Doctors' Advisors Share Their Best Year-End Tax Tips

Dennis G. Murray, MA

October 21, 2019

For doctors who are over 50, the Internal Revenue Service (IRS) allows for an additional $6000 in "catch-up" contributions. So if you've been slow out of the starting blocks in terms of saving, there's still a chance to make up for some lost time.

Saving in tax-deferred accounts is especially important for younger doctors, who are often slow to fully fund their retirement plans, be it a 401(k) plan or, for physicians who aren't eligible for a company-sponsored plan, a Keogh or SEP IRA plan. (Keogh and SEP plans are tailored more to small-business owners and have higher savings limits than employer-sponsored plans.)

In many cases, physicians drag their feet for legitimate reasons: They're raising kids, purchasing a home, and paying off any number of loans, including their medical school debt. But the reality is that their delay is likely to cause them to miss out on tens of thousands of dollars in contributions and appreciated assets—if not hundreds of thousands—by the time they retire.

A health savings account (HSA) is another vehicle for shrinking your pretax income. There are, of course, plenty of rules regarding who qualifies for an HSA, such as whether or not you're covered by a high-deductible health plan (HDHP). But a savvy doctor can contribute as much as $7000 toward family coverage in 2019 (reduced to $3500 for individuals) and get a nice tax break. (According to the IRS, an HDHP must have a deductible of at least $1350 for an individual, $2700 or more for a family.)

Like 401(k) plans, HSAs have a catch-up provision as well: $1000 for anyone aged 55 years or older. A further advantage of HSAs, on top of their ability to allow you to pay for medical expenses with pretax dollars, is that you don't have to spend all of your annual contributions in a single year or risk losing them, as generally happens with pretax dollars contributed to a flexible spending account. With a qualified HSA, unused balances can be rolled over from year to year. As the money grows, the account has the potential to become a strong safety net for large unexpected medical bills later in life.

Home Sweet Home (Deduction)

Part of the reason many people buy a home is to enjoy a tax break for mortgage interest and other related costs, such as points paid to reduce the loan's interest rate and premiums for private mortgage insurance.

For doctors who don't have a mortgage and currently can't afford large charitable contributions, taking the standard deduction may be the way to go.

Mortgage interest on loans of up to $750,000 are eligible, which was down from $1 million as recently as 2017. However, if the mortgage interest deduction, combined with your other itemized deductions, doesn't exceed the standard deduction, there's no sense in itemizing. So make sure your mortgage interest and other potential write-offs for 2019 exceed the amounts detailed at the beginning of this article. "For doctors who don't have a mortgage and currently can't afford large charitable contributions, taking the standard deduction may be the way to go," says Kathy Stepp, CPA, CFP, a financial planner and founder of Stepp & Rothwell in Overland Park, Kansas.

Be aware, too, that the TCJA limits mortgage interest deductions to primary residences only. Interest paid on second homes and home equity loans don't qualify for tax breaks anymore.

Another punch to the gut for some homeowners—especially those who live in high-tax states, such as Connecticut and California—is the reduction of the limit on certain state and local real estate taxes (known as the "SALT deduction") to $10,000 a year. In 2017, a mere 22% of filers with incomes of $200,000 or greater claimed the SALT deduction, according to estimates from the Joint Committee on Taxation.

In many cases, doctors in states with high property taxes have had to find other ways to shave their tax bill, such as writing off the portion of their residence used for a home office (assuming that their employer doesn't already provide office space) or looking for tax credits related to everything from the costs of solar energy systems to geothermal heat pumps. The great thing about tax credits, however, is that they reduce your tax bill dollar for dollar, versus tax deductions, which lower your taxable income. Tax credits are always the better deal.

An Effective Way to Donate to Charity

If you have little or no debt and it's one of your goals and life values to make large charitable donations on a regular basis, a donor-advised fund (DAF) may be right for you. A DAF lets you enjoy the sense of satisfaction that comes with giving to others, while receiving an immediate tax perk.

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