Tax season is coming up. And unfortunately, taxes are one of those topics that we as doctors just don’t learn a ton about. And while taxes are mandatory, and in my opinion, necessary, it doesn’t mean that we need to leave the government a tip. It therefore makes sense to improve our understanding of how taxes work. Below, I explain six ways to maximize tax deductions as a physician.
1) Retirement funds
My favorite strategy for minimizing tax deductions is retirement funds. They are a low-hanging fruit and a way for physicians to build wealth and put money aside — especially when they’re young, so they can have that tax-free growth.
I find that a lot of physicians retire or start at least slowing down by their late 50s, early 60s. That means they have a good 10 year or so period before they’re required to take retirement distributions. In that time, they can start doing Roth conversions so the money can grow tax-free and come out tax-free as well.
2) Hiring your kids to your practice
If you hire your kids to work for your practice, you can put that tax deduction right into a Roth IRA, use it for school or tuition, or just use it for after-school activities. Tasks that kids can do include paperwork, filing, or really anything else. “Modeling” is a common job task that kids are used for. However, unless they are also modeling outside of your company, this may not always pass the sniff test with the IRS.
A couple notes: The court tested age for kids to be working is seven, so they have to be at least that old. And the contribution limit for Roth IRAs is $6,000.
3) Cash balance plans
You can start a cash balance plan with about $50,000 of gross revenue, as calculated by an actuary. What an actuary takes into account is how much you make (your compensation), your age, and other factors like whether you have employees. Generally, you need to keep the plan open for five years and fund it for a minimum of three years.
What’s great about a cash balance plan is you are usually able to put in a ton more than you would with just a 401(k). Keep in mind though that unlike a 401(k) just by itself, if you have the 401(k) and a cash balance plan together, or just a cash balance plan, you have to use actuaries or a third party administrator to actually create the plan and to administer the plan for you.
This means that a cash balance plan is technically a more expensive type of plan, but the benefits greatly outweigh the cost in terms of tax savings.
4) Augusta Rule
Another really great strategy is the Augusta Rule. This was named after the Masters golf tour in Augusta, Georgia. During the two weeks that the Masters were there, homeowners would rent out their houses to them for 14 days or fewer. And the IRS said, “Well, you don’t have to pay tax on that rental income in your personal residence if it’s for 14 days or fewer.”
Now you’re thinking, “How does this apply to businesspeople?” Well, you can have your business rent your personal residence for 14 days or fewer (and they don't even have to be consecutive days). For example, you can rent your house one day a month for a corporate meeting or company party, and then take a deduction for the business from that rent. This way, you as the individual do not have to pay tax on that rental income.
5) Home office deduction
In terms of your home office, you can only claim the portion of your home that you use exclusively for business purposes. For example, if you have a 1,000 square foot house and you use 100 square feet for business, you can get a tax deduction for 10% of the expenses associated with the house, such as the depreciation, utilities, security system, et cetera. This also includes property taxes and mortgage interest.
Now, the office doesn’t have to be your full time workspace. But if you have an office in your home where you read images or do the books for your business, then by all means, take that deduction. You just have to make sure that you’re completing proper documentation.
6) Car deduction
Once you have that home office set up, you can do the same for your car if you’re driving from the home office to the hospital, going between hospitals, or going or to a clinic that’s way outside of town. You just have to count and write down the mileage. It’s the same sort of concept as a home office: If you used your vehicle for 80% business, you can write off the tires, the maintenance, the car washes, the lease payments, and the depreciation if you fully own it. You just have to make sure you’re keeping track of those things so you can substantiate your reduction.
In fact, you can actually write off the full purchase of the car, too — though this depends on whether you use it 100% for business.
In sum, there are numerous tried and true ways to make the most of your daily life as a physician, whether you are a 1099 physician or a W2 employed physician. By maximizing deductions that you are already using, you can reduce your tax burden significantly. This makes your money work for you and accelerates your path to financial freedom!
What strategies do you use to achieve financial freedom? Share in the comments!
Jordan Frey, MD is a plastic surgeon in Buffalo, NY at Erie County Medical Center and the University of Buffalo. His clinical focus is on breast reconstruction and complex microsurgery. He is also the founder of The Prudent Plastic Surgeon, one of the fastest growing finance blogs. There, he shares his journey to financial well-being with a goal of helping all physicians reach financial freedom, practicing on their own terms.
Illustration by Jennifer Bogartz