Physicians face unique financial challenges due to their high-income potential, complex compensation structures, and significant tax liabilities. Proper tax planning with the help of a financial advisor and accountant can significantly impact a physician's near-term and long-term tax bill. Here are several common tax strategies that I suggest physicians consider as part of their larger financial picture.
1. Choosing the Right Business Entity
Physicians who own their practices should carefully choose a business structure that aligns with their financial and tax goals. An S-Corporation (S-Corp) can help reduce self-employment taxes by allowing part of the income to be classified as distributions instead of salary, though owners must pay themselves a "reasonable salary" to avoid IRS scrutiny. A C-Corporation (C-Corp) is beneficial for those reinvesting profits into the business or seeking fringe benefit advantages, such as health and life insurance, but it is subject to double taxation—corporate tax at the entity level and income tax on dividends received by shareholders. Alternatively, a Limited Liability Company (LLC) or sole proprietorship offers simplicity but requires physicians to pay self-employment taxes on all earnings. However, an LLC may elect to be taxed as an S-Corp to achieve tax savings.
2. Maximizing Retirement Contributions
Physicians can reduce taxable income and save for the future by contributing to tax-advantaged retirement plans. Maximizing contributions to a 401(k) plan allows for tax-deferred growth, and if an employer offers a matching contribution, physicians should take full advantage of it to maximize their savings. For high-earning physicians, a defined benefit pension plan provides an opportunity for significant pre-tax savings beyond the limits of a 401(k), making it a valuable strategy for reducing taxable income while securing retirement funds. Since many physicians exceed the income limits for a Roth IRA, they can utilize a backdoor Roth IRA strategy by contributing to a traditional IRA and then converting it to a Roth IRA for tax-free growth. However, they should be mindful of the "pro-rata rule," which can impact taxation if they have existing pre-tax IRA funds.
3. Tax-Efficient Investment Strategies
Investing wisely can help reduce tax liabilities and enhance wealth accumulation. Municipal bonds generate tax-free interest income, making them particularly beneficial for individuals in high tax brackets. These investments are ideal for physicians seeking stable, tax-free passive income. Tax-loss harvesting allows investors to offset capital gains by selling underperforming assets, thereby lowering taxable income. Losses can be used to offset up to $3,000 in ordinary income each year, with any excess losses carried forward. Passive real estate investments also offer tax advantages, as investors can benefit from depreciation deductions and utilize 1031 exchanges to defer capital gains taxes. When structured correctly, rental properties can provide additional tax benefits.
4. Leveraging Deductions and Credits
Physicians can reduce taxable income by taking advantage of relevant deductions and credits. Several to consider include:
• Student Loan Interest Deduction: If eligible based on income limits, this deduction can provide financial relief by reducing taxable income up to $2,500 annually. This can be particularly helpful for medical residents and early-career physicians.
• Continuing Education & Licensing Fees: Deductible expenses include medical certifications, courses, and professional association memberships. Ensuring accurate record-keeping is essential for maximizing these deductions.
• Medical Equipment & Office Expenses: If operating a private practice, expenses related to equipment, rent, and professional development are deductible. Section 179 allows immediate expensing of eligible business assets.
• Home Office Deduction: Available to those who use part of their home exclusively for work. This can include a portion of rent/mortgage, utilities, and internet expenses.
5. Tax Considerations for Moonlighting and Locum Tenens Work
Physicians earning 1099 income from consulting, locum tenens work, or side businesses may be able to deduct business-related expenses such as malpractice insurance, travel, and home office costs. Maintaining accurate records and keeping receipts is essential for doing this. Additionally, be sure to make estimated quarterly tax payments on this income to avoid IRS penalties. Unlike W-2 income, taxes aren’t withheld automatically from 1099 income, so setting aside funds for taxes is critical.
6. Managing State and Local Taxes (SALT)
Physicians working in multiple states may face complex state tax obligations. If this impacts you, understanding tax liabilities for different states, including which state gets priority taxation on income earned across state lines, will be an important part of multi-state tax planning. While moving to a lower-tax state can reduce your overall tax burden, be sure to consider the overall picture and impact of state income tax, property tax, and estate tax before relocating.
7. Asset Protection
Given the risk of malpractice claims and high earnings, malpractice coverage and asset protection are crucial. Physicians should have a comprehensive strategy for shielding personal assets through appropriate insurance and legal structures. Asset protection trusts and umbrella liability insurance can provide additional security. My colleague Jason Largey shares more thoughts in this article on safeguarding your financial future and Frances Cronlund considers asset protection for physicians in this article.
8. Charitable Giving Strategies
Charitable giving can be a strategic way to reduce one’s tax burden while supporting causes the donor cares about. Donating cash or appreciated assets to qualified charities can offer a tax deduction, and contributing appreciated securities, such as stocks, can also allow the donor to avoid capital gains taxes while still providing you with a deduction for the fair market value of the asset. I also encourage many physician clients to establish a donor-advised fund (DAF) to make large, tax-deductible contributions while distributing funds to charities over time. Read more about proper usages for donor-advised funds in this recent article from my colleague Meg Bunn. Additionally, physicians over the age of 70½ can make qualified charitable distributions (QCDs) from their IRAs, which satisfy required minimum distributions without increasing taxable income—though keep in mind that a QCD cannot be made to a donor advised fund.
Final Thoughts
Tax planning is an essential component of financial management for physicians. By considering strategies that are personalized to their unique life and business circumstances, doctors can seek to optimize their tax position and safeguard their financial future. Consulting with a tax professional or financial advisor specializing in medical professionals can help tailor these strategies to individual circumstances.
If you have questions or would like to discuss your financial situation, please reach out to a member of the Curi RMB Capital team today.
The opinions and analyses expressed in this presentation are based on Curi RMB Capital, LLC’s (“Curi RMB Capital”) research and professional experience are expressed as of the date of this presentation. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future performance, nor is it intended to speak to any future time periods. Curi RMB Capital makes no warranty or representation, express or implied, nor does Curi RMB Capital accept any liability, with respect to the information and data set forth herein, and Curi RMB Capital specifically disclaims any duty to update any of the information and data contained in this presentation. The information and data in this presentation does not constitute legal, tax, accounting, investment or other professional advice.
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