For new doctors, the transition from medical resident to attending physician often brings a nearly four-fold salary increase. This pay hike can come as a great relief for a young physician, however it also raises new questions about taxes, investments, and long-term savings.
To plan for their increased tax burden, doctors should consult with a physician-specific financial advisor. A robust tax-savings plan can help you reduce your taxable income and save for your future financial goals. While this process can be daunting for busy, career-focused doctors, the first step is to identify what types of tax advantages make the most sense for you. Here are a few simple questions to kickstart your tax-planning:
Doctors who plan on saving up for the cost of private school or higher education can utilize a 529 plan to save on taxes. While it’s often referred to as a “college savings account,” a 529 plan allows investors to make tax-free withdrawals to pay for primary school, secondary school, or college tuition expenses.
Even better, you don’t have to wait until your kids are in school to enjoy the tax perks of a 529 plan. In addition to tax-free withdrawals, most states offer some form of tax credit or deduction for 529 contributions. Learn what tax benefits your state offers for 529 plans.
If saving for education expenses is among your financial goals, you can start this year and take advantage of serious tax savings with a 529 plan.
Health Savings Accounts (HSAs) help qualifying physicians save for medical expenses while reducing their taxable income. You may qualify for an HSA if you are enrolled in a high-deductible insurance plan designated as HSA-eligible by the federal government.
HSAs offer three different tax benefits:
The IRS determines the exact requirements for HSA-eligible insurance plans each year. In 2020, to qualify as a “high deductible insurance plan,” the minimum deductible is $1,400 for individuals or $2,800 for families. For qualifying physicians, investing in an HSA could be an invaluable way to save for healthcare expenses and decrease taxable income.
As a general rule, all physicians should maximize their annual contributions to employer-sponsored retirement accounts, such as a 401(k) or 403(b). However, the specific options for employer-sponsored accounts may vary widely.
Some employers and medical groups offer matching programs, wherein the employer will contribute money to your retirement savings based on a percentage of your annual contribution. These matching programs essentially offer physicians free money for investing in their retirement accounts. However, even if your employer does not offer a 401(k) match or similar program, it is still advisable to make the maximum annual contribution to your retirement plan under most circumstances but not all.
Depending on your employer, you may also have multiple employer-sponsored accounts available to you. In this case, you may be able to lower your effective tax rate even further by making contributions to more than one retirement plan each year. Talk with a financial advisor to learn how to effectively maximize and supplement your employer’s specific retirement offerings.
Most physicians are familiar with the general premise of tax-deductible donations: Any money or goods donated to an approved charitable organization can be deducted from your taxable income. However, many young doctors are still unsure about the best way to utilize charitable donations as a tax-savings strategy.
First, doctors must determine whether they plan to itemize deductions or accept the standard deduction. When it comes time to file your taxes, compare the total of your itemized deductions (including charitable write-offs) to the amount of the standard deduction offered. Go with whichever deduction amount is larger, whether it is standard or itemized.
If you choose to itemize your deductions, you must have the appropriate records for your charitable donations. Depending on the type of donation, this can include receipts of cash donations or value appraisals for donated goods. The IRS has specific guidelines on how to claim deductions for different types of contributions.
In short, careful organization is key to getting the most tax savings out of your charitable contributions. Keep track of all your philanthropic gifts throughout the year as well as the necessary receipts. By thoroughly recording all your annual itemized deductions, you can determine if an end-of-the-year donation could help you exceed your standard deduction amount and thus decrease your taxable income.
Want to learn more about these tax-savings strategies or others? Our team of financial advisors offers physician-specific tax planning services as well as comprehensive financial planning services. To reduce your tax burden, avoid costly tax mistakes, and plan for your financial future, contact one of our trusted advisors today.