Physicians usually make a lot of money, but they often miss out on tax deductions that they're eligible for due to a lack of up-to-date information. Physicians that have a sole proprietorship or form part of a partnership, LLC, or S corporation can reduce their taxable income substantially with strategic tax planning and itemized deductions.
While the information in this article focuses on self-employed physicians, salaried physicians can claim tax deductions for work they do on the side (such as teaching, research, locum tenens work, and commissions from drug companies). However, they can't claim unreimbursed out-of-pocket expenses that are connected with their salaried role. Seeking employer reimbursem*nt is the best approach for expenses connected with salaried work.
Basic Tax Deductions for Physicians
Self-employed physicians can claim their basic business expenses as tax deductions on their tax returns. Engaging professional accounting services for medical practices can make it easier to itemize these deductions correctly.
The home office deduction, if practicing medicine from a home-based clinic
The cost of renting or leasing a clinic
Office supplies
Office equipment
Medical equipment
Medical uniform (scrubs)
Board exam fees
Licensing fees and license renewal fees
Professional membership dues
Continuing education costs
Malpractice insurance premiums
Subscription fees for related technical or professional publications
Staff wages, salaries, tax withheld, and employee benefits
State income tax and local taxes
Additional Tax Deductions
Physicians that conduct home visits as part of their work can deduct the relevant percentage of their vehicle costs using the IRS mileage rate. They can’t, however, deduct the miles traveled between the medical clinic or hospital and their primary residence.
Physicians who travel for medical conferences and seminars can deduct their airfares, rental vehicle costs, lodging, and half of their meal costs (using the actual cost or per-diem method). Certain requirements and limitations apply.
Tax Deductions Relating to Income Received
Self-employed physicians who own a "pass-through" business—such as a sole proprietorship, partnership, LLC, or S-corp—could be eligible for the qualified business income deduction and the qualified business income deduction for rental property. Being a pass-through entity for tax purposes is one of the many benefits of forming an S corporation.
Qualified Business Income Deduction (QBID)
This tax deduction was established with the Tax Cuts and Jobs Act (TCJA) of 2017 and allows owners of pass-through businesses to deduct up to 20% of business income. The rules of this deduction are extremely complex, and physicians should contact a small business tax professional early in the year to help them maximize this deduction with strategic tax planning.
Qualified Business Income Deduction (QBID) for Rental Property
Physicians who own their practice building or investment property can claim up to 20% of their rental income as a tax deduction. This deduction was also introduced with the Tax Cuts and Jobs Act of 2017.
Tax Deductions Relating to the Allocation of Income
Self-employed physicians can deduct several types of eligible contributions and payments from their taxable income to reduce their total tax burden. By the time these contributions have been subtracted from their gross income, physicians can often find that their adjusted gross income (AGI) falls into a lower marginal tax bracket.
Contributions to pre-tax retirement savings plans, including 401(k)s, 403(b)s, 457 plans, and tax-deductible contributions to traditional IRAs. Physicians often use a back-door Roth IRA strategy to maximize their deductions.
Contributions to health savings accounts (HSAs)
Contributions to 529 college savings plans. Since the passing of the Tax Cuts and Jobs Act of 2017, these funds can be used to pay for private school K-12 tuition up to a limit of $10,000 per child, per year. Older physicians can use these funds to pay private school fees for their grandchildren.
50% of the self-employment tax
Health insurance premiums that cover themselves, their spouse, and their dependents
Healthcare costs that exceed 7.5% of their adjusted gross income for the tax year
Interest on student loan payments up to a limit of $2,500 per year
Interest paid on a home mortgage debt up to a value of $750,000 ($375,000 married filing separately) for mortgages originating on or after December 15, 2017, as per Publication 936 of the Internal Revenue Service (IRS)
Interest paid on a home equity line of credit (HELOC) can be deducted if the funds are used to improve your home or purchase a new property. Only the interest on the first $100,000 of the line of credit can be taken as a deduction.
Charitable donations up to 60% of the physician's adjusted gross income. Physicians can maximize their tax benefits for charitable donations by making a large donation of appreciated securities to a donor-advised fund in a single tax year, then using these funds to make smaller donations during the following tax years.
Tax Deductions Relating to Investments
Physicians who invest in real estate and stocks may be eligible for certain tax deductions.
Investment property depreciation. Physicians who own an investment property can segregate the costs relating to this property for an accelerated depreciation schedule. Using the cost segregation method, property owners can reduce the depreciation period to as little as five years, compared to 39 years for a primary residence.
Tax-loss harvesting. Physicians with losing investments may sell these investments at a loss and buy a comparable investment to maintain a balanced portfolio. Physicians can use the first $3,000 of investment losses to offset ordinary income or capital gains and carry the remainder of the loss forward to future years.
Tax Deductions for Physicians with Families
Physicians with children may be eligible for additional tax breaks, resulting in significant tax savings for themselves and their children.
The Child Tax Credit allows parents to deduct $2,000 per dependent child if their modified adjusted gross income is below $400,000 for married couples filing jointly or $200,000 for all other filers.
A physician with a child who becomes disabled before his or her 26th birthday can open an ABLE account and contribute up to $17,000 (the annual gift exclusion amount) each year tax-free. Their spouse can contribute another $17,000 each year without paying tax on the amount for a total annual contribution of $34,000. Distributions made for qualifying disability expenses of the designated beneficiary are tax-free. However, having an ABLE account with more than $100,000 could disqualify the child from receiving SSI payments.
Business-owner-physicians who hire their children can reduce their taxable income by shifting income onto their children's returns. Please note that it's essential to document this move in case you are selected for an IRS audit process. Wages up to the standard deduction ($13,850 for 2023) are tax-free. Each child should be paid appropriately for his or her age and skills.
Physicians with children who work for them or who have other employment can contribute after-tax amounts of up to $6,500 to a tax-deferred Roth IRA for each child. These accounts feature tax-free growth, and no taxes will be due on qualified distributions once the physician’s children reach retirement age.
Advanced Tax Strategies for Physicians
All of the tax deductions described so far can save physicians many thousands of dollars in taxes. If you want to reduce your tax bill even further, talk to your accountant about the following strategies—none of which should be attempted without professional advice.
Physician families can rent out their primary residence for up to 14 days each calendar year—tax-free—under US Tax Code Section 280A(g). For example, a family might rent out its Jacksonville, Florida home to visitors attending the Jacksonville Jazz Festival for a few days. As another example, a physician's family could rent its property to the physician's medical business for board meetings for tax-free income and a business tax deduction.
Self-employed doctors and doctors who are shareholders in their medical practices can deduct contributions made to defined benefit retirement plans (also called cash balance plans or pension plans) for a large tax deduction this year. Physicians can contribute more than $150,000 to the plan each year in addition to contributions of up to $22,500 for under-50s and $30,000 for physicians 50 years of age and above (for 2023) to a 401(k) account.
Find Out What Tax Advantages You Could Be Eligible For
Whether claiming tax write-offs for additional income or for a privately owned medical practice, physicians can easily reduce their tax liability by 50% or more by taking advantage of tax credits and deductions.
To optimize their earnings and expenditure for the most favorable tax return possible, physicians and medical practices should plan their tax history proactively with the help of a small business accountant who has experience with the medical industry and is abreast of the latest updates to federal and state tax laws.
