Physician Tax Deductions
Provided By Phil Behnen, CPA, CFE
Tax planning is all about using proven and effective methods to pay as little in taxes as possible. A good tax strategy will reduce your tax burden in three primary ways:
- Reduce your taxable income
- Reduce your actual taxes owed
- Delay the due date on your taxes for many years to come
Reducing Taxable Income
Tax deductions are the means of reducing taxable income as much as possible. Most tax payers are familiar with the idea of deducting the interest they pay on their mortgage from their taxable income. The effect is that there is less income to be taxed. The same holds true for practice owners who are able to expense their business purchases prior to calculating their taxable yearly profit. The number of opportunities tax payers miss when it comes to tax deductions is hard to quantify. Physicians overpay their taxes consistently by not taking full advantage of the tax deductions available.
Personal Tax Deductions Include:
- The value of items or funds given to charity (also considered a business deduction).
- Any interest paid on a first mortgage for your home, and a second home for up to $1 million of loans.
- Interest paid on second mortgages or home equity loans for your home, and a second home for up to $100,000 of loans.
- Interest paid on student loans if your income is within allowable limits.
- Funds contributed to a tax-deferred retirement plan (also considered a business deduction).
- Professional fees that exceed 2% of your adjusted gross income, including legal, accounting, investment, and financial planning fees.
- Investment losses.
- Travel expenses in connection with a job search.
- Expenses for using your automobile for charitable purposes.
- Continuing education expenses.
- Medical expenses, including health insurance premiums, which may or may not have income limits, depending on how the plan is structured.
- Pre-school or childcare expenses paid for your children so that both spouses can work.
Note: The preceding list of available tax deductions is only a partial representation. It is not comprehensive and varies from person to person. Please consult a tax professional with knowledge about your specific needs.
Even though numerous tax strategies exist, a favorite tax strategy is applicable to anyone that gives cash to charity each year, and also has a significant taxable investment account. In this case, a physician can gift investments to a charity instead of cash. They can repurchase similar investments with their cash, and will owe less tax when the investment is ultimately sold. This strategy creates a triple tax benefit:
- You receive a deduction for the full amount of the investments that you gift to the charity.
- The charity can sell the investments tax-free, even if there is a substantial gain.
- You pay less tax when you ultimately withdraw your cash that has been reinvested.
Tax Deductions for Doctors
In addition to tax deductions, available tax credits can actually reduce your tax bill, dollar for dollar.
Items potentially eligible for tax credits include expenses for:
- Higher education
- International or domestic adoptions
- Energy-efficient home improvements
- Each child that you have
- Childcare so that you and your spouse can work
Though tax credits are the most desirable tax benefit, they are often excluded for families with high incomes. Therefore, most of our clients find that they are limited only to tax deductions for planning purposes because their incomes are too high to be eligible for any credits.
Delaying the Due Date
When tax deductions or credits are not available, a third tax planning strategy is to delay the due date on taxes owed for as long as possible. One respected CPA told us that from day one, a CPA is taught how to keep delaying or deferring taxes. Though this is sometimes appropriate, in many instances it would likely be better to reduce the taxes owed rather than just delay them. Additionally, with high-income professionals, they may actually be delaying their taxes to an even-higher bracket later on.
The problem with delaying taxes is that it usually comes with a cost. Few people understand the negative ramifications of delaying taxes. Take for example the 401(k) that delays taxes until later. Not only do you eventually owe the taxes, but you also owe taxes on the growth in your account.
Due to the compound taxation often caused from tax-delay strategies, it is usually better to first seek out true tax-deduction strategies. The main exception to this rule comes with major real estate investment. If someone has a large gain on an investment property, under certain guidelines they can do what is known as a 1031 exchange, delaying the taxes owed on the sale of the property by purchasing another property. Many physicians use this technique on their investment property to delay their taxes as long as possible. Provided that they delay the taxes until death, the taxes may be forgiven without ever having been paid.
Physicians often pay unnecessary taxes to the IRS. A well balanced financial plan will help you implement strategies that reduce your tax burden. Larson Financial Group advisors are experts at creating balanced financial plans that can significantly reduce your tax burden. If you would like to schedule a time to speak with one of our advisors, click here.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.