Top 10 Tax Deductions Physicians Often Overlook

Managing taxes is an important aspect of financial planning for physicians. But it goes much further than just filing a tax return every year. By strategically claiming eligible tax write-offs, you can reduce your tax burden. Ensure you aren’t leaving your hard-earned money on the table — keep an eye on these best tax deductions physicians can claim.

Top 10 tax deductions every physician needs to know about

Whether you’re a wage-earning physician, practice owner, locum tenens provider or otherwise self-employed, there are many tax breaks that can substantially reduce your taxable income. Keep in mind that each has its own eligibility requirements and intricacies. It’s best to work with a tax professional who specializes in tax planning for physicians.

1. Mortgage interest deduction

Best for: All types of physicians

If you itemize your tax return, you can deduct the interest on the first $750,000 of your mortgage if you file as single or married filing jointly. However, this deduction is capped at $375,000 for married filing separately.

Note the mortgage interest deduction amount stated above applies to mortgages taken out after December 15, 2017. However, there are higher limits for mortgages taken out between October 1987 and December 2017.

2. Charitable contributions deduction

Best for: All types of physicians

Charitable contributions can save you money at tax time if you itemize deductions. To really take your charitable donations to the next level, consider these more advanced tax savings strategies:

• Use a donor-advised fund (DAF). This designated charitable investment account allows you to contribute appreciating stocks (and other types of assets). You’re then able to deduct the fair market value of those stocks, up to 30% of your adjusted gross income (AGI). 
• Maximize savings by “bunching”. With this strategy, you contribute multiple years’ worth of contributions in one year so you can get a bigger itemized deduction. This might come into play if your total tax deduction amount is below the standard deduction amount (e.g., $29,200 for married filing jointly).

If giving back is a priority, you can stretch your dollar further and benefit from tax savings at the same time.

3. Retirement contributions

Best for: All types of physicians

Tax-deferred retirement accounts are a great way to plan for your future. But they can also lower your tax bill as your contributions are tax deductible now, meaning you won’t have to pay taxes until you take distributions during retirement.

A few quick notes on common retirement savings options and advanced tax strategies for physicians:

• Contributing to a non-governmental 457(b) plan. If your hospital system goes under, your retirement account could be in jeopardy as it can be used to satisfy creditors in the event of litigation or bankruptcy. However, this isn’t something we generally worry about, and physicians typically contribute anyway.
• Using a Solo 401(k) to facilitate a backdoor Roth. If you’re a self-employed, moonlighting or locum tenens doctor with money sitting in a traditional IRA (or old SIMPLE or SEP IRA), you can use a Solo 401(k) to do a backdoor Roth. In which case, you can roll that pre-tax IRA into a Solo 401(k) to avoid the pro-rata rule.
• Profit-sharing within your Solo 401(k). If you’ve already maxed out your 401(k), self-employed physicians can take advantage of profit-sharing within a Solo 401(k), which allows you to make an additional contribution as the employer for up to roughly 25% of your net profit.
• Using a cash balance plan. If you’re an older self-employed physician or practice owner and have a lot of catching up to do for retirement, a cash balance plan can allow you to make contributions (as the employer) well beyond 401(k) limits.

Contributing to a tax-deferred retirement plan is also a great strategy to lower your student loan payment.

4. Section 179 deduction

Best for: Practice owners and self-employed physicians

Section 179 of the federal tax code allows business owners to deduct the cost of property — such as equipment, technology and business vehicles — when it’s placed in service rather than depreciating the asset over time. The maximum total deduction for qualifying property is $1,220,000 for 2024. Note the limit for expensed SUVs will be $30,500.

5. Short-term rental deduction

Best for: Self-employed physicians

You can use a short-term rental deduction — known as the Augusta Rule — to rent out your personal residence (e.g., primary or vacation home) for 14 days or less tax-free. This means you can technically rent out your home to your business for up to two weeks each year without having to report the rental income. However, this is a complex tax strategy with many nuances.

6. Home office deduction

Best for: Self-employed physicians

If you’re self-employed with a home office, there are two ways to calculate the home office deduction:

1. Simplified option. Take a standard deduction of $5 per square foot of your home that’s used for business. This comes with a maximum of 300 square feet.
2. Regular method. Use the actual expenses of your home office to determine the deduction amount based on the percentage of your home devoted to business use. For example, if you’re using 10% of your home for business, you can deduct 10% of your expenses, such as mortgage interest, utilities, insurance and more.

Note the latter will usually result in a much higher deduction, but it takes more work to calculate.

7. Healthcare expenses

Best for: All types of physicians

If your healthcare expenses for the year will exceed 7.5% of your AGI, you can deduct these costs if you itemize your tax return.

For W-2 physicians, your health insurance is already a pre-tax deduction. But if you’re self-employed, you can also deduct paid healthcare insurance premiums.

8. Professional development expenses

Best for: Practice owners and self-employed physicians

Self-employed physicians can claim business expenses related to professional development, including the cost of attending conferences and other business travel.

Unfortunately, W-2 physicians can no longer deduct the cost of work-related expenses. But you can always negotiate your compensation package to help cover the cost of these opportunities.

9. QBI deduction

Best for: Practice owners and self-employed physicians

The qualified business income (QBI) deduction, also known as the section 199A deduction, is available to physicians with “pass-through entities”, such as sole proprietorships, partnerships and S corporations. Many physicians assume the QBI deduction is off-limits due to being a specialized service trade business (SSTB). But if your income is below the threshold (e.g., $340,100 for married filing jointly and $170,050 for other returns), your profession doesn’t matter.

Related: Tax Planning for Physicians: What Are the Benefits of Using S-Corp Tax Strategies?

10. Tax-loss harvesting

Best for: All types of physicians

Normally, tax-loss harvesting is used to offset capital gains with capital losses — think of it as a way to balance your winning stocks with your losers. But with a tax-loss harvesting strategy, you can intentionally realize capital losses to offset up to $3,000 of ordinary income.

Additionally, when you pull money out of taxable accounts and pay taxes on the growth, you’ll likely pay at a more favorable capital gains rate than you will with your physician income tax rate.

How physicians can save on taxes

We always advocate to save the most on your student debt by strategically using the student loan system to your advantage. The same goes for your taxes.

The Internal Revenue Code is filled with thousands of pages explaining tax incentives that are ultimately designed to save business owners and high-income individuals from paying more in taxes. So, just like with student loans, you shouldn’t pay more taxes than you have to. You just have to play within the rules of the IRS game.

That said, the U.S. tax landscape is intentionally complex. And most people aren’t going to sit around reading the tax code for enjoyment, especially busy physicians. That’s where our SLP Wealth team comes in.

We’ve briefly laid out some of the top tax deductions for physicians. But claiming these tax advantages and implementing other strategies often requires a deeper understanding of tax laws and regulations. Reach out today to learn more about SLP Wealth’s tax and financial planning services.