Before we get started, let me make one thing absolutely clear. I am not an accountant or a financial planner or advisor. This is for educational purposes. So, consider it like a good chat in the physician lounge with a colleague who likes to talk money (and happens to host a personal finance podcast for physicians).
Here are two common ways to reduce taxes and some tips and tricks that may be new to you.
The First Thing About Tax Reductions for Doctors
There are no real loopholes for doctors, but there are some common sense ways to reduce your taxes that we need to cover. The first way to reduce your taxes as a doctor is to make sure to max out your tax-advantaged accounts.
Some accounts to consider each year, if available, include:
- 457 (includes both governmental and non-governmental 457(b) plans)
- Health Savings Accounts
- If saving in a 529 for someone’s college education, some states offer state tax advantages if you use their 529 as a citizen of that state
- Cash balance plans
- Other retirement vehicles from your employer that allow for pre-tax contributions
Of note, non-governmental 457(b) plans are only offered to “top-hat” employees (i.e., high-earners), which is why it is important to mention this to you as a physician, because this plan is often available to high-earning docs, but sometimes not to other staff. Be on the lookout for this!
Now, don’t get too excited! Whether you should take part in a non-governmental 457(b) plan offered by your employer is an article unto itself.
However, if you are fortunate enough to work for a governmental employer, then you can consider a governmental 457 like an “extra 401k” and take advantage of the tax savings if that is what you are aiming to do. And, yes, you can max out both a 403B/401K and a 457 plan.
It is also worth mentioning that while you won’t save taxes immediately, you can also consider using a Backdoor Roth IRA or Megabackdoor Roth to help you save taxes in the future, as these vehicles utilize post-tax money that won’t be taxed again.
The Second Thing About Tax Reductions for Doctors
Once you have maxed out the accounts mentioned above, you want to look at how you can get more than the standard deduction.
Here are the 2023 standard deductions:
- $27,700 for Married Filing Jointly;
- $20,800 for Heads of Households;
- $13,850 for All Other Taxpayers.
How do you get more than the standard? By choosing to itemize your taxes, which is often available to physicians. As a high-earning physician, there are not many ways that you can itemize on your taxes, but we wanted to share some of the typical itemized savings for high-income earners.
The three most common are:
- SALT (State and Local Taxes), which is limited to $10,000 per year,
- Mortgage interest, and
- Charitable deduction/giving.
A few years ago they put a maximum on the amount of SALT you can write off per year, but it is still important to write this off! You can deduct what you have paid in certain state and local taxes. This SALT deduction includes property, income, and sales taxes.
Tax Reductions for Doctors: Tips And Tricks
Now there are some additional tips and tricks to reduce your taxes as a doctor. These tax "loopholes" for doctors will help save you money.
Alternating Charitable Giving
We mentioned this above as one of the areas you can itemize, but I want to expand on it here. If you are giving charitable donations that put you over itemized deduction, but the remaining tax deductions won’t put you over (say, if you no longer have a mortgage), then you can alternate years.
For example, let’s say that you are married and have no mortgage (you are renting or the house is paid off), and you donate $20,000 per year to charitable giving.
If you simply donated the $20,000 per year and had a SALT tax limit of $10,000, over a 4-year period you would be able to deduct ($30,000 x 4 years) $120,000 from your gross income.
But let’s say you alternate charitable giving years and do double the charitable giving in years 2 and 4, and take the standard deduction in years 1 and 3. Then this is what it would look like:
- Year 1 = Take standard deduction ($27,700)
- Year 2 = You double up on charitable donations for two years → SALT $10,000 + $40,000 in charitable giving ($50,000 deduction)
- Year 3 = Standard deduction ($27,700)
- Year 4 = You double up on charitable donations for two years → SALT $10,000 + $40,000 in charitable giving ($50,000 deduction)
So, now instead of reducing your gross income by $120,000 over a four year period, you are now reducing it by $155,400. That’s an additional $35,400 that won’t be taxed and you still had the same amount of charitable giving.
The main point here? Depending on your tax situation, alternating charitable giving every other year may reduce your gross income and tax liability.
Tax Loss Harvesting
If you have a taxable or brokerage account, whenever the market goes down, you have the opportunity to take a “paper loss” on your investments if you sell them and immediately buy something that is not “substantially identical.”
So, for example, in 2022, I’m sure you noticed — like everyone else — the substantial market drop. Seeing this, I didn’t panic. Instead, I was excited because it meant I could “sell” my VTSAX total stock market index fund and immediately purchase the S&P500 index fund inside my brokerage account. Effectively, this allows me a “paper loss” without ever pulling money out of the market. It was invested the entire time.
Because of this, I reduced my tax liability. The limit for this is $3,000 in tax reduction each year, but if you “lose” more than that, it can be carried over each year. This is called Tax Loss Harvesting because you are switching to another fund that still fits your goals but is not identical, and it allows you to “harvest” some of your losses when you file taxes.
Some important things to know about tax loss harvesting is:
- Money is never out of the market, so market timing (which is not a good investing practice) is not involved.
- As said above, the maximum you can reduce your taxes by is $3,000 per year, but it carries over to following years.
- You need to be aware of WASH sales which will decrease the benefit of doing tax loss harvesting, so make sure to read up on that or consult your accountant.
All of this is to say that you can use your brokerage account to reduce your taxes.
Owning Your Own Business
Before we totally sum up the ways you can save money on your taxes, I wanted to note one more tax opportunity for doctors that you might be able to use. If you run your own business or own real estate, there are other great ways to reduce your taxes as a physician.
Obviously, any business expense is pre-tax in nature and deducted from the business’ coffers instead of your own. This can serve as a huge tax benefit while owning your business, in addition to the qualified business deductions you are allowed to take as well.
We won’t be diving into real estate here, but as a high-earning physician there are physician podcasts on real estate that can support you. You will learn about the short-term rental loopholes, real estate professional status, and how accelerated depreciation on real estate investments can help you reduce your taxes.
There you have it. Here are some tried-and-true ways doctors can reduce taxes in addition to some tips & tricks you might consider as well!
What are your tax tips? Share in the comments.
Dr. Jimmy Turner is a practicing anesthesiologist, physician entrepreneur, and coach for doctors. You can find him on Instagram or Twitter @tpp_md. You can also learn more by visiting his website.
Image by Denis Novikov / Getty