How can you do that, you ask? Well, for starters, you can begin by implementing a few effective tax strategies that can help you save on taxes and maximize your financial well-being.
In this post, we’ll explore several key tax-saving tips that serve higher income earners, including physicians.
1. Choose the right business structure
Selecting the appropriate business structure for your practice can have significant tax implications. Whether you opt for a sole proprietorship (generally not recommended), LLC, S corporation, or another structure, each choice comes with its own set of benefits and tax advantages. Consult with a tax professional to determine the best fit for your circumstances.
2. Understand real estate and depreciation
For those who own practice-related properties, understanding depreciation rules can lead to valuable tax savings. Consult a tax expert to navigate this aspect effectively.
3. Maintain thorough expense records
Accurate record-keeping is essential. Maintain detailed records of business-related expenses, including those for your practice, travel, and continuing medical education. Proper documentation ensures you claim all eligible deductions.
4. Maximize deductions and credits
Make sure you’re taking full advantage of deductions and credits that are applicable to your profession. Deductions for healthcare expenses (if above 7.5% of AGI), continuing medical education, professional memberships, and other relevant expenses can significantly reduce your taxable income.
5. Leverage retirement contributions
Contributing to retirement accounts not only secures your financial future but also offers tax benefits. Contributions to retirement plans like a 401(k) or an IRA are typically tax-deductible, reducing your taxable income for the year. You’ll want to make sure you have Roth accounts as well, though, because your goal should be to minimize your tax burden over your lifetime, not just this year.
6. Embrace health savings accounts (HSAs)
For those with high-deductible health plans, HSAs provide an opportunity to save on taxes while setting aside funds for medical expenses. HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. This is one of those rare accounts that goes in tax-free and comes out tax-free. Normally, you’re taxed on one side of the transaction, so with rare exceptions, you’ll definitely want to contribute to this if you can.
7. Invest tax-efficiently
Opt for tax-efficient investment strategies to minimize capital gains taxes. Consider tax-managed funds or index funds that aim to lower your overall tax burden while growing your wealth. Make sure you’re investing in the right type of account as well. For instance, REITs tend to throw off dividends taxable at ordinary income rates, so you may want to consider holding these types of funds in tax advantaged accounts only.
8. Explore income splitting
If you have a spouse or family members, explore income-splitting strategies to potentially move some income to lower tax brackets. This can help optimize your overall tax liability. Beware the infamous kiddie tax, though: For the 2023 tax year, the first $1,250 of a child’s unearned income qualifies for the standard deduction, while the next $1,250 is taxed at the child’s income tax rate. Any unearned income above $2,500 is taxed at the parent’s marginal income tax rate.
9. Harness the power of charitable contributions
Contributions to qualifying charitable organizations not only support meaningful causes but also offer tax deductions. Keep thorough records of your donations to ensure you claim the appropriate deductions.
10. Regularly review tax strategies
Tax laws and regulations evolve, so it’s crucial to stay updated and review your tax strategies periodically to ensure you’re making the most of current opportunities and are factoring in upcoming changes. In addition, you’ll need to be mindful of state and local tax laws, as they can significantly impact your overall tax liability. To make the most informed decisions, consult with a knowledgeable tax professional who knows your local tax laws and can tailor strategies to your unique situation.
By implementing these tax-saving strategies, physicians can optimize their financial health while focusing on what truly matters: providing exceptional care to patients.
Disclaimer: This blog post is for educational and informational purposes only, and is not meant as individualized financial or tax advice. We recommend you consult with a financial advisor or tax professional for personalized guidance based on your specific financial circumstances and local tax regulations before taking action.