Taxes are important. Like really important. This goes especially for high income earners like physicians. And even more so because we get no education on the topic. If you are like me, taxes have long seemed like a giant black box…kind of like the kidneys (or am I the only one that struggled with nephrology in med school?). With this in mind, I’m going to share some of the most important tax tips for physicians of all kinds with the help of Alexis Gallati, founder of Cerebral Tax Advisors, spouse of a physician, and my and Selenid’s own tax advisor!
Why are taxes important?
This may seem like a simple question. I’m sure everyone is shouting the answer at the screen, “Because so much of our money goes to taxes!”
And that’s true. But that alone is not why taxes are important.
Taxes are important because there is actually something we can do about them to improve our tax efficiency! Put simply, we can pay less in taxes through our own actions!
This is why learning about taxes and having the right people own your team is important. Most of us incorrectly assume there is just nothing we can do to lower our tax burden. But this is simply not true!
In fact, the tax code, it’s just the government telling you how they want you to live, in a way. They’re giving you incentives to do certain things. And you start looking at it like that. It becomes a fun game of seeing, “Okay, how can I be the most tax efficient?”
If you don’t believe me, just look at my and Selenid’s actual tax plan here to see how much we reduced our tax burden!
So, let’s talk about how you all can make that happen too!
Tax Tips for Physicians
From the top…
1. All tax professionals are not the same…
I asked Alexis, “what is the difference between a tax advisor and a tax preparer?” Because this is a question I get all the time.
In her words,
“So you think of it just like physicians.
Not all physicians are created equal, as well. You’ll have those that are generalists and those that are specialists. So when you go to an H&R Block, or even maybe a mom-and-pop shop down the street, I mean, most of them are working reactively, and that means that they’re preparing your tax return. They’re really not looking at your year and saying, “Hey, where are the opportunities for us to save additional tax?”
Because as most of you will find out, as you are investigating different strategies, most of them have to be done in the year that you want that deduction or credit to apply. There are a few things you can do retroactively, but a majority, it’s going to be in the current year.
So the way that someone like myself and the team at Cerebral are different, we’re very proactive in how we approach each of our client’s tax situations. So we do projections throughout the year. We do a minimum of two, and that allows us to help eliminate surprises. It allows us to apply different strategies that may come up, depending on changes in your situation or changes in tax law.
So in effect, you’re tax-efficient throughout the year, where what most people are used to are, “Hey, I got my tax return, and maybe my accountant gave me a few little tips and tricks for the current year.” But that was the end of it. They don’t hand-hold like a tax advisor does.”
2. The best time to start thinking about taxes is…now
Per Alexis, “Truly, the earlier in the year, the better, because if there are strategies that are time-sensitive, then we want to be able to take advantage of those strategies as soon as possible.
Now, there’ll be other strategies that you can retroactively, during the year, go and set up. So think about an accountable plan, so then that way, you can be reimbursed for business expenses that you paid personally. That can be set up retroactively.
But things like if you are earning 1099 income and you’re being paid in your personal Social Security number, versus your business EIN. Well, the longer that you wait, the less income that will go into that EIN, as opposed to your personal Social Security number.
So earlier is always best, but as we get towards the end of the year, it starts to get more difficult, because there’s less time for us to implement strategies.”
3. W2 physicians can still lower their taxes
I am a W2 physician. All of my physician income is via W2. Now, in recent years I have started earning rental income and non-W2 income through side gigs. But even before that, I had to find ways to lower my tax burden with just W2 income.
While the tax advantages will always be greater for non-W2 physicians, too many W2 income earners don’t take the necessary steps to lower their burden at all. And that costs them a lot of money!
So what can be done to avoid this pitfall?
“If you’re strictly W2, what you can be looking for is obviously, if your employer provides a retirement plan, maxing out that retirement. That’s going to be probably one of the biggest things you can do.
Next is HSAs, so health savings accounts, if you are eligible for it. You have to have a high deductible plan in order to be eligible, and that’s something you can easily go on Google and figure out those requirements and then see if your plan applies. Then that’s another way you can do it.
A Quick and Dirty Guide to All Types of Investment Accounts: Where Should You Put Your Money?
Tax lost harvesting, if you do have a taxable account, and even charitable giving. So if you want to open up a donor-advised fund, or if you want to look at charitable trusts, private foundations, those are all things that someone can do, even without that 1099 income.”
Bonus Tax Tip for Physicians!
Q: What’s another great way to improve your tax efficiency as a W2 physician?
A: Start making some 1099 income through side hustles like these ones!
4. 1099 income gives you incredible tax advantages!
Alexes says, “There really is a plethora of different strategies available, and some of it depends upon how much 1099 income you actually have. If you are doing surveys, you’re probably not really making more than five grand a year. If you are, that’s amazing, and keep going. And so even with that, you’re able to go and write off different things that your employer might not allow you to get reimbursed for. That’s what you’re really looking for, are things that you need to have.
Let’s say CE, for example. If you are only allowed to have $2,000-worth of CE through your employer, but you go to a $3,000 course, well that $1,000, you can write off through your business. So then that way, you’re still being able to continue with your education and everything.
And then if you have more income, you can do things like hiring your kids. That helps you shift income from your higher tax bracket down to their lower tax bracket. Helps to save for their retirement or help out writing off their support. You can do the same thing with parents. If you’re supporting your parents, you can have them working legitimate jobs in your business and help write off that support.
Retirement plans. You can continue to do more into retirement, as well. Put more away, not just what your employer gives, but then off of the income that you’ve earned 1099. Really, it’s an open book, almost, of different strategies and write-offs that allow someone to really take advantage of the code in their favor.”
5. Education through experience
It’s very difficult to tie a neat bow on any discussion about tax tips for physicians because everyone’s situation is so unique.
But like anything, the most important first steps are to start educating yourself. I think hands down the best way to do this is to do your own taxes.
When I started my financial education in training, I did my own taxes. I read this book first and then I just did them myself. It was easier than I thought. I even did my own taxes for my first year as an attending.
Doing your own taxes gives you the best understanding of the tax code possible. So that experience for me is invaluable.
Now, after my first year as an attending, my taxes got much more complicated. I realized that I needed help to maximize my tax efficiency. That’s when I found Alexis and her team who now serve as my tax advisors.
But I am still very active – and that is the key!
A lot of people (myself included) may be tempted to just find the right tax advisor like I did and then just release all responsibility.
This is the wrong way to go about it. You need to stay active and stay educated in the process. This way you can learn to enact new strategies and keep everything on the up-and-up when you do use advanced techniques to reduce your tax burden.
You also want to make sure your tax advisor is doing a good job. This is your money we are talking about!
Did we actually just tie a bow on our tax tips for physicians?
I think we did!
If you are interested in learning more about tax planning for physicians, check out these resources!
- An Inside Look at My Personal Tax Plan
- 5 Ways W2 Physicians Can Lower Their Taxes
- 3 Things I Did To Reduce My Taxes This Year
- Tax Management Advisors
You can also find a full video of Alexis and me talking tax tips for physicians right here!
What do you think? Do you have any more tax tips for physicians? How do you maximize your tax efficiency? Let me know in the comments below!