Tax strategies for medical professionals

As a medical professional, you have unique financial considerations and opportunities when it comes to tax planning. By implementing smart tax strategies, you can reduce your tax liability, maximize deductions, and keep more of your hard-earned income. In this comprehensive guide, we'll explore key tax strategies specifically tailored for doctors, dentists, and other medical professionals.

Choosing the right business structure

One of the most important tax decisions you'll make as a medical professional is choosing the right business structure for your practice. The entity you select can significantly impact your personal liability and tax obligations.

Sole Proprietorship

A sole proprietorship is the simplest business structure. As a sole proprietor, you report your business income and expenses on Schedule C of your personal tax return (Form 1040). While easy to set up, this structure offers no personal liability protection and all income is subject to self-employment tax.

Partnership

In a partnership, two or more individuals share ownership of the practice. Each partner reports their share of income and expenses on their personal tax returns. Like sole proprietorships, partnerships offer no personal liability protection.

Limited Liability Company (LLC)

An LLC provides personal liability protection and tax flexibility. You can choose to be taxed as a sole proprietorship (single-member LLC), partnership (multi-member LLC), S corporation or C corporation. This makes an LLC an attractive choice for many medical professionals.

S Corporation

An S corporation is a pass-through entity that provides personal liability protection. Income and losses are passed through to shareholders and reported on their individual tax returns. S corps can help mitigate self-employment taxes, as shareholders only pay these taxes on salary, not distributions.

C Corporation

A C corporation is a separate legal entity from its owners. It pays taxes at the corporate level and offers the strongest personal liability protection. However, C corps are subject to "double taxation," as profits are taxed at the corporate level and again when distributed to shareholders as dividends.

Maximizing deductions

As a medical professional, you likely have significant expenses related to your practice. By diligently tracking and claiming eligible deductions, you can greatly reduce your taxable income.

Business Expenses

Virtually any ordinary and necessary expense related to running your medical practice is tax-deductible. This includes:

• Medical supplies
• Office rent and utilities
• Equipment and furniture
• Malpractice insurance premiums
• Continuing education and training
• Professional membership fees
• Marketing and advertising costs

Keep detailed records and receipts for all business expenses to substantiate your deductions.

Home Office Deduction

If you use a dedicated space in your home regularly and exclusively for your medical practice, you may be able to claim the home office deduction. You can deduct a portion of your rent, mortgage interest, utilities, and other home-related expenses based on the percentage of your home used for business.

Vehicle Expenses

If you use your personal vehicle for business purposes like traveling between offices or hospitals, making house calls, or attending conferences, you can deduct related expenses. You can use either the standard mileage rate method (multiplying business miles driven by the IRS-set rate per mile) or the actual expense method (deducting a portion of vehicle expenses based on the percentage of miles driven for business).

Health Savings Accounts (HSAs)

If you have a high-deductible health plan, you can contribute pre-tax dollars to a Health Savings Account (HSA). Funds can be used tax-free for eligible medical expenses, and unused balances roll over each year. Contributions for 2025 are limited to $4,300 for self-coverage and $8,550 for family coverage. Effective in 2023, there is a 6% and it's on any amount over the contribution limit excise tax on the value of HSA assets above $73,000 per spouse, intended to discourage overly large HSA balances. But an HSA can still be an excellent way to save for future medical expenses in a tax-advantaged way.

Retirement Plans

Funding a retirement plan allows you to invest pre-tax dollars, reducing your current taxable income. Options include:

• SEP IRA: You can contribute up to 25% of your net self-employment income or $70,000 in 2025, whichever is less. Easy to set up and maintain.
• Solo 401(k): Designed for sole proprietors and business owners with no employees (other than a spouse). Allows salary deferrals up to $23,500 in 2025 ($31,000 if age 50+) plus profit-sharing contributions up to 25% of compensation. More complex than a SEP but offers higher contribution limits.
• SIMPLE IRA: Available for practices with 100 or fewer employees. You can defer up to $16,500 in 2025 ($20,000 if age 50+), and employers must make matching or non-elective contributions.
• Defined Benefit Plan: Allows high annual contributions, making it an attractive choice for highly compensated medical professionals nearing retirement age. An actuary determines contribution limits based on your age, expected retirement benefits, and other factors.

Income deferral and acceleration

Timing your income and expenses strategically can help manage your tax liability from year to year.

Deferring Income

If you expect to be in a lower tax bracket next year, consider deferring some of your income into the following tax year if possible. Strategies may include:

• Billing late in the year so payments aren't received until the next tax year, cash basis only
• Postponing contract signing or completion of services
• Delaying bonus payouts or sale of assets until the next year

Accelerating Deductions

Conversely, you may want to accelerate deductions into the current tax year if you anticipate being in a higher tax bracket this year. Some ways to do this:

• Prepaying property taxes, rent, or equipment leases
• Making charitable contributions
• Purchasing needed equipment or supplies before year-end
• Paying January's malpractice insurance premium in December

Hiring family members

Employing family members in your practice can provide tax benefits if done properly. You can deduct their salaries and benefits as a business expense, shifting income from your higher tax bracket to their lower one. Just be sure their compensation is reasonable for their role and work performed.

You can also use family employment to fund retirement accounts an d deduct medical expenses by adding them to your practice's health insurance plan. However, beware of "kiddie tax" rules that tax a portion of a child's unearned income at the parents' top marginal rate.

Charitable giving strategies

In addition to providing philanthropic benefits, charitable donations can offer tax advantages.

Cash Donations

You can deduct cash donations made to eligible 501(c)(3) organizations, up to 60% of your adjusted gross income (AGI). Obtain written acknowledgment from the charity for gifts of $250 or more.

Appreciated Assets

Donating appreciated assets like stocks or real estate held long-term can be especially tax-efficient. You can deduct the fair market value of the asset (up to 30% of AGI) without paying capital gains tax on the appreciation.

Donor-Advised Funds (DAFs)

Contributing to a donor-advised fund allows you to make a large, tax-deductible donation in a high-income year and then distribute grants to charities over time. This "bunching" strategy helps you exceed the standard deduction threshold and itemize deductions in some years.

Navigating student loan repayment

Many medical professionals have substantial student loan debt. The interest paid on student loans is still deductible, and there are still some strategies to consider.

Public Service Loan Forgiveness (PSLF)

If you work full-time for a government organization or non-profit, you may be eligible for Public Service Loan Forgiveness after making 120 qualifying payments. This program forgives your remaining Direct Loan balance tax-free.

Income-Driven Repayment Plans

Enrolling in an income-driven repayment plan can lower your monthly payments based on your income and family size. By the end of the repayment period in an IDR plan, any remaining balance that you have not paid off is forgiven, your remaining balance may be forgiven, though this forgiven amount is taxable under current law.

Employer-Sponsored Repayment Assistance

Some hospitals and healthcare organizations offer student loan repayment assistance as an employee benefit. Under the CARES Act, employers can provide up to $5,250 annually toward employee student loans tax-free through 2025.

Tax credits

Tax credits provide a dollar-for-dollar reduction of your tax liability and can greatly lower your tax bill.

Research & Development (R&D) Tax Credit

If your practice engages in qualifying research activities, you may be eligible for the R&D tax credit. Qualifying activities include developing new products, processes, or software, or improving existing ones. Examples in the medical field could include developing new medical devices, treatments, or diagnostic tools.

Disabled Access Credit

Small practices may qualify for the Disabled Access Credit, which covers 50% of eligible expenditures (up to $10,000, with a maximum credit of $5,000) to make your facility more accessible to individuals with disabilities.

Work Opportunity Tax Credit (WOTC)

The WOTC provides a credit for hiring individuals from certain target groups, such as veterans, ex-felons, and long-term unemployment recipients. The credit amount varies based on the employee's target group and hours worked.

Effective tax planning is essential for medical professionals looking to minimize their tax liability and achieve their financial goals. By choosing the right business structure, maximizing deductions, implementing income deferral or acceleration strategies, and taking advantage of tax credits, you can significantly reduce your tax burden.

However, navigating the complex world of taxes can be challenging, especially while managing a busy medical practice. That's where Instead's AI-powered tax planning software comes in.

With Instead, you'll have access to a comprehensive suite of tools and strategies specifically designed for medical professionals. Our platform will help you:

• Determine the most tax-efficient business structure for your practice
• Identify and maximize all eligible deductions
• Optimize retirement planning and charitable giving
• Evaluate student loan repayment options
• Discover applicable tax credits
• And more

Instead simplifies the tax planning process, empowering you to make informed decisions and keep more of what you earn. Our user-friendly interface and expert guidance make it easy to implement proven tax strategies, so you can focus on providing exceptional patient care.

Take control of your taxes and start your journey towards financial success with Instead. Sign up today and experience the power of AI-driven tax planning built for medical professionals like you.