Tax season is upon us, and physicians especially will feel a chill in the air that has nothing to do with the temperature. It is the time of the year, when they need to work hard and fast to prepare for the tax payment deadline.
Considering that good doctors almost always have their hands full with patients and compliance to numerous programs, they can rarely find the time to learn tax codes and their application, which means many of them end up making ill-advised investments and turning to inadequate ‘tax shelters’. But with a few things cleared up, physicians can significantly reduce their tax bills.
Business Expenses
Self-employed doctors generally do not watch which expenses are deductible, which means that they are likely missing out on ways to cut the tax bill. Being the owner gives you the ability to deduct, and not using that would mean paying the employer a part of payroll taxes.
The Backdoor Roth IRA
First off, this one needs to be used fairly early, so it might not work this year. You can, however, protect investments from future taxes this way, and it is a way better option than what insurance-related tax shelters. It is possible to invest up to $5K in a non-deductible IRA for you and $5K for your spouse, followed by immediate conversion of both to IRA. However, you cannot have another SEP-IRA or traditional IRA, owing to the pro-rata rule, although it is possible to roll the IRA’s into your 401k.
Heath Care
Many doctors fail to deduct their own health insurance costs, even though these premiums are a deductible business expense. Combining high-deductible health plans with an HAS might not be the best option in all cases, but if you are healthy, it would mean the chance to save substantial money.
Tax-Deferred Retirement Plans
- Reducing Taxable Income
One of the biggest tax deductions that doctors overlook – tax-deferred retirement accounts are a good decision for doctors who happen to be the highest tax bracket, having significant state and local taxes for their incomes. Every 2 dollars they put into a retirement account is a dollar they save from the IRS. Doctors earning under $250K can contribute more than 20% of their income to a single 401K.
If you are an employee, this is limited to $17,000 into a 401K, although there are many 401Ks, which will match you. If the plan you are on does not provide for that, get your employer to help switch to a better one.