As the year draws to a close, it is important that we maximize our opportunities to reduce our taxes. Let’s explore three essential moves that doctors should consider before the tax year concludes to reduce their tax liabilities.
1. Contribute to tax-advantaged retirement accounts.
One of the most effective ways for doctors to reduce their taxable income is by contributing to tax-advantaged retirement accounts. Not only does this help build a secure financial future, but it also offers immediate tax benefits.
Considerations for doctors:
- 401(k) contributions. Doctors should maximize contributions to their employer-sponsored 401(k) plans. For the tax year 2023, the contribution limit is $20,500, with an additional catch-up contribution of $6,500 for those aged 50 and older.
- SEP-IRA or solo 401(k) for self-employed doctors. Self-employed doctors can explore contributing to a simplified employee pension (SEP) IRA or a solo 401(k). These plans allow for significant contributions, potentially lowering taxable income.
- Traditional IRA contributions. Contributing to a traditional IRA is another avenue for tax savings, especially for doctors who may not have access to an employer-sponsored plan or want to supplement their existing retirement savings.
2. Harvest tax losses and optimize capital gains.
Capitalizing on investment gains and losses can be a strategic move to manage tax implications. This involves selling investments strategically to offset gains with losses, thereby reducing the overall tax burden.
Considerations for doctors:
- Tax-loss harvesting. Doctors should review their investment portfolio for underperforming assets. Selling these assets at a loss can offset capital gains, reducing the taxable income. It’s important to adhere to tax rules regarding the wash-sale, which prohibits buying the same or a substantially identical security within 30 days before or after the sale.
- Long-term vs. short-term capital gains. Understanding the tax implications of long-term and short-term capital gains is crucial. Long-term gains from assets held for over a year are taxed at a lower rate. Doctors should consider the timing of selling assets to qualify for preferential tax rates.
3. Utilize available tax credits and deductions.
Doctors should explore available tax credits and deductions to optimize their tax position. These can significantly reduce taxable income, leading to lower tax liabilities.
Considerations for Doctors:
- Health savings account (HSA) contributions. For doctors with high-deductible health plans, contributing to an HSA offers a double benefit. Not only are contributions tax-deductible, but withdrawals for qualified medical expenses are also tax-free.
- Education credits. Doctors pursuing additional education or covering education expenses for dependents may be eligible for education credits like the Lifetime Learning Credit or the American Opportunity Credit.
- Qualified business income (QBI) deduction for self-employed doctors. The QBI deduction allows eligible self-employed doctors to deduct up to 20 percent of their qualified business income, subject to certain limitations and conditions.
Work closely with tax professionals or financial advisors specializing in health care to tailor these strategies to their unique circumstances. By taking a proactive approach to year-end tax planning, doctors not only optimize their current financial situation but also lay the groundwork for a more tax-efficient future. The key lies in informed decision-making and strategic execution to navigate the complexities of the tax code.
Amarish Dave is a board-certified neurologist with over 20 years of experience in both neurology and active stock investing. In addition to his medical career, he holds a background in business from the University of Michigan and has successfully passed the SIE exam administered by FINRA. Dr. Dave is founder, FiscalhealthMD.com, a website dedicated to educating doctors at all stages of their careers, ranging from residents to retirement, about financial planning.