Tax Reduction Strategies Series
While tax season seems to have just ended, tax planning should be a year-round event for high earning physicians. Your focus should be on the three key ways to minimize your tax burden – Income Reduction, Tax Deductions and Tax Credits. This series will discuss each of the focal points, starting with Income Reduction.
Strategy 1: Reduce your income
The key number for determining how much you will pay in taxes is your Adjusted Gross Income (AGI), which represents your income from all sources, less any adjustments. Anything you can do, legitimately, to reduce your AGI will lower your taxes. Of course, that may seem easier said than done for high earning physicians, but there are certain things you can do that will reduce your AGI, and, ultimately, your annual tax bill.
Contribute to a Qualified Retirement Plan
401k or 403b plans offered through your employer allow you to contribute up to $17,500 of your income in 2014 on a pre-tax. For someone in a 35 percent tax bracket, that’s a savings of $6,000, plus your entire contribution goes to work for you on a tax-deferred basis.
Establish a Health Savings Account (HSA)
As with a qualified retirement plan, HSAs allow for pre-tax contributions of up to $6,550 for family coverage ($3,300 for individual coverage) in 2014. The only requirement is that your HSA has to be linked to a high-deductible insurance plan. Many employers offer HSA-friendly insurance options, as do the health insurance exchanges.
Avoid capital gains and unearned income
With implementation of the Affordable Care Act, comes a new tax on capital gains. The new surtax of 3.8% is paid on top of the 20% on long-term capital gains and is levied on an unearned income, such as interest, dividends, rental income and short-term capital gains. Invest, instead in tax exempt securities or passively managed funds.
Invest in tax exempt securities
If you generate a lot of interest from taxable bonds or other fixed yield investments, consider investing in tax exempt bonds (municipal and state issued bonds) which generate tax-free interest.
Invest in Indexed Funds or Exchange-Traded Funds
If you invest in mutual funds outside of your retirement plan, consider investing, instead, in indexed mutual funds or exchange-traded funds which are passively managed. Actively managed fund can generate a lot of tax activity through the buying and selling of stocks.
Check out more in our Tax Reduction For Physicians series:
Part II: Increase Your Deductions
Part III: Tax Credits
Every individual’s tax situation is unique; therefore, this article is intended to be informational only and not as specific tax advice. Please consult a tax professional.