Money Minutes for Doctors #29 ~ Tax Tips for Physicians
It has been said that the average taxpayer shouldn't be embarrassed about not fully understanding taxes. Quite frankly, who really does? Earned Income Tax Credit, multiple exemptions, filing deadlines ~ head scratchers for most, but we are here to help! To help guide us off of the dock and into the ever shifting waters of our tax code is our professor of finance, Ms. Katherine Vessenes, JD, CFP®, RFC, Founder and President of MD Financial Advisors.
About Ms. Vessenes:
Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.
Quick Notes:
Top Twelve Tax Tips for Physicians
401k/403b is a defined benefit plan where you can invest up to $19,500 annually if you are under 50 (If >50 can increase to $26,000) and not have to pay income tax on that portion of your income.
These contributions may be capped by proposed changes in congressional tax law so stay tuned!
Roth 401k/ 403 b will not lower taxes this year but will lower taxes in the future. Can be thought of as tax insurance as will not have to pay taxes on this again! You pay taxes on the money now but not on the gains or when withdraw money from the account. Katherine has this option save doctors over $1,000,000 in retirement!
A second 401k is a possibility if you have 1099 income. Often called independent or solo 401k and you can stack the contributions from your original 401k… up to 25% on your profits for the year. For example if you earned $100,000 in your side gig you could place $25, 000 into the account. There are limitations and need to coordinate with your tax accountant but you can possibly input up to $58,000 in your solo 401k
HSA (Health Savings Account) can be obtained through your employer (if offered) and allows for tax deductible contributions. Additionally when you withdrawal money from the account for health care purchase there are no taxes on the purchase! In 2020 an individual could contribute $3500 and a family could contribute $7100. A HSA is an investment account that can be managed just like any other account, generally recommend investing when the account value is > $5000
Home office deductions work well if you have 1099 income and you don’t have another office. If you work from a home office then the office area, a percentage of your home/apartment, becomes a deductible can expense including any needed repairs/upkeep which means a % deduction of any needed hot water heaters, cleaning, utility bills etc.
Tax efficient strategies for childcare - tax credits are better than deductions as it’s a 1:1 tax write off and can deduct the amount of the tax credit directly from your tax bill. The child care tax credit (up to 35% of $3000, or $6000 for two children under 12) which can include babysitters, summer camps etc. The catch – only eligible if the modified adjusted gross income is < $400,000
Employ your children – You can hire your children in your business. Minor children can become employees which is a deduction to the business. As long as children are paid less than $12,000 per year the business does not have to pay social security taxes etc. either. Your accountant can help to identify a reasonable wage and age of when employment is appropriate.
529 funds grow tax free and when used for appropriate college expenses (high school, college etc.) than any withdrawal is tax free. Money is deposited into the 529 fund with after tax dollars but the growth is tax free.
Chartiable contributions – assuming you are itemizing deductions then donations to charities and can lower your tax bill. Donating clothing, books, toys etc. that you are not using can be donated to charitable organizations and qualify for you for a deduction. If you are not itemizing then not eligible for this deduction.
Can also write a check to charities or involve a donor advised fund or trust for larger sums of money. Any organization must be recognized as a 503c to qualify for the tax donation. You can also donate appreciated assets such as stocks/mutual funds/real estate. If you sell the asset then you are subject to capital gains or ordinary income tax on the profit (depending on the duration of ownership) however if you gift the stock then the receiving charity can sell the asset and not pay taxes on the gain. You can take a tax donation for the amount of the gifted asset thereby lowering your taxable income.
Self-employment insurance options – buying private insurance can be very expensive. You are not eligible for Medicare until 65 and many doctors may wish to retire before the age of 65. If you are self-employed then the health insurance you purchase can be a tax deduction through the business and thus cost less than the actual policy price due to tax benefits.
Cash balance plans - a defined benefit plan where you can set a goal for a specific dollar amount for the desired benefit in retirement. You then work backward and set the needed dollar amount annually to reach the benefit goal. This can be layered onto a 401k and can add up to several hundred thousand into these plans.
Business expenses can be deducted like computers, lap tops , phone etc. Can also include stethoscopes, licensing, board exams, travel etc. costs if you have 1099 income.