The big picture goal should be to eliminate as much tax-liability as you can over time
As a physician, you’ve worked hard for your degree and the ability to earn the income that comes along with it. But as we all know, one of the challenges of being a high-income earner is devising a tax-planning strategy that keeps more money in your pocket and less out of the Uncle Sam’s.
Of course, getting your tax documents together isn’t exactly anyone’s idea of a fun weekend activity, but we can likely all agree that the potential savings are worth the careful planning.
As you begin to pull together your tax information for 2020, answer these 6 essential questions to potentially reduce your taxable income 2020 tax liability.
While the contribution deadline for most employer-sponsored plans (such as 401(k)s, 403bs, and most 457 plans) falls on the last day of the calendar year, traditional IRAs and Roth IRAs allow individuals to beef up their savings as late as the tax-filing deadline— April 15, 2021.
Not only will contributing more to these accounts grant your funds more time to compound, but can help reduce your taxable income. This could be an especially advantageous move for physicians whose income places them at the cusp of spilling over into a higher tax-bracket.
Making charitable contributions are a tried and true tax-reduction strategy. But, in order to receive credit for your generosity, you need to be able to produce a receipt for each and every donation.
If you didn’t take advantage of donating last year, here are a few things to keep in mind for 2021.
Each and every year you can gift a certain amount to anyone you want without having to deal with the gift tax. For 2020, that amount was $15,000. The $15,000 applies to each recipient, so if you donated $15,000 each to five of your children, you will have reduced your taxable estate by a total amount of $15,000 x 5 or $75,000. That’s not a tax deduction for this year but will reduce your heirs’ ultimate estate tax liability.
If you gave more than $15,000 in cash or assets (e.g. stocks, land, a new car) last year to any single person, you will need to file a gift tax return IRS Form 709 to be compliant with the IRS tax code. This doesn’t necessarily mean you’ll have to pay a gift tax this year, it simply satisfies the requirement to disclose the gift.
If you’re an independent contractor or a locum tenens physician, there are several things you can do to claim deductions against your income, one being the possible deduction for Qualified Business Income (QBI). As long as the total taxable income claimed on your 1099 is not derived from restricted income sources, you may be able to deduct 20% of your QBI from your total taxable income. There are a number of restrictions and qualifications that accompany this deduction, so you’ll want to consult with your tax professional and financial planner to see if this option applies to you.
A tax credit is a dollar-for-dollar reduction in your taxes due. Tax credits are not the same as deductions. In fact, they can be far more beneficial than deductions since deductions only reduce the amount of your taxable income while credits directly lower your total tax liability. A $20,000 tax credit, for example, would save you far more than a $20,000 reduction in your taxable income.
If going through this list has you thinking there may be a number of opportunities you missed out on in 2020, now is the time to devise a tax plan for 2021 and beyond. The big picture goal should be to eliminate as much tax-liability as you can over time, ultimately leaving you more to save and invest to build wealth.