Tax Planning for Doctors
Tax Planning for Doctors
As a doctor, planning for tax season is essential. This article will help you understand your options. We’ll review some of the most popular tax deductions and credits available to high-income doctors. Start your tax planning before it’s too late! Working with a qualified financial planner and tax advisor can ensure you’re making the most of all available benefits.
Understanding Taxes as Doctors
The first step in developing a tax strategy is understanding the types of taxes you may be required to pay. There are federal, state, and local taxes that you may need to pay, as well as self-employment taxes.
Stay Up-to-Date on Tax Changes
Tax laws are constantly changing, so staying up-to-date on any changes that could impact your tax planning is essential. By keeping up with changes in the tax code, you can ensure that you are taking advantage of all available deductions and credits.
Taking Deductions & Credits
When determining your tax liability, consider any deductions or credits you may be eligible to take. Several deductions and credits can help reduce your tax liability, including those for practice expenses and charitable donations.
- Retirement plan contributions
- Health insurance premiums
- Marketing expenses
- Practice insurance premiums
- Legal and professional services
- Home office expenses
- Self-employment taxes
- Interest on Practice loans
- Health insurance premiums
- Paid family and medical leave
- Work opportunity credit
- Research activities
- Disabled access
- Childcare facilities and services
- Alternative energy
Tax Planning & Investing
Taxes are often one of the highest costs to investors. The impact of taxes on your investments is hard to quantify since the calculated tax liability isn’t offered on brokerage statements.
Below are a few ways to optimize your investments to help minimize your tax liability. The ultimate goal is to maximize your after-tax returns.
Asset location is essential for tax-efficient investing between taxable brokerage accounts and IRAs. The difference between qualified and non-qualified dividends can significantly impact an investment portfolio’s tax efficiency. For example, qualified dividends are taxed lower than non-qualified dividends. Stock ETFs can also be more tax efficient than bonds.
Asset location is a complex topic, and investors should work with a financial advisor to determine the most tax-efficient way to invest their assets.
Invest in Tax-Advantaged Accounts
Another strategy for practice owners is the 401k + cash balance plan. This plan allows you to contribute more money into retirement accounts each year than other traditional retirement plans allow. It also provides more flexibility regarding withdrawals and distributions from these accounts in retirement. The 401k + cash balance plan may benefit you if you have a significant income from your high-earning practice and want to save as much as possible for retirement while reducing your taxable income.
Back-Door Roth IRA for High-Earning Doctors
One of the best retirement savings strategies is the Roth IRA. However, only some are eligible to contribute to a Roth IRA due to income restrictions. The back-door Roth IRA allows high-income earners to contribute indirectly to a Roth IRA.
To complete the back-door Roth IRA, you must first open a traditional IRA and contribute. You can then convert the traditional IRA into a Roth IRA. The conversion is taxed as ordinary income, but there are no penalties for converting. This strategy allows you to get money into a Roth IRA even if you are not eligible to contribute directly.
The back-door Roth IRA can be a great way to save for retirement, but it’s essential to understand the rules before you start. Additional considerations exist if you currently have a traditional IRA balance when completing your Back-Door Roth IRA. Make sure you work with a financial advisor or tax professional to ensure that you are completing the process correctly.
Tax Loss Harvesting
Tax-loss harvesting is a technique that can be used to reduce the tax liability on investment gains. It involves selling investments at a loss and using the losses to offset any capital gains. This can effectively minimize the tax bill on investment gains, but it is important to note that tax-loss harvesting can only be used to offset gains from the sale of securities.
Furthermore, the losses can only offset up to $3,000 in ordinary income each year. Capital losses not used are carried-forward to the next tax year to offset future income. Nevertheless, tax-loss harvesting can be a valuable tool for investors who are looking to minimize their tax liability.
Related Reading: Investing During An Election – Arch Financial Planning
Tax Planning for Your Practice
Review Your Practice Structure
The first step in reducing your tax bill is to review your Practice structure. Are you operating as a sole proprietorship, partnership, or corporation? Each structure has different tax implications, so choose the proper structure to minimize your tax liability. Many practice owners decide whether you should be taxed as a sole proprietor, s-corporation, or c-corporation.
Each structure has unique advantages and disadvantages that can significantly impact your tax planning. For many, the simplicity of being taxed as a sole proprietorship is the optimal choice. For others, an s-corporation may benefit doctors looking to save on FICA taxes.
Use Tax-Deductible Practice Expenses
One way to reduce your taxable income is to take advantage of tax-deductible practice expenses. These expenses can include things like office supplies, travel expenses, and marketing costs.
Bonus Depreciation for New Equipment
Bonus Depreciation is a vital tool to help your practice grow and succeed. Bonus Depreciation allows you to write off the cost of new equipment purchases more quickly than under traditional “straight-line” depreciation. Bonus depreciation will enable you to deduct a more significant portion of the equipment cost in the year when it is first placed in service, saving you money on your taxes.
Bonus Deprecation is especially valuable for practices making significant investments in new equipment. The sooner you can write off the cost of the equipment, the more money you will save on taxes. Bonus Depreciation is an essential tool to help your practice grow and succeed. Contact your tax advisor to learn more about how Bonus Depreciation can benefit your practice.
Related Reading: Tax Advantages for Practice Owners – Arch Financial Planning
How Much Taxes Will You Pay
Estimate Your Tax Liability
Once you have considered all the factors mentioned above, you should have a good idea of your estimated tax liability. This will give you a starting point for developing your tax strategy.
Make Safe Harbor Tax Payments
As a high-income doctor or practice owner, it’s essential to ensure that all safe harbor tax payments have been made. Making safe harbor tax payments will help prevent underpayment penalties for not paying enough taxes throughout the calendar year.
There are several ways to ensure your safe harbor tax payments have been made. First, you can contact your tax preparer or accountant and ask for a copy of your tax return. This will help determine your safe harbor amount for the current tax year.
How To Determine Safe Harbor Tax Payments
The safe harbor estimated tax payments are designed to help taxpayers avoid underpayment penalties. To qualify, you must pay either 90% of the tax you owe for the current year or 100% for the previous year. This rule is slightly altered for high-income taxpayers, who must pay the lower 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year. Making safe harbor estimated tax payments can help avoid penalties and interest on your taxes.
Make Estimated Tax Payments
If you expect to owe taxes at the end of the year, it is essential to make estimated tax payments throughout the year. Making estimated payments will help to avoid penalties and interest charges that can accrue if you do not pay enough tax throughout the year.
Estimated tax payments are typically due on the following dates:
– April 15(for January-March Income)
– June 15 (for April-May Income)
– September 15 (for June-August Income)
– January 15 of the following year (for September-December Income)
Hire a Qualified Tax Professional
Hiring a qualified tax professional can also help you save money on your taxes. A tax professional can help you identify deductions and credits that you may be eligible for and help you navigate the complex tax code. Working with a dental-specific or physician-specific tax professional is essential because they can offer unique insights that general tax professionals don’t understand about working with doctors or practice ownership.
Finding a Qualified Tax Professional
Whether it’s tax season or facing an audit, finding a tax professional can be daunting. The IRS website offers a search tool to help you find a tax professional near you. You can search by zip code or city and state, and the results will include Enrolled Agents (EA) and CPAs. You can also narrow your search by selecting “Licensed,” “Internal Revenue Service Practitioner,” or “Exempt Organization Tax return preparer.” If you need help finding a licensed tax professional, the IRS has a list of resources to help you find a tax professional who meets your needs.
We work with tax professionals that specialize in the unique needs of dentists & physicians. We’d be more than happy to make an introduction to a good fit for your needs.
Tax planning is essential to running a successful practice and minimizing tax liability as a high-income doctor. Understanding the available strategies and using them appropriately can reduce your taxes and maximize your profits. Two popular strategies for practice owners are bonus depreciation and 401k + cash balance plans, which can offer significant benefits when used correctly. With the proper guidance, these strategies can provide substantial long-term returns for your practice – so consider their potential!
Related Reading: Estate Planning for Doctors – Arch Financial Planning
Related Reading: Dentist’s Guide to Student Loans – Arch Financial Planning
Author: Cecil Staton, CFP® CSLP®
I'm a fee-only financial advisor for dentists serving clients nationwide.
I left the large financial institutions to start my own RIA. I did it so people could pay for real planning and not just an agenda to sell a hidden product. As a fiduciary, Arch Financial Planning, LLC was built on that promise by delivering non-cookie-cutter plans that provide solutions to achieve their goals.
Who do I serve?
Typical: Dental practice owners
Goals: Pay off student debt, start/sell a practice, and grow their wealth
Location: Virtually anywhere in the U.S.
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