TJ PorterBy T.J. Porter, WCI Contributor

The average physician earned about $363,000 in 2023. That’s enough to land a single filer in the second-highest income tax bracket, and it pushes someone who is Married Filing Jointly near the top of the third-highest bracket, assuming their spouse doesn’t earn a penny all year.

Paying your taxes is important, and not just for staying on the good side of the IRS. Taxes fund essential government programs that help us all. Still, giving up a third or more of your hard-earned pay can be painful. For doctors who want to keep more of their earnings in their pockets, reducing taxes is essential. Let's review strategies that can help you minimize your tax burden and keep you in a lower tax bracket.

 

#1 Use Tax-Advantaged Retirement Accounts

One of the simplest ways to limit your tax burden is to reduce the amount of taxable income that you have. Traditional 401(k)s, IRAs, and other retirement accounts let you deduct the amount you contribute from your taxable income, reducing the amount you owe.

For 2024, the top income tax bracket is 37%, and the maximum employee contribution you can make to a 401(k) is $23,000 ($30,500 if you’re 50 or older). If you max out your contributions, you’ll save $8,510 ($11,285) in income taxes assuming you’re in the top bracket. That's a significant savings.

Some doctors may also have access to a 457(b), a type of deferred compensation plan that will let you contribute more and further reduce your taxable income. Others have access to 401(a)s, 401(k) profit-sharing plans, cash balance plans, and even multiple 401(k)s. It would not be uncommon for a doctor to be able to defer $100,000 or more in retirement accounts. A $100,000 contribution for a high-earning doctor in a high-tax state like California could save as much as $49,300 off their tax bill. While the deferred taxes will have to be paid eventually (unless that money is given to charity), they are often paid at a lower rate many years later. Plus, the money in the account grows in a tax-protected manner for decades between those two dates. Tax-deferred contributions can sometimes lower your income enough that you qualify for the 199A deduction (scheduled to end after 2025). If you want to lower your tax bill, the first place thing to consider is simply saving more money for retirement. 

 

#2 Contribute to a Health Savings Account

Health Savings Accounts are only available if you sign up for a high-deductible health plan (HDHP). HDHPs make sense if you’re young and healthy, and you don’t expect to incur any major medical expenses during the year.

HSAs let you deduct the amount you contribute (up to $4,150 if you’re covered individually, $8,300 for family plans). Money in the account grows tax-free, and it can be withdrawn tax-free to pay for medical expenses. Once you turn 65, you can withdraw money from the HSA without needing to use the funds for medical expenses. However, you will pay income tax on non-medical withdrawals. That means the account functions like an extra 401(k) or IRA. The fact an HSA is triple tax-advantaged makes it a great way to invest.

 

#3 Plan Your Tax Deductions

The standard deduction for 2024 is $14,600 for single people and $29,200 for people who are MFJ. Many people wind up taking the standard deduction because they can't itemize enough deductions to make it worth doing.

As a high earner, there’s a good chance that you pay both $10,000 in state and local taxes (SALT) and perhaps that much in mortgage interest. In that case, you would still need about $10,000 in deductions before itemizing makes sense if filing jointly.

Charitable giving is another big source of deductions. If you give to charity regularly, you might consider planning your donations to be tax-efficient. For example, if you donate $10,000 each year, you’d only be able to itemize $30,000 total in deductions, meaning you deduct $800 more than the standard deduction. If you changed your giving to $20,000 one year and $0 the next, you could deduct $40,000 ($20,000 from the donation and $20,000 from SALT and mortgage interest) and then take the standard deduction the following year. Instead of your deductions netting you $1,600 in tax deductions ($800 per year), you’d get to deduct $10,800 in one year, saving you far more in taxes.

If you have the opportunity to time your tax deductions, lining all your deductions up in a single year will let you get the greatest benefit from itemizing compared to the standard deduction. Just like deductions, sometimes part of your income can be bunched into one year or the other. 

More information here:

How to Lower Taxable Income

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#4 Use the Qualified Business Income Deduction

If you own your own business or work as a contractor, the Qualified Business Income (QBI) deduction (also called the 199A deduction) can be a boon in terms of reducing your tax liability. This deduction allows you to deduct up to 20% of your qualified business income and 20% of qualified real estate investment trust or qualified publicly traded partnership income. For most physicians, the deduction for QBI is the exciting bit.

The QBI deduction is very complicated. To highly simplify it, the deduction means you can deduct 20% of the money you earn in profit (but not in W-2 income paid to yourself) from your taxable income. For some professions like doctors, the deduction does begin to phase out if your income is high enough to put you in the 32% tax bracket, and there is a lot of fine print to read. It’s worth consulting a tax pro to see how much you can save through this deduction.

 

#5 Take Advantage of Tax-Loss Harvesting

When you sell investments for a profit, you pay capital gains taxes on the money you make. Depending on how long you hold the investment, you could pay your normal income tax rate or a lower, long-term gains rate. When you sell investments for a loss, you can use those losses to offset any investment gains. If you have more losses than gains, you can use the losses to deduct up to $3,000 from your ordinary income each year, carrying any additional losses forward to the next year to offset future income or gains.

Tax-loss harvesting is a strategy that involves selling underperforming stock to book a loss, netting you a tax deduction. You need to follow a few rules, such as avoiding buying substantially similar investments within 30 days of selling for a loss, but this strategy can help you offload underperforming investments and get a bit of a tax benefit out of it.

More information here:

Tax-Loss Harvesting Pairs and Partners

 

#6 Construct a Tax-Efficient Portfolio

When building your investment portfolio, a bit of planning can massively impact how much you pay in taxes. 

physician on fire taxes

The key idea here is that different investments have different levels of tax efficiency. For example, stocks with high dividends are not tax-efficient because you’ll be forced to receive dividend income from them each year, meaning you’ll pay taxes on that income. Similarly, investments with significant growth potential could see you paying a big tax bill when you sell them for a massive gain.

If you have a specific asset allocation in mind, you should carefully consider which accounts you use to hold which investments. Place your least tax-efficient assets in tax-advantaged accounts like 401(k)s or IRAs and more tax-efficient investments in taxable accounts.

 

#7 Invest in Qualified Opportunity Zones

Qualified Opportunity Zones (QOZs) are designated areas in the United States that need economic development and assistance. Investors who help grow these communities by investing in them can qualify for several tax benefits.

For one, if you sell an investment and reinvest those funds into a QOZ, you can defer the capital gains taxes until the end of 2026. Additionally, you can reduce the capital gains tax you’ll owe by 10%-15% based on how long you hold the investment in the QOZ.

 

#8 Incur Business Expenses

If you own a business or work as a contractor, you can write off business expenses to reduce your company’s taxable income.

Imagine you want to buy a new piece of equipment for your office. The equipment costs $20,000. If it’s almost the end of the year and you buy it today, you can deduct that $20,000 from this year’s taxes, lowering your taxable income. If you wait until January, you’ll take the deduction on next year’s tax return.

Either way, you get the deduction, but money is more valuable today than it is next year, so getting the deduction sooner is more valuable. Don't forget that like any other deduction, you're not coming out ahead by spending that money since the deduction is worth less than the cost of the deduction. But if it is something you need to buy anyway, and it qualifies for a legitimate deduction, be sure to claim the deduction and keep proper documentation in case of an audit. 

 

#9 Move to a Low-Tax State

If you’re looking to move to a new area or have the flexibility to live where you want, state taxes are something worth considering if you want to minimize your tax bill. Some states have very high income tax rates. For example, Californians pay as much as 12.3% while Hawaiians pay as much as 11%. Other states—such as Alaska, Florida, and Nevada—have no income taxes.

Keep in mind that income taxes are just one tax to consider. Think about others, like sales tax and property taxes, to determine the true tax burden of any state you might move to in the future.

More information here:

Cost of Living Matters More Than Anything Else

 

#10 Donate Appreciated Assets to Charity

If you’re thinking about making charitable donations, donating appreciated assets or investments is a far more tax-efficient strategy than just donating cash.

Imagine that you want to give your favorite charity a donation of $15,000. Donating $15,000 in cash will let you itemize $15,000 in deductions. However, imagine that you’d purchased shares in a company for $10,000 a few years ago and that they’ve appreciated to $15,000. By donating the shares, you get to itemize a $15,000 deduction and avoid $5,000 in capital gains taxes, essentially letting you double-dip on the tax benefits.

You could also consider using a Donor Advised Fund (DAF). With a DAF, you can gift assets to the fund, immediately receiving the tax deduction. However, you then have the flexibility to dole out the donations to charities over time. That means you can make regular donations to your DAF, taking advantage of the tax benefits, without needing to make immediate decisions about where the funds will go.

 

If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.

 

What do you think? How else can you lower your taxes? Comment below!