End-of-Year Tax Tips for Doctors

Although the month of April typically gets the headline attention around tax filing, the last few months of the year are the most important time for high-income Americans to take steps to manage their tax liability.

Keep reading or watch this video on tax tips for wealthy families.

End-of-Year Tax Considerations

Here are four essential tax tips tailored specifically for physicians and dentists, along with examples to help you maximize your tax savings and financial well-being.

1. Maximize Retirement Plan Contributions

One of the most effective ways for physicians to reduce their taxable income is by maximizing contributions to retirement plans. For 2024, the contribution limit for 401(k) plans is $23,000, with an additional $7,500 catch-up contribution allowed for those 50 and older.

For example:

Dr. Sarah Chen, a 45-year-old pediatrician in Dallas, realized in October that she had never adjusted her 401(k) deferral percentage as her income had grown, and she had only contributed $15,000 so far this year. With two months left, she was able to increase her contributions to reach the $23,000 limit.

This adjustment not only boosts her retirement savings but also reduces her taxable income by an additional $8,000, lowering her income tax liability and resulting in significant tax savings.

2. Consider Giving Away Profits

For clinicians with after-tax investment portfolios holding mutual funds or stocks, 2024 has been a particularly good year and may have created significant untaxed profits (unrealized capital gain). The tax liability on this gain can be avoided if the shares are donated to a charity.

To illustrate:

Dr. Michael Rodriguez, a Cincinnati-based orthopedic surgeon, received a call from his financial planner in November to review his investment portfolio. Because of the strong market returns this year, his $10,000 investment in a tech company is now worth $22,000.

When he learned that selling the stock would result in over $12,000 in realized capital gains (which would be subject to a 23.8% federal tax rate), he decided to replace his year-end charitable cash donations with a gift of the appreciated stock.

As a result, Michael will avoid nearly $3,000 in capital gains tax and get a deduction for the full value of the shares ($22,000 x 37% = $8,000). In addition, he'll be meeting his charitable intentions using an investment that only cost him $10,000 instead of $22,000 worth of cash.

3. Accelerate Deductible Expenses

Physicians can potentially lower their tax bill by accelerating deductible expenses into the current year, especially if they anticipate being in a higher tax bracket the following year.

To give you an idea:

Dr. Emily Thompson, a dentist outside Charlotte, NC, is hiring an associate in 2025. Due to the additional overhead, she expects her taxable income to drop next year. After meeting with her CPA and financial planner, Emily decided to:

• Prepay her malpractice insurance premium for the upcoming year
• Purchase new dental equipment she had planned to buy in January
• Pay for a professional conference registration scheduled for early next year

By accelerating these deductible expenses into the current year, Dr. Thompson reduces her taxable income for the current year when she's in a higher tax bracket, maximizing her tax savings.

4. Contribute to a Health Savings Account (HSA)

For doctors with high-deductible health plans, maximizing contributions to a Health Savings Account (HSA) offers triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

For instance:

Dr. James Wilson, a 50-year-old cardiologist, has a family high-deductible health plan. He realized he'd only contributed $5,000 to his HSA this year. With the 2024 contribution limit for family coverage at $8,300 (plus an additional $1,000 catch-up contribution for those 55 and older), Dr. Wilson has room to contribute an extra $3,300.

James decided to max out his HSA contribution before year-end, which will give him an additional 2024 tax deduction, reduce his taxable income, and set aside tax-free funds for future medical expenses.

Implementing These EOY Tax Strategies

While these tax-saving strategies can be powerful tools for medical professionals, it's essential to remember that every financial situation is unique. Here are some key points to consider when implementing these year-end tax tips:

1. Consult with a Tax Professional: Tax laws are complex and constantly changing. Always consult with a qualified tax professional or financial planner who specializes in working with medical professionals before making significant financial decisions.
2. Keep Detailed Records: Maintain thorough documentation of all expenses, contributions, and investment transactions. This will not only make tax preparation easier but also provide necessary support in case of an audit.
3. Plan Ahead: While these strategies can be implemented at year-end, the most effective tax planning is done throughout the year. Consider setting up a quarterly financial review to stay on top of your tax situation.
4. Balance Tax Savings with Financial Goals: While reducing your tax bill is helpful, ensure that your tax strategies align with your overall financial objectives, including retirement planning, practice growth, and personal financial goals. Often, it's helpful to consider your "lifetime tax liability" in addition to your current year's tax bill.
5. Stay Informed: Tax laws and contribution limits can change annually. Stay informed about updates relevant to medical professionals to take advantage of new opportunities or adjust your strategies accordingly.

Have You Thought About End-of-Year Tax Planning?

By implementing these year-end tax tips, doctors and dentists can potentially save thousands of dollars in taxes while strengthening their overall financial position.

Remember, the key to successful tax planning is to act before December 31st. Take the time now to review your financial situation and implement these strategies to ensure you're maximizing your tax savings for the year in conjunction with your financial advisor and accountant.

Curious about end-of-year tax planning? The financial planners at Spaugh Dameron Tenny, in collaboration with your accountant, are here to help you determine what actions make the most sense for your specific financial situation.

Reach out to us today to get started.

Names and locations have been changed in this article to protect the identity of those involved.

Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

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