Tax season is upon us. To help you get the most bang for your buck, we rounded up some tax tips from physician tax experts. Check out their pointers before you file.
By Dr. Noah Kaufman, Co-Founder of Physician Tax Solutions, LLC
Supreme Court Justice Oliver Wendell Holmes called taxes “the price we pay for civilization.” But he didn’t say we had to pay retail. The 70,000 page tax code was written to heavily favor businesses and describes the numerous tax deductions given to businesses that have a legitimate profit motive and strategy. Owning your own business is the best tax shelter left in America. There are many strategies for organizing your business, deducting day-to-day expenses, buying and owning real estate and equipment, and choosing retirement and employee benefit plans that can save you dramatically come tax time.
Tax Tip #1: Start a Business
When lawyers get paid, it’s business income. When consultants get paid, it’s business income. When large companies get paid… How do you get paid? If you get paid W-2 income you are an employee. Take agency over the value you are creating in the world. YOU are the value creator in medicine and YOUR skills are why the whole system works. If you make W-2, drop to the lowest number of shifts you can — or NEGOTIATE — and the pick up some locums tenens for 1099 income that you can shelter with your tax team. Open the business as a PLLC. Make it “member-managed” to further insulate from any personal liability and have it taxed as an S-Corp. Do consulting work from the business from your home office and make sure that every part of your life has business intent. Your whole life can be a business (without giving up your free time).
Tax Tip #2: Take Every Legal Deduction and Credit
Shift income to your children, rent your home to your business, deduct a portion of your utilities, electric, internet, phone, computer, etc. If your CPA is worth their salt, they can help you be savvy and take all the deductions you deserve. Make sure you or your team document everything: Create rental agreements, employment agreements, company resolutions, meeting minutes, promissory notes, management agreements, so on and so forth. You can use online legal forms companies to do this for cheap these days, and ALL these expenses are deductions themselves! Legal work, tax preparation - are all deductions.
Tax Tip #3: Get a Bona Fide Tax Team
Some of us do our taxes on our own. That’s like one of our patients doing surgery on themselves. It’s the height of ignorance and hubris. No, you cannot do your taxes as well as a certified tax coach, tax attorney, CPA/EA team. In the same vein, a CPA or EA can do your taxes—and they are great historians, recording all of the numbers — but what they don’t do is structure you and your business for success. For that, you will need a very smart and very capable tax attorney who understands the tax law. Make sure they have an LLM in taxation and get second opinions. Certified Tax Coaches have a certificate much like your Board Certificate only less than one percent of tax preparers actually have gone through this rigorous training.
The bottom line is that if you change your perception about what your value is to society, and you begin to see that you, as a physician, are one of the most financially valuable members of society, you can start to structure yourself correctly and start using the tax laws to your advantage!
By James Dahle, MD, Founder of The White Coat Investor
The most important tax change that physicians need to be aware of in the last year is the 199A (Qualified Business Income) deduction.
While many physicians will not be able to take advantage of this deduction, for those eligible, it may be their largest deduction. If your taxable income is under (or close to) $207,500 ($415,000 married) or if you have any business income from a business outside of your medical practice, you and/or your tax advisor need to look into this deduction very carefully and possibly make significant changes in your business structure and retirement plans in order to take advantage.
Another important change to the tax code is the loss of a large part of the state and local income tax deduction and the new larger standard deduction. Many physicians will find that they no longer benefit from itemizing their deductions or that they may benefit from "bunching" deductions like charitable contributions into every other year. A donor-advised fund may facilitate this process for those inclined to donate to charity.
The largest tax break for most physicians will continue to be the use of tax-protected (retirement) accounts such as 401(k)s, Backdoor Roth IRAs, Health Savings Accounts, Defined Benefit/Cash Balance Plans and for independent contractors and those with a second job, an individual 401(k). Understand what accounts are available to you and maximize your contributions to them. This lowers your taxes this year and in the years to come, including after retirement.
Beware those selling insurance-based investing products such as whole life insurance or annuities as methods of decreasing your taxes. The tax benefits of these products are often oversold and certainly outweighed by the downsides of investing in these. They are generally products designed to be sold, not bought, and have only niche uses for a small percentage of docs.
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