Tax Planning Strategies for Physicians
Are you a physician who has just started the practice and listed down the things you would do after your retirement? If so, tax-planning strategies are vital throughout your career. Apart from maximizing your income after you retire, this helps to ease tax burdens each year.
The graduate school and training of an average physician is almost a decade. However, the curriculum offers little or no education about tax planning or personal finance. For this reason, we have made a list of tax planning strategies for physicians.
This article gives tips for physicians to cut their tax burden and enhance their income in retirement.
Here are the strategies:
1. Stay updated on tax law changes
The tax laws keep on changing almost every year. You must stay updated about the recent tax law changes. For example, in 2018, there was a major change in the reduction of itemized deductions, while the standard deduction increased.
In turn, most physicians opted for the standard deduction. Following the changes, people opted to enjoy benefits from “bunching deductions” to exceed the highest threshold. The bunching deduction is a tax planning strategy, which enables taxpayers to make delays in claiming deductible expenses. For example, delaying to claim deductible expenses in charitable donations for a year or more result to a huge total deduction amount.
Although charitable contributions are deductible, you can save a lot by itemizing your donations. For instance, instead of donating a smaller amount each year, you can itemize your donations by giving larger donations in a year. This might help you as a physician to overcome the normal deduction limit that may lower your taxable income.
Also, the Donor-advised Funds (DAF) are an excellent means to raise deductions each year. These accounts allow you to give a huge sum at once and then smaller donations to various charities for specific several years.
If you are more than 59 and a half years, it is advisable for you to make donations directly out of your IRA account. This comes with two benefits. One, contributions that you send directly to a charity from your IRA do not fall into the taxable income group. Two, because of reduced account balance when you give from your IRA account for long, your donor’s Required Minimum Distribution age of 70.5 years may get reduced.
2. Select an ideal pre-tax retirement plan with most contributions
The other great way to lower your taxable income and save money is making the largest annual contributions to pre-tax retirement accounts—for example, Profit Sharing Plans (PSPs) and 401(k) s.
Since these contributions are pre-tax, it means your contributions are tax-deductible each year you make them. Furthermore, the money in pre-tax accounts grows to tax-deferred funds for later distribution in retirement. You should always try to maximize pre-tax contributions each year. At the same time, if you invest these funds in qualified plans, they are subjected to an exemption from legal claims.
If you are supplementing your retirement income with IRA, deducting your IRA contributions may be impossible, but based on your income. However, you should consult a financial planner to decide if it is possible to use the backdoor Roth IRA tax strategy. This enables you to overcome the income barriers.
The Internal Revenue Service (IRA) dictates the annual contributions you can make to pre-tax accounts, depending on your age. In most cases, they increase the amounts to cater for inflation and the cost of living adjustments.
3. Reduce your unpaid taxes
To cut your unpaid taxes, you need to make sure your taxable income is low. To make this, you must maximize your deductions.
The most common deduction for homeowners is home mortgage interest. However, if you own a home equity line of credit, it is possible to deduct the most interest of up to $100,000. Do not forget to deduct the interest.
Since physicians enjoy high earnings, then your student loan interest is not deductible. On the contrary, you can deduct a cash-out refinance from your home mortgage loan. Thus, it is advisable you refinance your home to pay off your medical school debt. This allows you to apply the interest paid on loan like a tax deduction.
You can also take eligible tax credits to cut your taxable income. To qualify for various credits as a physician, consider costs such as energy-efficient home improvements, adoptions, and continuing education costs.
4. Diversification of investments
The tax planning strategies for physicians does not revolve around just on reducing tax liabilities. Instead, it involves maximizing your tax efficiency after retirement. The best way to do so is by diversifying your investments.
However, diversifying your investments requires you to crosscheck all your financial accounts. For example, your taxable accounts, tax-advantaged accounts, tax-deferred accounts, etc. After that, spread your investments in various accounts to maximize your tax after retirement.
Although tax-deferred vehicles like IRA and 401k are good for your portfolio, they give minimal flexibility while in retirement. In short, you cannot solely rely on them. To be in an ideal financial situation in your retirement, you need to spread money in various accounts through diversifying your investments.
5. Claim your social security benefits at the right time
According to the law, individuals should start to make claims of their social security benefits while at the age of 62. However, this ends up costing them in terms of high taxation if the person is still working, and reduced benefit amount until death.
Once you reach the full retirement age, high taxation on the benefits reduces, although you will incur some tax if you are still getting a paycheck. In this case, it is advisable you claim the benefits when you reach 70 years.
Each year you defer to claim benefits past your full retirement age, your retirement amount grows by almost 8% per year until the age of 70. This is a good reason you should delay benefits as a practicing physician, who is about to retire.
6. Health savings accounts
Unlike other fund accounts, health savings accounts offer triple tax benefits. One, your contributions are tax-deductible. Two, the account grows tax-free. Three, there is no taxation of money taken out.
Nonetheless, health savings accounts are limited to people who enroll in high-deductible health plans. Enrolling in such insurance plans is among the best means to take advantage of the tax-savings ability.
7. Hire experts to assist you
Hiring the right tax experts is one of the best means to approach tax planning as a physician. Instead of waiting until the last minute to come up with a tax planning strategy, hire a team of tax experts to make a solid tax plan.
These professionals are:
- A tax professional to file your taxes: He/she make sure that you take the right deductions and enjoy the benefits of your eligible tax credits.
- An accountant to trace and check all your expenses each year: In turn, maximizing business and personal deductions becomes easier.
- A financial planner helps you make a good financial plan: The plan helps you to cut your tax burden the following year, diversify your investments, and lower your taxable income.
Also, you do not need to keep up with tax laws, because tax experts understand the present laws and stay updated about tax law changes. Hiring professionals helps you save a lot of money while at work and after retirement.
Paying taxes is an obligation for all citizens, but physicians can use various tax planning strategies to cut their tax liabilities. As a physician, consider diversifying your investments, maximizing on deductions, or cutting your taxable income. If you are busy with work, it is advisable to consult a tax professional about the tax laws and plans.To know more visit-UBOS