Do you get frustrated during the tax period? You’ve worked hard this year, so now it’s time to compensate for the piper. Yet no one needs to spend additional income taxes than they actually should. Just be smart about it and don’t fall for such potentially dangerous tax schemes that make you scramble for tax benefits and deductions.
Below is a list of legitimate ways I’ve compiled to help you reduce your white coat income tax bill.
Business deductions are geared towards those self-employed physicians, whether you are a partner in a practice or an independent contractor. As long as you have records to justify your deductions, you may claim some, if not all, of the deductions below:
- Board examination fees
- Cell phone usage
- Clothing (i.e., scrubs, white coats, and work shoes)
- CME expenses
- Fees paid for tax preparation, accounting, and retirement plans
- Home office expenses
- Malpractice insurance
- Medical and DEA licenses
- Medical equipment
- Mileage and business-related vehicle expenses
- Office equipment and supplies
- Patient refunds
- Payroll taxes
- Work-related travel expenses (i.e., meals, accommodations, flights, car rentals, etc.)
Although this white coat deduction focuses on self-employed physicians, other physicians should consult their tax advisor and discuss the possibilities of setting up a business in addition to your primary employment, so that you can reduce your taxable income through deductions.
If you are donating your assets, financial resources, or even talents to a charitable organization or cause, then you can use it for a white coat tax deduction.
The hardest thing about charitable deductions is to keep track of your contributions throughout the year. It’s going to take a little time, but it’s worth it. You can also report the total amount of the donation and/or commodity you contributed, but you can also document the mileage associated with the deduction. You ‘re going to be rewarding yourself for the little amount of preparation and work in tax season.
Health Care Deductions
Don’t forget that you are still a consumer of the health care service that you get from your work. Your health insurance premiums are pre-tax; self-employed physicians can also take advantage of this white coat tax deduction.
You could also be eligible for a white coat tax deduction if you incurred a personal medical expense. Even if you don’t qualify for the federal tax deduction, some of these may be available for you when completing your state income taxes.
If you are a physician who chose a high-deductible health insurance plan, you may also benefit from putting funds aside in a health savings account (HSA) on a pre-tax basis. These funds can be used later for health insurance co-pays and deductibles.
If you’ve reached Medicare-retirement age, 65 years old, then you can use your accumulated HSA dollars for anything as it’s treated like any other IRA account. All of your contributions to an HSA are tax-deductible, and there is no income limit for being able to take a deduction, unlike with a traditional IRA contribution.
Investing Tax Loss Harvesting
When you invest, the goal is to make money, and nobody is delighted when the investment depreciates. However, there’s still good in the bad as the IRS allows you to deduct up to $3,000 of capital losses to offset your capital gains that would otherwise be taxed.
Although most physicians make too much money to take advantage of the deductions from interest on student loan payments, the interest you pay on your home mortgage is currently not subject to income limits.
This means that you need to consider which kind of debts you pay down first thoroughly. Reach out to your financial professional to have them review your overall picture and then assist in creating a strategy that makes the most sense for you.
One of the most significant ways that physicians can reduce their tax bill and save more for retirement at the same time is by doing retirement planning through tax-deferred retirement vehicles.
Although it’s the most significant way to reduce your tax bill, there aren’t many physicians who are taking advantage of the opportunity. When you put money in a tax-deferred account, you are ultimately reducing the amount of taxable income, and the opportunity for savings is huge!
If you’re self-employed, you can contribute as much as 25% or up to $54,000 to a SEP-IRA or 401(k) in addition to your salary deferrals of up to $18,000. And, if you are 50 years of age or older, you can make additional contributions of $6,000. Another way to save on a tax-deferred basis includes taking advantage of SIMPLE IRAs and profit-sharing plans.
Although non-self-employed physicians don’t have the same opportunity, they can still set aside up to $18,000 in an employer-sponsored 401(k) plan, and those who are 50 years of age and older can still make those additional contributions of $6,000.
Although after-tax vehicles such as Roth IRAs won’t help with tax savings, it’s still worth evaluating to see if you should set aside money for future tax savings based on your situation.
When exploring options for retirement savings, reach out to your financial professional that understands and is experienced with financial planning.
Other Personal Tax Credits & Deductions
Let’s not forget about those other personal credits and white coat tax deductions that you may qualify for. These can be:
- Adoption expenses
- Alimony payments
- Casualty losses
- Child care expenses
- Energy-efficient home improvements
- Job search expenses
- Physicians with children in college may be eligible for the American Opportunity Credit
- Proper taxes paid
- State and local income taxes paid
Seek Professional Tax Services
Even though there are many do-it-yourself and software tools available for preparing and filing income taxes, physicians should consider hiring a tax professional who regularly works with medical professionals.
We recommend working with a firm that understands the intricacies that come with the business of practicing medicine. Doing so will help physicians have control over their finances as well as identify additional opportunities to reduce income tax bills.