and Taxes"report, which surveyed over 1,200 physicians across 29 specialties. Currently, the average physician pays about $83,620 in federal taxes annually, and an additional $12,952 in state taxes. The total of nearly $100,000 annually can certainly cause concern for all us, whether you are employed or self-employed.
In the same survey, here are the most commonly used physician tax breaks:
1. Contributing to charity: 70 percent
2. Contributing to pre-tax 401(k) account: 60 percent
3. Deducting interest on a home mortgage: 52 percent
4. Writing off eligible business expenses: 46 percent
5. Contributing to a 529 college savings plan: 27 percent
6. Selling investments at a loss: 22 percent
7. Contributing to a backdoor Roth IRA account: 20 percent
8. Owning rental properties: 17 percent
9. Contributing to a cash balance pension plan: 11 percent
As this survey demonstrates there a wide range of tax lowering strategies that doctors are using depending on their situation. Perhaps some of you are using these similar options. I sure hope so!!
Micro-Corporation Owners Have More Options
In the dynamic landscape of taxation, being proactive and informed is the key for you to reduce your tax burden.
I once found myself in a situation similar to many of you, feeling targeted and helpless with my high tax burden, yet paradoxically grateful for my financial success. Thankfully I was fortunate enough to discover that there were other options available to help alleviate my tax burden.
The secret involves learning how to maximize your deductions, and the most important principle for that strategy is to avoid being an employee and instead choose to be a micro-business owner. When I made the change to micro-business status 10 years ago and transitioned to long-term independent contracting instead of being an employee, it significantly benefited my net worth by a million dollars over that decade. I didn't work harder, longer, or more—I simply learned to work smarter—and as a result, I retained more of my earnings.
Whether you job stack and blend W-2 and 1099 work or if you are 100% self-employed, your micro-corporation unlocks two separate tax channels for your income: both as an individual and as a micro-business. This special power of simultaneously being both an individual and a micro-business taxpayer is often overlooked or minimized by many of you. Don’t miss this critical small business idea.. This combination can greatly multiply your tax planning options and open the door for business deductions and fringe benefits that are not available to high-income W-2 employees.
Now let me delve into some additional less common and yet powerful strategies that you can deploy to reduce your tax burden. As the leader our SimpliMD micro-business community, it’s my goal to empower you to make informed decisions that enhance your financial health.
Business Structure Optimization: Choosing the right professional business structure is a critical first step. Many doctors opt for structures like S corporations or Limited Liability Companies (LLCs) for their practices. These structures can offer tax advantages, such as pass-through taxation and the ability to deduct certain business expenses. I invite you to reach out me here to schedule an inexpensive business consultation to discuss what would be best for your specific situation.
Income Splitting: If you are in partnership or for those of you with family members involved in your micro-corporation, income splitting can be a valuable strategy. Distributing income among family members in lower tax brackets can result in overall tax savings for the household. I use this strategy by employing my wife as the book-keeper for my micro-corporation.
Maximizing Retirement Contributions: Contributing the maximum allowable amount to retirement accounts is a cornerstone of tax planning for doctors. Whether it's a 401(k), Individual Retirement Account (IRA), or other retirement vehicles, maximizing contributions not only secures your financial future but also reduces taxable income. As a micro-business owner you have the option to contribute larger tax-advantaged retirement dollars than traditional W-2 employees.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs): Those of you with high-deductible health plans can leverage HSAs, which offer triple tax benefits. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. FSAs also provide pre-tax dollars for medical expenses. By combining this with a health reimbursement plan through your micro-corporation, you can accelerate your household savings.
Strategic Expense Management: Meticulous tracking of business expenses is crucial. Professional micro-business owners can deduct a variety of expenses, including those related to continuing education, professional memberships, malpractice insurance, home rental, and even home office expenses for those who qualify.
Utilizing Section 179 Deduction: The Section 179 deduction allows you to deduct the full purchase price of qualifying equipment in the year it's placed into service, rather than depreciating it over time. The most common use of this business deduction for a doctor would be for a company owned vehicle.
Charitable Giving: Beyond the altruistic benefits, charitable donations can also yield tax advantages. Doctors can contribute to qualified charitable organizations and receive deductions for the donated amounts. I personally like using my donor advised fund for charitable giving.
Tax-Efficient Investment Strategies: Consider tax-efficient investment approaches, such as investing in tax-advantaged accounts and prioritizing investments with favorable tax treatment. Tax-efficient portfolio management can help minimize capital gains taxes including options like tax loss harvesting.
Estate Planning Strategies: Estate planning is not only about preserving wealth for future generations but can also involve strategies to minimize estate taxes. Utilizing tools like trusts and gifting can be integral components of a comprehensive estate plan.
Navigating the tax landscape as a physician requires a multifaceted approach.
The most fundamental and important tax strategy you will ever make is to start a micro-corporation and channel as much of your income a possible through it. If you have been contemplating this, perhaps this is the tipping point. Let SimpliMD help you with the process of starting your micro-corporation here.
If you are not quite sure if it’s right for you, schedule an inexpensive business consultation with me here and allow me help assess whether it would be a good step for you.
It is important to note that the information provided in this blog is based on my personal experience and my role as the president of SimpliMD. However, it should not be considered as legal or financial advice. It is recommended that you seek independent professional advice from a licensed and knowledgeable individual in the relevant field before acting upon any opinion, advice, or information contained herein.
Tax laws are intricate and subject to change, so it's imperative to collaborate with tax professionals who specialize in healthcare to ensure compliance and maximize available benefits.