There’s a lot of hype about the president’s new tax bill, or the Tax Cuts & Jobs Act. Here’s a breakdown of what tax for doctors actually means and tax saving tips for high-income earners.
- According to research by The Tax Foundation, a physician’s family with two children and $325,000 in earnings would save about $6,000 in federal income taxes.
- Since the state and local tax deduction or “SALT deduction” is limited now to $10,000 for joint filers, doctors in high tax states like California, Oregon, New York, and New Jersey will lose state income tax deductions which resultantly, will increase their tax bills.
- As paying taxes is obligatory, but there are several techniques for doctors and medical professionals to help lower a tax bill. While the U.S. tax system is prepared so that high earners pay higher taxes, the ultra-rich often take advantage of laws that allow them to lessen their applicable tax rate.
Tax strategies for high income earners
Increasing Retirement Accounts
The most common way to start dropping your taxable income starts by reaching the maximum limit of one’s retirement accounts. Rescheduling as much tax as possible early on during the functioning years and taking benefit of tax-deferred plans is a must. These types of employer-sponsored retirement plans offer employees an automatic method to save for their retirement while taking advantage of tax breaks. While contributing to these types of accounts, using “pre-tax” dollars, where the money goes directly from the paycheck into the plan before the deduction of taxes; the end result is less tax for doctors.
For those who don’t have the choice of an employer-sponsored plan or are self-employed, can adopt contributing to accounts such as a:
- Solo 401(k)
These are another way to lower your tax bill providing you a chance to lower your taxable income through pre-tax contributions.
Health Savings Accounts (HAS)
These are the only accounts that offer a triple-tax advantage, means that:
- Contributions are tax-deductible
- It grows tax-free
- Money is taken out and not taxed
HSAs are available only to those enrolled in a high-deductible health plan (HDHP). These are sort of insurance plans with a high deductible, and maximum out of pocket costs. It is one of the best ways to capitalize on the tax-savings potential.
- Giving money to non-profit organizations has always been a way for the rich to get a subtraction on their taxes. Under the tax law, the amount you can deduct has increased with time.
- Since the standard deduction has amplified to $24,000 for married physicians, you may not be able to benefit from making smaller charitable donations.
- So whenever you give, as a substitute for writing a check, consider giving valued stocks or mutual fund shares that you’ve owned for more than one year instead of cash. Why? Capital gains taxes are removed when you contribute long-term appreciated assets directly to a charitable trust instead of selling the assets and donating the after-tax earnings.
Invest In Real Estate
One of the best means to build wealth but lowering your taxes involves investing in real estate business. Some of the benefits include:
- Potential to recover the cost of profit-producing assets through reduction
- Private residence exemption – helps with capital gains taxes
- Mortgage interest deduction
This is the act of selling a losing investment in a taxable account to reduce the loss. While this may not sound so good, physicians can use the first $3,000 of losses to offset ordinary income, saving the average physician $1,000 to $1,500.
Home mortgage interest
This is a frequent tax deduction in tax for doctors, especially those with large homes and larger mortgages. Physicians can also deduct the interest on up to $100,000 worth of a home equity line of credit (HELOC) or a cash-out refinance to get cash to pay down student loans, thereby converting the interest into a tax deduction. This works for consumer debt too.
- If you have a disabled child who became disabled before their 26th birthday, consider making contributions to an ABLE account as you plan to financially support your child.
8. Self-employed physicians can save taxes by hiring their kids and by benefitting with all the above-mentioned tax strategies for high-income earners.