Physician Tax DeductionsTax 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 IncomeTax 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.
Charitable GiftsEven 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 DoctorsIn 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