As healthcare professionals, we must master every component of providing competent, inclusive, and high-quality patient care. But what is not widely taught in medical schools is financial literacy — and what you don’t know could cost you today and further down the road.
Unfortunately, financial and tax literacy among doctors is relatively low. As a result, some get involved with high-risk investments and “tax shelters” to save minimal amounts on taxes. However, there are much more effective ways for medical practitioners to reap the benefits of tax deductions without risking their financial well-being.
Here are five tips doctors must know to reduce their tax bill and increase their bottom line.
1) Invest in Tax-Deferred Retirement Plans
Tax-deferred retirement plans are a significant tax deduction that you may be missing out on. In my research, I found less than one-quarter of doctors max out all the retirement account options available to them. Some simply don’t save enough money, and others may not realize just how much money they can put away into these accounts with massive tax benefits.
Every dollar put into a tax-deferred retirement account isn’t taxed this year. If you’re in the highest tax bracket and have hefty state and local income taxes, you could have a marginal tax rate approaching 50%. This means for every $2 put toward a retirement account, you save $1 on your tax bill. That’s a pretty good return ratio.
2) Contribute to Roth IRAs
Even though Roth IRA contributions won’t lower this year’s tax bill, they will lower the tax bill for every other year of your life. All the money earned in a Roth IRA, so long as it is withdrawn in
retirement, is never taxed. This goes for Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s, too.
Most doctors use Backdoor Roth IRAs, which, despite its name, is not an account. It is a process with two steps: 1) Contribute to a Traditional IRA; 2) Complete a Roth conversion. The Backdoor Roth IRA process leads to more tax-free retirement account money for doctors and other high-income professionals.
3) Take Advantage of Tax-Free Healthcare
There’s no doubt, health insurance is expensive. But at least you can pay for it with pre-taxed money. Your health insurance premiums could be a deductible business expense, as are the contributions to a Health Savings Account (HSA) — aka a stealth IRA — that you can use for co-pays and deductibles. A high-deductible health plan combined with an HSA isn’t the right choice for everyone, but for the healthy, you can save a lot of money on premiums and taxes.
Imagine a 401(k) where you get the tax break up front, the tax-protected growth, and then tax-free withdrawals. That’s essentially how an HSA works, at least when spent on healthcare. Even if you don’t spend it on healthcare, there is no penalty for withdrawing the money after age 65, so it is at least as good as a 401(k).
4) Offset Expenses with Deductibles
Many self-employed doctors miss out on tax deductions because they don’t realize what is deductible and what is not. And, essential items that qualify for tax deductions — including home office equipment, travel, medical equipment, CME expenses, licensing fees, communication expenses, board exam fees, and more — get lost in the shuffle come tax time.
For instance, if there is an area of your home you use regularly and exclusively for a business, it may qualify for a deduction. Since calculating and using the deduction can be complicated, the IRS made a simplified tool that calculates $5 per square foot of up to 300 square feet and no recapture of the deduction when the home is sold. That $1,500 deduction may be worth $500 or more off your taxes.
5) Make Charitable Donations
Medical professionals tend to be charitable. If they don’t contribute money, they often give time. You can use TurboTax’s It’sDeductible to figure out the value of things you give to Goodwill. You can also count the miles used to drive to and from your charity of choice and any other expenses associated with donating your time.
My preferred way to give to charity is to donate appreciated mutual fund shares from a taxable account. The charity and I both get out of paying capital gains taxes, and I get a Schedule A deduction for the entire value of the donated shares. Combined with tax-loss harvesting, this can save charitable high earners a ton of money in taxes.
Navigating taxes can feel overwhelming for anyone — but especially doctors because of the intricacies of the job. But with the right strategies and knowledge, you can take your financial situation to the next level. Whether it’s maximizing deductions, staying organized, or seeking professional advice, small efforts throughout the year can lead to big savings when tax season arrives. Just remember to stay informed, plan ahead, and take advantage of resources to get the most out of your taxes every year.
James M. Dahle, MD, FACEP
James M. Dahle, MD, FACEP is a practicing emergency physician and the founder of The White Coat Investor. After multiple run-ins with unscrupulous financial professionals early in his career, he embarked on his own self-study process to become financially literate. After seeing the benefits of financial literacy in his own life, he was inspired to start The White Coat Investor in 2011 to assist his colleagues.
