Tax burden strategies physicians should employ to assist with preparation for tax season, identifying tax deductions, possible pitfalls to avoid, and more.
Physicians lose a significant portion of their income to taxes. While some doctors may expect them, tax burdens may be particularly surprising for new attendings or physicians who recently got a pay raise. According to the founder of Career Money Moves, LLC, Altelisha Taylor, MD, MPH, several factors contribute to physicians’ tax burdens throughout their careers. Dr. Taylor points out that the US has a progressive tax system, meaning there is a direct relationship between income and the amount paid in federal taxes; physicians with a higher income will have a greater percentage of owed federal taxes. Making more money decreases a physician’s chances of getting certain tax credits. Dr. Taylor suggests a simple solution—a shift in mindset. In other words, physicians should ask themselves if they would rather earn millions of dollars but be in a higher tax bracket or make an average salary and pay almost nothing in taxes. In Dr. Taylor’s opinion, the millionaire scenario always wins.
Contributions to pre-tax retirement accounts also play a role in high tax bills. Dr. Taylor notes that physicians who don’t invest in a tax-savvy could develop a higher tax burden. Given that such investments are made with pre-tax dollars, they are not included in taxable income. Therefore, physicians can increase wealth and lower taxes by intelligently investing in retirement accounts. For those who are either unemployed or get paid as a 1099 contractor, Dr. Taylor suggests opening a retirement account to save investors thousands of dollars and build their wealth simultaneously.
Retirement account options aren’t limited to work retirement accounts. According to Dr. Taylor, physicians with a high-deductible health plan might want to consider putting their money in a health savings account (HSA). For those who don’t qualify for HSA contribution, Dr. Taylor suggests investing pre-tax income into a flexible spending account (FSA), which allows them to pay tax-free for health-related items like glasses, visit co-payments, and prescriptions. An excellent option for physicians with dependents may be investing in a dependent care FSA, giving them the tax-free opportunity to pay for a child’s daycare or an older adult relative’s nursing care. For physicians employed at academic institutions or non-profit healthcare systems, Dr. Taylor advises investing in a 457b deferred compensation plan, which allows for an annual retirement investment in addition to $23,000 and thousands of dollars saved.
Family structure also plays a role in a physician’s tax burden. Dr. Taylor points out that unmarried physicians are in higher tax brackets than those who file jointly. What’s more, the tax code provides added benefits to those with children or other dependents, providing them with potential tax credits and deduction eligibility that they might not receive otherwise. Dr. Taylor notes that mortgage interest deduction offers one of the most significant tax savings for those who own a home or are considering purchasing a home. In other words, home-owning physicians can deduct a certain amount of interest paid on the mortgage. Owning a home also provides doctors with an asset that will likely grow in value over time.
Altruistic physicians and doctors with a side hustle also have certain tax-burden considerations. About the former, Dr. Taylor suggests making tax-deductible donations and itemizing taxes when filing to decrease the tax burden. It might also behoove physicians to consider the time they donate to charities and organizations. For instance, annual donations may benefit some physicians, while monthly gift-giving might work best for others. Dr. Taylor notes that every physician’s optimal timing is specific and unique. In the case of physicians who side hustle and are likely paid as independent contractors, they must pay taxes with their reserve money. Owing federal taxes, state taxes, and other taxes might lead to a 15% raise in a physician’s tax burden.
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