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15 Smart Ways for Physicians to Reduce Taxes: Keep More of Your Earnings

Jan 11, 2025

I love hearing from readers in our community, because it provides me with the opportunity to do some coaching.

Reader Question: “As the year wraps up and my micro-corporation closes its books, I'm reminded that I pay a lot of taxes as a doctor. How can I reduce my taxes?”

My Answer: You're not alone! High taxes are a common pain point for doctors, including those running micro-corporations. Many physicians start their practices or side businesses hoping for more professional freedom, only to find that their tax burdens remain frustratingly high. Let me summarize some tips for you.The good news is that there are actionable, legal tax-saving strategies designed to keep more of your hard-earned money in your pocket.

In this post, we'll explore practical tips that I provided to this doctor to optimize their tax strategy—just in time for beginning of the year planning. From maximizing deductions to taking advantage of available credits, these approaches could lead to substantial savings and help you manage your micro-corporation’s finances more effectively.

These steps not only help reduce your taxes but can also improve the financial health of your business, freeing up capital for growth, personal investment, or even a well-earned vacation!

Let’s dive into the 15 key approaches for you to consider.

1. Maximize 401(k) and 403(b) Contributions

Contributing to a 401(k) or 403(b) allows you to defer taxes on a substantial amount of income until retirement, when you might be in a lower tax bracket. For those maxing out their 401(k), this tax-deferred growth can create significant savings on taxable income today and accumulate wealth for tomorrow.

2. Cash Balance Plans

For physicians with their own micro-corporation, private practice, or who work with a progressive employer, a cash balance plan can amplify retirement contributions. Cash balance plans are similar to pensions and can allow additional tax-deferred contributions well beyond 401(k) limits, sometimes exceeding $200,000 annually.

3. Contribute to an HSA

A Health Savings Account (HSA) operates as a “triple tax-advantaged” account: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs function similarly to 401(k) accounts, but with the added benefit of tax-free withdrawals for healthcare expenses—making it ideal for covering both current and future medical costs.

4. Self-Employed Health Insurance Deduction

If you operate as an independent contractor, self-employed, or part of a micro-corporation, health insurance premiums are tax-deductible. This benefit mirrors what employers provide for W-2 employees but allows self-employed physicians to take the deduction directly against income.

5. Utilize 457(b) Deferred Compensation Plans

If you’re employed at a hospital or academic center, you may have access to a 457(b) deferred compensation plan. These plans let you defer income beyond traditional retirement accounts, providing a further tax-sheltered growth avenue. However, keep in mind that assets in 457(b) plans remain legally the employer’s until disbursed, so assess employer stability before committing heavily.

6. Leverage the 199A Deduction (if eligible)

The Section 199A deduction allows qualified small businesses to deduct up to 20% of qualified business income. While not all physicians are eligible due to income phaseouts, physicians owning their practice or working as contractors may qualify, especially if they manage to keep taxable income within certain thresholds.

7. Claim the Home Office Deduction

If you regularly use a home space exclusively for business, you may be able to deduct it. While calculating this deduction can be complex, the IRS offers a simplified option, providing up to $1,500 in potential savings, a helpful benefit for any of you with administrative or telemedicine work done from home.

8. Rent Out Your Home for Business Events

Instead of claiming a small home office deduction, consider renting out your home to your business for up to 14 days a year. This strategy allows you to claim a “fair rental rate” for the home without treating it as taxable income. Ensure you document the rental agreement and fair rental rates to remain IRS-compliant.

9. Hire Your Kids

If you’re self-employed, you may be able to pay minor children a reasonable wage for work done in the business. Wages paid are tax-deductible and provide income your children may not owe taxes on, up to certain thresholds. This is a unique way to help fund savings accounts or Roth IRAs for your children while reducing taxable income.

10. Invest in Roth IRAs

While contributions to a Roth IRA won’t reduce your tax bill today, Roth IRAs are powerful vehicles for long-term tax efficiency. Roth contributions grow tax-free, and qualified withdrawals in retirement are also tax-free, a great way to diversify tax exposure across different retirement income sources.

11. Tax-Loss Harvesting for Investments

If you’re investing in a taxable account, tax-loss harvesting can be a valuable tool. By selling investments that have lost value and repurchasing similar ones, you can use the losses to offset gains, potentially deducting up to $3,000 against ordinary income each year.

12. Tax-Gain Harvesting

Physicians planning an early retirement or those with variable income years can use tax-gain harvesting during lower-income years. Selling investments to capture gains at a lower tax rate raises the asset’s cost basis, reducing future taxes.

13. Charitable Giving Strategies

Charitable giving provides a double benefit—supporting meaningful causes and offering tax savings if you itemize deductions. Beyond direct cash donations, options like Donor Advised Funds (DAFs) or Charitable Remainder Trusts provide tax-smart, strategic ways to give that may better align with your tax and estate planning goals.

14. Invest in Real Estate for Depreciation Benefits

Investing in rental real estate offers depreciation, a non-cash deduction that can reduce taxable rental income. Depreciation can eliminate tax on rental cash flow, while Real Estate Professional Status (REPS) may allow certain high-income earners to offset other taxable income if qualifications are met.

15. Business Expenses as Tax Deductions

Operating a private practice or micro-corporation enables physicians to deduct a variety of business expenses. Common deductions include CME, business meals, medical equipment, office supplies, and malpractice insurance. Keeping clear records on all business-related expenditures maximizes these deductions.

By embracing these 15 dynamic strategies, high-income physicians have the incredible opportunity to not only reduce their tax burdens but also to cultivate and expand their wealth in a manner that harmonizes beautifully with their long-term financial aspirations. Each strategy is designed to maximize potential and create synergy between personal goals and financial health. It’s immensely beneficial to partner with a knowledgeable tax advisor who possesses an in-depth understanding of the distinct financial landscape faced by physicians. Such collaboration ensures that these tactical approaches are not just applied but are finely tuned and customized to fit your unique circumstances, paving the way for achieving financial success beyond mere numbers on paper.

Take Control of Your Taxes and Build Your Wealth with SimpliMD Business Coaching!

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