In the fast-paced world of medicine, physicians must devote the majority of their time to patient care, often leaving little room to focus on personal finances. Many doctors can find themselves overwhelmed by tax obligations, especially as they transition from residency to full-time practice. Amanda Han, co-founder of Keystone CPA, specializes in helping professionals like doctors retain more of their hard-earned income through proactive tax planning. Han’s philosophy and strategies offer invaluable insights for physicians to not only meet their tax obligations but do so with the least financial strain, allowing them to keep more money to invest and build wealth.
Why Taxes Matter & How to Minimize Them
Doctors are often surprised when they receive their first paycheck after residency or fellowship. Despite negotiating a generous contract, the net income after taxes can feel underwhelming. This discrepancy stems from the multi-layered tax system, which includes federal, state, local, and, in many cases, even city taxes.
While taxes fund critical public services, including healthcare, it’s essential to strike a balance. Physicians need to be mindful of how much of their income they are legally required to pay, and how much they can save by optimizing deductions and using proper tax-saving strategies. Han points out,
“Average Americans lose more money to taxes than on food, clothing, and housing combined.”
For high-income earners like doctors, this percentage can be even higher, especially as they climb into the top tax brackets, where 35-40% or more of their income goes to taxes before factoring in state taxes. The goal of tax planning is to keep as much of your money as possible to invest and save, rather than handing it over to the IRS.
Proactive Tax Planning: A Game Changer for Doctors
One common misconception is that tax planning is only for the wealthy or seasoned professionals. In reality, Amanda Han suggests that doctors should begin thinking about tax planning as early as possible in their careers. She states,
“It’s not about how much money we make—it’s about how much of it we actually get to keep.”
Additionally, tax planning isn’t just about looking at past earnings and seeing what can be deducted. Han emphasizes that true tax planning looks forward, considering not only what happened last year but what financial decisions you plan to make in the coming years. This allows you to align your financial decisions with tax strategies to minimize future liabilities.
Whether it’s saving for retirement, purchasing a home, or investing in real estate, these financial moves can all be optimized for tax purposes when planned carefully. Doctors who overlook this often find themselves with a higher tax bill than necessary, simply because they didn’t take advantage of available strategies.
The Tax Savings Toolkit for Physicians
Physicians often juggle a variety of income streams, from traditional W-2 salaries to locum tenens work, consulting fees, and even rental income from real estate investments. Each income stream offers unique tax-saving opportunities that, when properly harnessed, can lead to substantial savings. Here are a few tools doctors can use to maximize their tax savings.
Business Expenses
For physicians running a private practice or doing freelance work, understanding deductible expenses is crucial. Business-related costs such as attending medical conferences, travel expenses, medical equipment, and professional development courses can be deducted, reducing taxable income.
For example, if you attend a medical conference in a different city, not only is your registration fee deductible, but so are travel expenses, lodging, and meals, provided they meet certain IRS criteria.
Han recommends,
“Instead of asking, ‘Can I write this off?’ try asking, ‘How can I write this off?'”
Retirement Contributions
Doctors, particularly those with access to employer-sponsored retirement plans like 401(k)s, should take full advantage of tax-deferred retirement savings. Contributions to these accounts reduce taxable income in the current year and allow for tax-free growth until retirement.
Beyond traditional retirement accounts, doctors can also explore self-directed IRAs, which allow for investment in assets like real estate or private businesses. This offers greater flexibility and can provide significant tax advantages when used strategically.
Health Savings Accounts (HSAs)
HSAs offer triple tax benefits: contributions are tax-deductible, the funds grow tax-free, and withdrawals are tax-free when used for qualified medical expenses. For doctors with high-deductible health plans, HSAs are an excellent way to save for future healthcare costs while reducing taxable income today.
Real Estate: A Key Tax-Saving Strategy for Physicians
Real estate investing is one of the most effective ways to build wealth while simultaneously reducing your tax burden. Many doctors overlook real estate as an investment option, thinking it’s reserved for those with large amounts of capital or extensive knowledge. However, Amanda Han points out that even doctors with limited savings can start small and reap significant benefits over time. She says,
“Once you have rental income, you’re a business owner in the eyes of the IRS, which means you can start to take write-offs against that rental income.”
Here are a few other considerations Han recommends keeping in mind when using real estate as a tax-saving strategy.
Depreciation
Depreciation allows real estate investors to deduct the cost of their property over time, even if the property is appreciating in value. This is a major tax advantage for doctors who own rental properties. For example, if you own a rental property and collect rent each month, you can use depreciation to reduce or eliminate the taxes owed on that income.
Long-Term vs. Short-Term Rentals
Both long-term rentals (e.g., renting out a property for more than a year) and short-term rentals (e.g., Airbnb) provide tax benefits, but they do so in different ways. Short-term rentals, in particular, offer a unique opportunity for high-income doctors.
With a short-term rental, you may qualify for special rules that allow you to use the losses from the property to offset your W-2 income. For doctors looking to balance a demanding career with passive income from real estate, short-term rentals can be a great way to maximize tax savings while building wealth.
Election Year Considerations: Staying Informed & Adapting Strategies
Tax laws change frequently, and election years bring even more uncertainty. Amanda Han reminds us that the current political climate can heavily influence tax policy. For example, the ability to take bonus depreciation—where you can write off a larger portion of an asset in the first year of ownership—may be impacted by future legislative changes.
Doctors should work closely with tax professionals during election years to ensure their strategies are aligned with the latest laws. Pre-election planning can make a significant difference in the timing of income, deductions, or investments, potentially saving thousands in taxes.
Tax Planning Tips for Doctors
Implementing tax strategies can feel overwhelming, especially for busy physicians. However, breaking it down into manageable steps makes it much easier to approach. Here are some key takeaways.
Get Professional Guidance
Working with a tax professional who understands the unique needs of medical professionals is essential. A proactive advisor will not only help you file your taxes but also identify areas where you can save more. According to Han,
“To save on taxes, you don’t have to become a CPA. You don’t have to become all-knowing in tax law. You just have to have basic knowledge and work with a good tax advisor.”
Conduct Regular Financial Reviews
Schedule quarterly reviews with your tax advisor to stay on top of changes in your financial situation. This will help you adjust your strategies as necessary.
Start Early & Be Consistent
Tax planning is a long-term strategy. Start as early as possible and make it a regular part of your financial management so you can stay on top of any changes in your financial situation.
The Bottom Line: The Importance of Proactive Tax Planning for Physicians
Doctors spend years mastering their craft, but financial wellness is equally important. By incorporating smart tax strategies, physicians can protect their income, invest wisely, and build lasting wealth. Whether through maximizing retirement contributions, leveraging real estate investments, or simply taking advantage of available deductions, there are numerous ways to reduce tax liability.
For personalized strategies and to explore more options tailored to your needs, connect with the experts at Keystone CPA. With their guidance, physicians can navigate the complex world of taxes and come out on top, keeping more of their income for themselves and their future.
To continue learning how to maximize your finances as a physician, sign up for The Home Stre+ch, hosted by Dr. Derrick Burgess. This online course for transitioning physicians is designed to help you navigate physician contracts, debt, budgeting, investing, insurance, and entrepreneurship so you can avoid common financial pitfalls and build wealth.
The information provided in this blog post is for general informational purposes only and should not be construed as financial advice. For specific financial counsel on tax planning, we strongly recommend seeking the guidance of a qualified expert.
