Engaging professional accounting services for medical practices can make it easier to itemize these deductions correctly. Reduce taxes owed If you've been working with an experienced financial planner and CPA, you know how important reducing your taxable income is to ultimately reduce what you owe. It essentially acts like a traditional IRA (pre-tax contributions, tax-free growth, and taxed distributions), but with an increased distribution age of 65. You may be able to deduct the cost of work-related education expenses paid during the year if you're: A disabled individual with impairment-related education expenses. Modes of Transportation. If you are in practice, there are very few reasons why you shouldnt contribute the maximum allowed each year (currently $22,500 salary deferral limit to a 401(k)/403(b) type account, plus $7,500 if age 50 or older in 2023). 1099 vs W2 Guide for Physicians DeLucia CPA Differences between a 1099 vs W2 2. OVERVIEW Claiming medical expense deductions on your tax return is one way to lower your tax bill. What other strategies can you use to pay less tax? But What Does Good Teaching Look Like? The child tax credit is perhaps the most common refundable credit, but most physicians cannot claim it as it is phased out as income rises. More detailed information may be found in the IRS publications referred to below. There are currently seven states that do not levy personal income tax including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Each child should be paid appropriately for his or her age and skills. It is only deductible from income for state taxes (not federal), so the tax savings likely isnt huge, but well take what we can get. The key is that the home office space must be used exclusively for business purposes., You can claim a percentage of the upkeep of the home the taxes and interest against ordinary income if youre not able to itemize for the portion of the home for that use. If you take a distribution from your HSA that is not for a qualifying medical expense, then you will own income tax on the distribution as well as an additional 20% tax penalty. There are many ways that you as a physician can reduce your tax bill now and in the future. Tax Deductions for 1099 Contractor - Don't miss out on the 20% Qualified Business Income Tax Deduction 4. It is also a time where you reflect on ways you can find more tax deductions in your financial plan as a doctor. Most non-profit hospitals are set up under the IRC 501(c) designation, so if you work for one of these organizations, your employer may offer a 457 plan. 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. Disclosure: This is information only and should not be construed as individualized tax advice. You can contribute another $28,500 after-tax and convert that into a Roth account. While some deductions are limited, physicians do have the option to write off depreciation expenses when buying equipment for their practice. This technique can also sometimes be used to reduce Alternative Minimum Tax. Wages up to the standard deduction ($13,850 for 2023) are tax-free. If youre married, you may want to consider doing a separate return from your spouse. If you are able to use geographic arbitrage to move to a state with no income tax, this could significantly reduce your tax bill each year. If your itemized deductions, which include charitable contributions, exceed your standard deduction, then the amounts above the standard deduction are tax deductible. Cambridge does not offer tax or legal services. You are entitled to a tax deduction if you're a physician with employer-sponsored retirement accounts like an Individual Retirement Account (IRA) or 401k . 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 fact, after the 2017 Tax Cuts & Jobs Act, you are no longer able to deduct non-reimbursed business expenses as an employed physician. Tax Savings for Physicians Working as Independent Contractors Any other expenses that are essential to operating your business can potentially be deducted from your revenues to reduce your taxable income. Get free access to Financial Residency's best tips. 1. You can contribute $6,500 to an IRA in 2023 ($7,500 if over age 50). Continuing off the previous example, lets say both physicians have a kid who qualifies for the Child & Dependent Care Tax Credit and can take a $2,000 credit. While you can file taxes on your own, Callahan recommends finding an advisor experienced with physician taxes to ensure youre filing correctly and receiving all of your entitled deductions. Should I Make Roth or Pre-Tax Contributions to my Retirement Plan. As of 2018, 1099 physicians can qualify for a 20% pass-through deduction which can save you upwards of $15,000 in taxes in a year. Callahan recommends seeking professional tax advice any time you have a structure change in your employment relationship meaning you have become self-employed or, conversely, changed from self-employment to a W-2 earner. Policy, Terms of Plus, the money grows tax free. Dont assume youre in one of those industries that doesnt allow the qualified business income deduction, says Callahan. This brings the total you can contribute to your individual 401(k) or 403(b) up to $27,000 for 2022 and $17,000 for your SIMPLE IRA. You want to max out whichever of these accounts are available to you, so you can reduce your taxable income as much as possible. Here are some of the most significant items you should discuss with your CPA: Post-its, pens, computers, and desks can be written off on your tax return. They are as follows. If you are self-employed, or own your own practice, you can contribute up to $66,000 this year to a 401(k). Topic No. 513, Work-Related Education Expenses Contributions to 529 college savings plans. A traditional IRA is a pre-tax retirement account that you can open on your own through companies like Vanguard, Fidelity, and Charles Schwab. 5 Tax Planning Strategies for Physicians | Physicians Thrive Contributions are generally limited to 60% of your income, but if you send that money directly to a qualified charity, that never comes into play. 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). Tax Deductions for Physicians | MB Group Earning more is a good thing. 7 Costly Physician Tax Mistakes (and How to Avoid Them) - PracticeMatch 1. As an example, if you bought a $3,000 computer, you have to make the election to expense that by putting it on your depreciation form. Op-Med is a safe space for free expression and diverse perspectives. Consult with a tax professional for tax advice pertaining to your specific circumstances. Tax information contained in this document is not intended to be used, and cannot be used, by any person as a basis for avoiding tax penalties that may be imposed by the IRS or any state. Seeking employer reimbursement is the best approach for expenses connected with salaried work. Theyve eliminated those 2% employee business expenses in their entirety as a deduction, including tax preparation fees, business car use, and business home use. However, an extra nuance for this year is that single filers will be allowed to deduct up to $300 for cash donations to a charity; married, joint filers can deduct up to $600. Callahan explains many physicians miss the extra $6,000 because its a separate button to select in most payroll systems. So if your adjusted gross income is $40,000, anything beyond the first $3,000 of medical bills or 7.5% of your AGI could be deductible. 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. Physicians with losing investments may sell these investments at a loss and buy a comparable investment to maintain a balanced portfolio. If you run that through as an office expense, you really havent properly documented that youre claiming that expensing election.. For each of these plans, speak to a CPA to confirm your income and how much you are able to contribute into each of these plans. In past years, doctors could itemize employee business expenses such as dues . They are quite different and we will define them below. Can shift income to lower-tax-bracket individuals. Evaluation and Management of Rheumatic Diseases: A Case-Based Review, Unclear Benefits for Dementia Screenings at Nursing Homes, Complex but Crucial: Enhancing Epilepsy Treatment at UCSF, Improving Therapeutic Options for Patients With PTSD, Promise and Pitfalls of Preventing Migraine With CGRP Inhibitors, ZTlido Lowers Doses While Raising Efficacy, US Outpaces Others on Administrative Costs, Group Aims to Ease Multi-State Licensure for Doctors, Tax Credits and Deductions for Physicians, Beyond Manhattan: The Borough of Brooklyn, Active Physician Involvement Needed in Nursing Homes. So while you arent reducing your taxes in the current year, you will be earning many years of tax-free growth and have tax-free withdraws once you reach age 59 . July 1, 2019 by Benjamin Sanchez The recently passed Tax Cuts and Jobs Act is debatable, to say the least. Service. This deduction was also introduced with the Tax Cuts and Jobs Act of 2017. This will affect many negatively, but I was used to paying the AMT and getting no deduction for SALT. Contributions are limited based on whether you have self-only coverage or family coverage. For specific QBI qualification guidelines, review details here or contact a FDI representative. Physicians who own their practice building or investment property can claim up to 20% of their rental income as a tax deduction. Physicians are generally more than willing to pay their share of the expenses of running their country and state, but most of them would prefer not to leave a tip! Contributing to a traditional IRA reduces your current years taxable income by the amount you contribute. The new tax bill allows physician families to use Section 529 assets to cover the cost of private K-12 education up to $10,000 per year, per child. But What Does Good Teaching Look Like? Your business can then contribute additional funds to your solo 401(k). The beauty is that you dont have to start your own medical practice to do this. Physicians can maximize their tax benefits for charitable donations by making a large donation of appreciated securities to a donor-advised fund in a single tax year, then using these funds to make smaller donations during the following tax years. Maximizing these accounts may reduce your current and future tax bills by tens of thousands of dollars. For example, you are not able to deduct business expenses. For 2022, the standard medical mileage rate allowed is 18 cents a mile from January 1, 2022, through June 30, 2022, and 22 cents a mile from July 1, 2022, through December 31, 2022. Nothing is certain except death and taxes, right? Op-Med provides clinician authors like you a place to share thoughts, opinions, and knowledge with the largest medical community in the United States. The Mega Backdoor Roth is where you contribute after-tax dollars to your 401(k)/403(b) at work, on top of the standard $22,500 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). This is an example of a non-cash expense that could allow you to achieve the positive cash flow and paper loss scenario previously mentioned. You can also sell a property and immediately reinvest the proceeds into another property without paying capital gains taxes via a 1031 exchange. Investing in real estate (REI) is great for a ton of reasons. Link to We Know What Bad Teaching Looks Like. Contributions to pre-tax retirement savings plans, including 401(k)s, 403(b)s, 457 plans, and tax-deductible contributions to traditional IRAs. These deductions are much more difficult for an employee physician to take, as the physician not only must itemize deductions, but he also loses the first 2% of his income worth of deductions. But really, all W2 physicians should care about their taxes. The new limit is $20,500 (up from $19,500). 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. You may be like me and be very happy in your employed W-2 doctor job. Theres another method, though, if people dont want to keep up with the records, he says. In this article, we will walk you through various ways to pay less income tax as a high-earning physician. Some physicians have appreciated securities, so a stock has gone up in value. Make sure working with a tax professional who is familiar with taxes surrounding rental properties. Tax Saving Strategies for Doctors | Deductions, Credits & More Tax Deductions for Doctors - a Complete Tax Checkup - SybridMD Some people view the home office deduction as taboo, or theyve been told the IRS is going to break your door down if you try to take advantage of it, but thats not necessarily the case, he says. But What Does Good Teaching Look Like? Definitelyconsult with a tax strategistabout your own personal tax situation. Again, a lot of physician and physician families may be outside of these income limits, but if you are a resident or new attending, and have a low enough salary, you should definitely consider saving some money in a Roth IRA. Well, by selling an investment that has lost money, you lock in a loss. The contributions must come from your own paycheck. How the New Tax Plan Affects the High-Income Physician When you contribute to a tax deferred retirement account, the money that you put in is not taxed. Link to I Used to Be a Skeptic Of AI in Medicine. The total amount that can be contributed to your solo 401(k) through employee salary reductions and contributions from your business is $61,000 in 2022. Tax Strategies for Doctors - Physician Family If you work for an employer that offers a 457 plan, you are in an amazing position to pay less tax. Some Common Tax Deductions for Physicians Qualified business income deduction (QBID) for personal income. New Hampshire and Tennessee dont tax wages, but they do tax investment income and interest. Its called a qualified charitable deduction.. Tax planning is the mere act of planning ahead for things you can do to benefit you from a tax standpoint. 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. As a self-employed doctor, you are both the employee and employer.