Plenty of perks come along with earning a physician’s salary, but a low tax rate isn’t among them. Medscape’s Physicians and Taxes Report 2023 shows that last year, doctors paid an average of nearly $100,000 in state and federal taxes, and three quarters of them thought that they were paying too much to Uncle Sam. In most cases, it’s impossible to eliminate that tax bill, but physicians told us they have found ways to minimize it.
“The percentage you have to pay in taxes escalates as you earn more money, and most doctors are at the maximum rate,” says Paul Joseph, a certified public accountant and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan. “So every dollar you can deduct from your income is worth more.”
Here’s a look at the seven top tax breaks physician respondents claimed in our tax report, so you can ensure you’re making the most of the tax strategies available to you. To claim most of these options, you’ll need to itemize your deductions when filing your taxes.
Contribute to Charity
Claimed by 70% of physicians in 2022
Who’s eligible: Anyone.
How it works: If you itemize your taxes, you can deduct the value of cash, securities, or property donations to 501(c)(3) organizations. You’ll need a receipt from the charity and a third-party appraisal for any property donations worth more than $5000.
Pro tip: Donating stocks that have appreciated in value can deliver additional tax benefits: You get to write off both the value of the contribution and avoid capital gains taxes that you’d face for selling the security.
Contribute to a Pre-Tax 401(k) Account
Claimed by 60% of physicians in 2022
Who’s eligible: Those who work for a company that sponsors a 401(k) plan.
How it works: Contributions to a 401(k) or 403(b) account come directly out of your paycheck, pre-tax, and grow tax-free until you withdraw them in retirement. Many companies offer a match on contributions. In 2023, you can contribute up to $22,500 ($30,000 if you’re age 50 or older) to a 401(k) account.
Pro tip: If you’re maxing out your 401(k) account, you can stash money in other tax-advantaged accounts such as a health savings account (if you have a high-deductible health plan) or an individual retirement account (IRA). Although employees with access to a 401(k) may not get the pre-tax advantage of the IRA contributions, the money will grow tax-free through retirement, and you may have access to additional investment options unavailable in your workplace plan.
“You want to maximize your retirement contributions,” says Mark Steber, the chief tax information officer for Jackson Hewitt Tax Services. “If you’re not taking full advantage of them, you’re probably leaving some tax dollars on the table.”
If you’re self-employed and don’t have access to a workplace plan, there are several options for tax-advantaged retirement savings, including a SEP IRA and a solo 401(k).
Deduct Interest on a Home Mortgage
Claimed by 52% of physicians
Who’s eligible: Most homeowners who have a mortgage.
How it works: Homeowners can deduct the interest paid on the first $750,000 of their mortgage. (Those who have had the same mortgage since before December 16, 2007, can deduct interest on the first $1 million of their loan.)
Pro tip: If you purchased a home this year and bought points to reduce the rate, you may be able to deduct the cost of those points on your taxes.
Physicians might also be eligible for other home-related tax benefits, such as for green home improvements under the Inflation Reduction Act or for home equity loans used to improve the value of your home.
Write Off Eligible Business Expenses
Claimed by 46% of physicians
Who’s eligible: Physicians who own all or a portion of their practice, as well as those who work as consultants or contractors paid with a 1099.
How it works: Doctors who run their business using an LLC or S corporation can itemize the deductions on their Schedule C. There are dozens of deductions that might qualify, including for office space and supplies, medical equipment, uniforms, staff wages and benefits, and state and local tax payments. Physicians who work as consultants can deduct home office expenses, travel costs, and the price of supplies purchased for the job.
“For business expenses, you want to make sure that you’re tracking those expenses on an ongoing basis, rather than trying to reconstruct something at the end of the year from 8 months ago,” Joseph says. “You want to have a system in place that’s calculating those expenses every single day.”
Pro tip: The Tax Cuts and Jobs Act of 2017 also allows owners of pass-through businesses to deduct up to 20% of their business income.
“Not all physicians will qualify for that, because they are in a service-based business and many of them make too much money, but it’s always a good idea to look at whether that’s something they’re eligible for and make sure that they claim it,” says Eric Bronnenkant, head of tax at New York–based investment company Betterment.
Contribute to a 529 College Savings Plan
Claimed by 27% of physicians
Who’s eligible: Those who live in the 37 states that offer a credit or deduction for 529 plan contributions.
How it works: The rules and amounts that qualify vary significantly by state. Most states offer benefits for contributions to in-state accounts only, whereas others offer a tax break for contributions to any 529 account.
Although there is no federal income tax benefit for contributions to a 529 plan, the money grows tax-free until tapped for qualified education expenses, which include both private primary and high school tuition and college costs. Starting in 2024, up to $35,000 in unused funds can roll over into a Roth IRA for the beneficiary.
“It’s not just about the immediate deduction with a 529 account,” says Brian Copeland, partner and director of financial planning with Hightower Wealth Advisors in St. Louis. “It’s not saving you a lot on day one; it’s more about as that account grows, you don’t have to pay taxes on it along the way, so you’re sheltering it from taxes for the 18 years you’re saving for your kids’ college.”
Pro tip: Even if you live in a state without a state income tax or without a tax break for 529 contributions, opening an account can be a smart financial move. Because you don’t need to choose an in-state plan for the tax breaks, look for one that offers low fees and investment options that you like.
Sell Investments at a Loss
Claimed by 22% of physicians
Who’s eligible: Anyone who has sold stocks, mutual funds, or other investments at a loss.
How it works: After selling a security that has lost value, you can deduct the value of that loss on your taxes to offset capital gains in the same year. If you have more losses than gains, you can use the losses to offset up to $3000 in ordinary income per year. If you have more than $3000 in losses, you can carry those losses forward to offset future income or capital gains.
Pro tip: In years with a lot of market volatility, such as this one, there’s potential to engage in “tax loss harvesting” in which you intentionally sell securities that have lost value to realize the losses for the tax benefits. Keep in mind that if you sell a security at a loss, you cannot repurchase the same security within 30 days — the IRS sees that as a “wash sale,” which does not qualify for a capital loss for tax purposes.
Contribute to a Backdoor Roth IRA
Claimed by 20% of physicians
Who’s eligible: Anyone who wishes to contribute to a Roth IRA but is not allowed to do so because their income is too high.
How it works: High earners typically don’t qualify for contributions to a Roth IRA, in which contributions go in after taxes but grow tax-free and distributions in retirement are also tax-free. But there are no income requirements for making after-tax contributions to a traditional and then converting it to a Roth IRA.
There are, however, complex tax rules for those who also have a traditional IRA that’s funded with pre-tax dollars. If that’s the case, work with a tax pro or financial advisor to determine whether a backdoor Roth conversion is the most tax-efficient approach for your situation.
Pro tip: A growing number of workplace retirement plans now include an option for Roth contributions. There are no income limits on a Roth 401(k), so contributing to that type of an account could be a smart route for taxpayers for whom a backdoor conversion doesn’t make sense.
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