12 Tax Deductions Physicians Overlook


 
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By Syed Nishat, BFA

Recently, I was talking on the phone to a physician client of mine about the COVID-19 vaccine and how thrilled I was that everyone over the age of 30 is now eligible in New York, which meant I could now schedule my own appointment.

We discussed the current market, and just when I was about to end the call by wishing him a happy National Doctor’s Day, his younger son, who was visiting and heard the conversation, had a question about his taxes.

When he got on the line, the first thing he asked was, “I’m a salaried physician, so I’ll be fine without much tax planning, right? I don’t really have many deductions I can take, right?”

As a financial advisor, I hear this misconception all the time, primarily from physicians who are employed at hospitals or who have just started their practices after completing a fellowship.

During the conversation with my client’s son, a self-employed internist in Texas, I was able to advise him that his income was low enough to claim the recently passed QBI (qualified business income deduction) taxes. Missed opportunities like this are very common, particularly for young graduates who use online tools like Turbo Tax for self-filing. Tools like that are great for someone knowledgeable about taxes, but those depending on the programs for guidance often end up missing some important deductions that could save them significant amounts in taxes.

It’s with some relief that most Americans welcomed the news that the 2021 IRS tax deadline had been extended to May 17. This gives filers a little breathing room after an eventful and harrowing year, and it also provides some extra time to go over tax filings more closely for deductions that may be overlooked that could be saving them money, like these commonly missed tax deductions.

1. Qualified business income deduction (QBID) for personal income. The Tax Cuts and Jobs Act (TCJA) passed in 2017 established a new tax deduction for business owners of ‘pass-through’ businesses, including sole proprietorships, partnerships, and S corporations. It’s not uncommon for physicians to work as an independent contractor besides their full-time job at the hospital. Self-employed physicians can qualify for this deduction, which is a 20% deduction of business income, though this is subject to income fadeout.

2. Car mileage deduction. If driving is part of an individual’s job, there is an available option that allows for using the federal mileage rate deduction to claim the mileage costs for reimbursement. The qualifying fields vary from the obvious, such as ridesharing and delivery, to the less obvious, such as real estate and medicine, including those who are self-employed. Physicians who are 1099 and freelancers are also eligible for this deduction.

3. Depreciation in real estate deduction. For physicians who own real estate besides a primary residence, cost segregation allows an accelerated depreciation from 39 years to as few as 5 years on those retail or rental properties. Through a cost segregation analysis, a property is considered as its components, each with its own depreciation rate. This acceleration can generate significant tax savings for both active and passive income.

4. Food expense deduction. While business meals for 2020 can be deducted at the rate of 50%, the COVID-19 Relief Bill made changes for tax years 2021 and 2022. Meant to bolster the restaurant industry that has suffered throughout the pandemic by encouraging more business meals, restaurant-provided food and beverages that were previously 50% deductible will be fully 100% deductible in 2021 and 2022.

5. Health savings account (HSA) and IRA contributions. Physicians with high deductible insurance plans are eligible to contribute annually to health savings accounts (HSA), which can be used for qualified health-related expenses at any time. The funds in the HSA are not liable for federal income tax at the time of deposit. Until April 15, 2020, the maximum pre-tax contribution for a family is $7100. Looking at other tax-saving contributions, an individual over the age of 50 can contribute up to $7000 into a traditional and/ or Roth IRA account for the 2020 tax year.

6. Qualified business income deduction (QBID) for rental property. Under the Tax Cuts and Jobs Act (TCJA) of 2017, property owners may be eligible for a qualified business income (QBI) deduction for rental income. For physicians who have active rental property or own their practice building, they may deduct up to 20% of the rental income as a deduction on their taxes.

7. Student loan payment deduction. It’s very common to have student loans for physician graduates. For those paying back debt from student loans, filers can deduct up to $2500 of interest paid for the year. There are income limitations to this deduction that may apply, so it’s best for individuals to discuss their own particular situation with a financial advisor.

8. Child tax credit. The TCJA doubled the child tax credit to $2500 per child under 17 years of age, and further amendments under the Biden administration have increased that to $3500 for taxpayers meeting certain criteria. There have been changes made about future exemptions and deductions as well, so there could be additional deductions for the next tax year to pay attention to.

9. Stock market loss. Stock market losses or capital losses can be applied against annual income to reduce the amount of income that is taxable. To get the greatest tax benefit, there are strategies to implement that will deduct losses in the most efficient ways. An individual can claim up to $3,000 if they have any losses from the market, and they can carry forward the remainder of the balance to offset any future income.

10. Education savings deductions. For those making contributions to their children’s education savings plans, there are state tax deductions for 529 contributions. While the amount may vary by state, some states have significant deductions. For example, New York has a deduction maximum of $10,000 per child.

11. Home office deductions. While past regulations did not allow for home office tax write-offs, recent changes make it possible for self-employed taxpayers to deduct expenses related to space in a home set aside to be used exclusively for business. A lot of physicians have transformed their practices home-based due to Covid-19. Eligible expenses that can be deducted include rent, utilities, and supplies used for the business.

12. Home improvement deductions. Certain improvements made to a primary residence can also count as deductions. Changes to a home for medical reasons, including ramps for wheelchair access, widened doorways, and modifications to bathrooms, are eligible, provided the amounts are not outrageous and do not include the costs of aesthetic construction. Improvements made to a home for energy generation can also help save in taxes. There is an available federal tax credit of 30% of the cost of energy generating systems such as solar panels, wind turbines, and geothermal heat pumps installed for existing or new homes.

The credit can be applied for most of these, even in a secondary home, and the credit applies to the cost, including installation, with no maximum limit (except for fuel cells). The credit is applied in the tax year that the system was first used and, in order to qualify, a certification from the manufacturer is required.

As shown by the variance in these deductions, there are many aspects of an individual’s situation that need to be taken into consideration, including family, real estate, career, and financial accounts. It’s best to speak with an experienced financial advisor who will do a thorough analysis of your unique circumstances and provide you with guidance to make the most of tax strategies for savings that will benefit your financial future.

 
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