As the end of the year quickly approaches, it’s important make sure you’re doing everything you can to reduce your owed taxes.
Being a physician leads to a busy lifestyle, so it’s understandable that many doctors choose to take a hands-off approach to tax matters. However, many of the most common ways to reduce your tax bill are fairly straightforward. Especially with the help of a qualified accountant, any of the steps below should be relatively easy to implement and could potentially save you thousands of dollars.
1. Make Charitable Deductions
Contributing to charitable causes is just as powerful a tool for physicians as it is for the layman when it comes to reducing taxable income. However, saving your contributions for the very end of the year can add unnecessary stress to your tax preparation and paperwork-wrangling, so it’s best to do your contributing at least a few months earlier.
Depending on the business structure of your practice, qualifying contributions can come directly from you or from the business itself. In either case, those contributions additionally serve as a bit of positive public relations for your practice. To maximize that angle look for local or regional charities, especially those that publicize their donors.
Not all charitable organizations are able to accept tax-deductible donations, so verify that your charity of choice qualifies before donating. With few exceptions, any charity classified by the IRS as a 501(c)(3) organization can accept deductible donations.
Remember that you can even deduct expenses for volunteering your time. While the time itself isn’t deductible, any amount you spend on transportation or supplies for the charitable activity usually is, and should be, included on your tax return accordingly.
Finally, if you’re older than 70.5 years, consider taking advantage of the newly permanent IRS rule that allows you to donate up to $100,000 directly from your IRA, completely untaxed.
2. Deduct Expenses for Equipment
Until recently, most equipment costs for your practice were required to be amortized over a period of years. However, as of the 2016 tax year, Congress permanently instituted the Section 179 provision allowing you to deduct costs for purchasing equipment in their entirety. That means you can take the full deduction on any equipment purchase for the same year it was bought, allowing you to immediately enjoy the full tax benefits.
Since doing so effectively discounts the buying price straight away, it’s an especially good idea if you’re been thinking about a big equipment purchase but have been waiting for an opportunity to reduce the cost.
3. Review Your Qualified Retirement Plan
The vast majority of physicians have a qualified retirement plan (QRP), but you may be unaware that the rules for contributing to it have changed in your favor. Experts say that while 95 percent of physicians have a QRP, the vast majority aren’t taking advantage of new limits and rules put in place by the Pension Protection Act.
The specifics can vary widely from one physician to the next, so your best bet is to schedule a meeting with an accountant who can carefully review your IRA, 401(k) or other QRP to ensure you’re maximizing your deductions every year, and so maximizing your tax reduction opportunities.
4. Avoid Income Recognition in Boom Years
While the rule of thumb is that you should always take advantage of every opportunity to reduce your taxable (or recognized) income, that’s especially true if you’ve enjoyed an exceptionally lucrative year. One of the easiest ways to do this is to ensure you’ve created every type of tax-deferred account available to you. Most of those will be retirement accounts, but some types of investment accounts can also qualify.
Whatever the case, contribute the maximum amount to all such accounts during boom years. Doing so removes that income from your taxable amount and ensures you’ll pay a much lower rate (or potentially nothing at all) when you do eventually withdraw the money in your later years.
5. Consider Deferring Income
Even when you can’t outright avoid income recognition, it’s often worthwhile to try and defer anticipated income to the next year. In most cases, this is accomplished by delaying issuing invoices and other billed receivables until the new year, although that’s not always possible for physicians, depending on the specific charge.
6. Explore Tax-Loss Harvesting
If you maintain a significant investment portfolio, you may be used to unexpected tax bills resulting from high-performing investments. However, in such a case, you don’t necessarily need to “eat” the tax burden without question. Often, you can engage in “tax-loss harvesting” by claiming deductions for other investments in your portfolio that have lost value since the shares were initially purchased. Consult with your investment professional to find out if this is the case.
7. Seek Expert Advice
Many physicians form long-time relationships with an accounting firm, and if you’re a small practice, you may even have dealt with the same individual accountant for years on end. Even when your existing accountant has done a stellar job, it’s always a good idea to engage in periodic reviews of your finances with a firm that specializes in working with physicians, and intimately understands medical practice finances.
Giving another pair of eyes the chance to look over your financial landscape is a great way to spot opportunities that may have been missed over the years. For the best results, look for a firm that also specializes in business taxes, since they’re more likely to be able to find every avenue for tax reduction than most accountants. It can even be a good idea to shift all your accounting to such a firm, allowing it to more effectively guide your tax-based planning throughout the year.
With a bit of pre-planning, you can ensure your tax bill is as low as it can be. By consulting with professionals and regularly reviewing your practice’s finances, you’ll likely be reducing your tax bill in the future, as well.
The medical CPA team at Goldin Peiser and Peiser has experience working with medical practices of all sizes and disciplines. Contact GPP for additional tax savings strategies for your practice.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.