The Ultimate List Of Tax Deductions For Doctors

The Ultimate List Of Tax Deductions For Doctors

Recently in the gym, I had a conversation with two medical students. They asked, “What do you recommend we learn now before we start practicing?”

These guys are thinking the right way. I told them that their situation was similar to that of pro athletes. They go from making nothing (with zero financial training) to a 6 or 7 figure salary right off the bat. 

They already knew that financial and tax literacy among doctors is sub par which is why so many (myself included) get taken advantage of investing in “questionable” deals and using shady “tax shelters.”

But “good news”. There are ways for healthcare providers to lower their tax bill and in this article, we’ll take a look at some of the top ones you can implement this year.

As a side note, don’t take this as tax advice. Check with your tax professional and if you want a really GOOD group, feel free to contact mine HERE.

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Tax Deductions Vs. Tax Credits

As a doctor or other high-income earner, it’s important to understand the difference between tax deductions and tax credits.

Tax deductions

Tax deductions help lower your taxable income by subtracting certain expenses from your gross income.

Examples include:

  • required licenses and dues
  • retirement account contributions
  • certain healthcare expenses

Tax credits

On the other hand, tax credits directly reduce your tax liability by a specific dollar amount. This is a BIG difference.

For instance, a $5,000 tax credit would directly reduce your tax bill by $5,000.

Taxable Income Vs. Gross Income

In order to properly manage your taxes, you should also know the difference between taxable income and gross income.

They don’t teach this in medical or dental school!

Gross income

Gross income refers to your total earnings before any taxes and deductions are applied.

Taxable income

Taxable income is the portion of your gross income that remains after accounting for all tax deductions.

The goal is to reduce your taxable income through various tax deductions, which will ultimately lower your tax bill.

An example of taxable income:

  • Gross income: $200,000
  • Tax deductions: $30,000
  • Taxable income: $200,000 – $30,000 = $170,000

What About Your Marginal Tax Rate?

Your marginal tax rate is the percentage at which your last dollar of income is taxed. This rate is dependent on your yearly earnings and your tax filing status.

As your income increases, portions of your income fall into higher tax brackets, resulting in a higher tax rate on that income (i.e., progressive tax system).

For example, the IRS uses different tax brackets for single filers and married couples filing jointly. By lowering your taxable income through deductions, you can potentially reduce your marginal tax rate which decreases your overall tax burden.

For example, in 2024, if you are a single filer earning over $609,351, your income above this threshold is taxed at the highest federal rate of 37%. Married couples filing jointly are taxed at this rate for income over $693,750.

Types of Tax Deductions Available to Doctors

Here are the different types of tax deductions available to doctors, including medical expenses, business expenses, home office deductions, and travel expenses.

Deduction Category Examples of Deductible Expenses
Medical Expenses Medical equipment, uniforms, licensing fees, license renewal fees.
Business Expenses Malpractice insurance, professional membership dues, staff wages and benefits, office equipment.
Home Office Deductions Mortgage interest or rent, utilities, depreciation.
Travel Expenses and Continuing Education Travel expenses for conferences or business, professional development, continuing education fees.

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Tax Deductions for Self-Employed Doctors

#1. Independent Contractor and Sole Proprietorship

If you’re a self-employed physician, dentist, or an independent contractor, you have various tax deductions to reduce your taxable income.

Sole proprietorships operate under your personal name, while independent contractors typically work for multiple entities. In both cases, you can claim tax deductions for legitimate business expenses, such as:

  • Advertising and marketing costs (e.g., website hosting, domain registration, business cards)
  • Clinical equipment and supplies
  • Continuing medical education expenses
  • Licensing and professional membership fees

#2. Qualified Business Income Deduction

Self-employed doctors can also benefit from the Qualified Business Income (QBI) deduction.

This allows eligible taxpayers to deduct 20% of their qualified business income, subject to an income phase-out limit.

#3. Business Use of Home and Car

Self-employed doctors utilizing a portion of their home for business purposes can claim home office expenses as a tax deduction.

To qualify, you must designate a separate, exclusive area in your home for conducting your medical practice.

Deductible expenses include:

  • a pro-rated portion of your mortgage interest or rent
  • property taxes
  • utilities
  • maintenance costs

Doctor Car

Additionally, if you use your car for business purposes, you can claim car expenses, such as:

  • mileage
  • fuel
  • maintenance
  • other related costs

The Internal Revenue Service (IRS) allows using either the actual expenses method or the standard mileage rate method for calculating deductible car expenses.

Remember that only the business use portion of the expenses is deductible.

Retirement Planning and Deductions

Here are some of the retirement planning deductions that can be used as part of your tax strategy. 

Retirement Account Description Benefits
401(k) Employer-sponsored account with pre-tax contributions. Reduces taxable income, often including employer match.
IRA (Traditional and Roth) Individual accounts with tax-deductible contributions (Traditional) or tax-free withdrawals (Roth). Tax advantages either upon contribution or withdrawal.
SEP IRA Designed for self-employed and small business owners. Higher contribution limits, tax-deductible contributions.
Cash Balance Plan Employer contributes a predetermined amount annually. High contribution limits, portability, complements other retirement accounts.
Backdoor Roth IRA Strategy for high-income earners to utilize Roth IRA benefits. Tax-free withdrawals during retirement, bypasses income limits.
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Real Estate and Investment Deductions

Most doctors can take advantage of tax deductions related to my favorite investment (real estate) and capital gains on investments. This could not only help diversify income streams but also provide some valuable tax breaks.

#1. Depreciation

Depreciation is one of the most significant tax breaks when investing in real estate. Isn’t it funny though that most CPAs never mention it? I wonder why…..

Anyway, this benefit allows you to write off the property over time due to wear, tear, and deterioration.

Each year, investors can use depreciation deduction from pre-tax income to recover the property cost basis over the years they own it.

Want to learn more about how depreciation works? Check out this article: Real Estate Depreciation: #1 Tax Strategy for Busy Professionals

Three types of depreciation
Depreciation Type Description Example
Straight-line Depreciation Depreciates property evenly over 27.5 years for residential rental properties. $300,000 property value = $10,909.09 annual depreciation.
Accelerated Depreciation Utilizes a cost segregation study to depreciate building components over shorter periods (5, 7, 15 years). Appliances, flooring, cabinets, parking lots.
Bonus Depreciation Allows immediate depreciation of items with less than a 20-year life in the first year. Immediate depreciation of qualifying items in the first year of ownership.

Rental Property Deductions

Besides depreciation, other deductible expenses related to your rental property may include:

  • Property taxes: You can claim a portion of your property taxes as a deduction based on your rental income.
  • Management and maintenance expenses: Expenses incurred in maintaining the property, such as repairs, property management fees, and insurance premiums, are deductible.
  • Loan interest: If you have a mortgage on the property, the interest portion of the mortgage payment is deductible.

Remember to keep clear records of all expenses related to your rental property to support your deductions.

Capital Gains on Investments

If you have investment income, such as from stocks or bonds, any capital gains realized from these investments can also provide tax advantages.

A capital gain is when you sell an asset at a higher price than you initially paid.

The formula for calculating a capital gain is:

Selling Price – Purchase Price = Captial Gain

There are two types of capital gains:

Short-term capital gains

A short-term capital gain occurs when you profit from selling an asset after owning it for less than a year. 

Although you might find yourself in a situation where selling is unavoidable, it’s crucial to understand that doing so could adversely impact your tax obligations.

This is because the gain is treated as ordinary income.

Long-term capital gains

If you profit from the sale of an asset held for more than a year, you’ll pay a long-term capital gains tax.

By doing this, you’ll keep more money versus holding it for less than a year, as this tax has a significantly lower tax rate than your standard income.

If your income is low enough, you may not have to pay the tax. The long-term capital gains tax rates are 0, 15, and 20%, depending on your income.

Many ultra-wealthy individuals are knowledgeable about how taxes work, which is something many doctors aren’t familiar with.

The key concept is straightforward: if most of your earnings come from passive income, which is taxed at a lower rate, rather than from ordinary income, which is taxed at a higher rate (like the salary doctors receive for their work), you will not only increase your wealth but also have more free time.

If you want to learn more about using real estate to lower your tax bill, check out this video:

Other Tax Planning Strategies

Health Savings Account (HSA)

A Health Savings Account (HSA) is an excellent tool for tax planning. They allow you to allocate pre-tax money for qualified medical expenses that your insurance plan does not cover.

Contributions to your HSA are tax-deductible, thereby reducing your overall taxable income. Also, the growth within your HSA is tax-free, and if you use the funds for qualified medical expenses, withdrawals are also tax-free. 

Life Insurance and Disability Insurance

Life insurance and disability insurance are critical components of a comprehensive financial plan for physicians. Premiums paid for life insurance policies with cash-value components, such as whole life or universal life, may provide some tax benefits. 

For instance, the cash value within a permanent life insurance policy can grow tax-deferred, and if you decide to take out policy loans, the withdrawals may be tax-free. (As a side note, I only use term life insurance.)

On the other hand, disability insurance plays a key role in safeguarding your income stream if you can’t work due to illness or injury.

Premiums paid for personal disability insurance policies are not tax-deductible; however, any benefits received due to a disability claim are tax-free, providing you with a source of income without added tax burdens.

Charitable Contributions and Deductions

When making donations to qualified organizations, you may be eligible for tax deductions, thereby lowering your taxable income. There are a couple of strategies to consider for maximizing the tax benefits of your charitable giving:

  • Bunching donations: Since the standard deduction has increased, making smaller charitable contributions may not provide significant tax benefits. Instead, consider consolidating your donations into one larger sum every other year to increase the chances of your donations qualifying for itemized deductions.

  • Donating appreciated assets: If you have stocks or other investments that have increased in value, you can avoid capital gains tax by donating these assets directly to a charity. This not only allows you to obtain a tax deduction for the full value of the asset but also allows the charity to benefit from the asset’s increased value.

Frequently Asked Questions

What are the major tax write-offs available for medical professionals?

There are several tax deductions available for medical professionals such as the costs for professional dues and licensing fees, continuing education expenses, and unreimbursed employee expenses. Additionally, you can also deduct car mileage costs if driving is a part of your job, and self-employed physicians may qualify for a 20% deduction of business income.

Are costs associated with medical board exams deductible for tax purposes?

Yes, costs associated with medical board exams, including registration fees and preparation materials, can be considered deductible educational expenses if they help maintain or improve your professional skills.

Which expenses are deductible for W2 physicians when filing their taxes?

W2 physicians can deduct unreimbursed employee expenses necessary for their job, such as professional licenses, dues, board exams, and continuing education expenses. However, these expenses need to be itemized on your tax return, and they may be subject to certain limitations.

Can medical equipment, such as stethoscopes, be claimed as a tax deduction?

Yes, medical equipment like stethoscopes and other tools or devices used in your practice can be claimed as tax deductions. If the equipment is used exclusively for your profession, the full cost is deductible. However, if the equipment is used for both personal and professional purposes, you must allocate the cost proportionally.

Is clothing, such as medical scrubs, considered a deductible expense for tax purposes?

Clothing expenses, like medical scrubs, can be deductible if they are specifically required for your job, not suitable for everyday use, and are purchased and maintained at your expense. Keep in mind that you may need to itemize your deductions, and there could be limitations based on your income or other factors.