This episode covers everyone’s favorite topic – taxes. The bad news is that, as a physician, you face a higher tax rate and you’ll pay more in taxes than the average person. The good news is that you can take a strategic approach to your tax planning that enables you to take advantage of the government’s rules to ensure that you’re not paying more than you absolutely have to.
In this episode, we cover the importance of looking at tax planning within the right time horizon, the difference between tax preparation and tax planning, and 6 of the most powerful ways you can save taxes as an employed physician.
Outline of this episode
- Trent’s breakfast experience that explains taxes (it includes a sippy cup) [0:34]
- The 3 distinct “tax phases” every physician will experience in their career [2:30]
- The goal for most attending physicians (reduce and defer) [3:03]
- Health savings accounts (HSA) and flexible spending accounts (FSA) [6:28]
- Tax planning opportunities if you have side income [12:04]
- Saving toward college expenses with a 529 plan [14:55]
- Charitable giving opportunities [18:30]
- Tax-loss harvesting [22:55]
Are you making the most of your employer’s retirement plan?
When it comes to utilizing the resources available to mitigate your tax obligations, there’s no place better to start than with your employer’s retirement plan. It’s one of the best ways to pay less in taxes and save toward retirement, using options like a 403b, 401k, or 457b. These allow you to save toward retirement in a tax-advantaged manner.
Most employers have shifted the responsibility of saving for retirement to the employee, and these programs are the result of that shift. If you contribute to your 403b or 401k, your employer will match your contribution with a predetermined percentage. There are ways to make contributions that give you a tax deduction now (advantageous for most attendings) or contributions that provide tax advantages later (advantageous for many physicians in training).
Are you generating side income? If so, it can help you save on taxes
Many physicians earn income in contexts outside the role they fill for their full-time employer. This could be moonlighting, consulting, speaking, and more. If you generate side income of any kind, you could save taxes and increase your ability to save for retirement because of the opportunities that extra work provides.
You may not realize it, but earning income on the side makes it possible for you to establish your own small business and in that situation, you will be considered the employer and employee. Why is that important? Because it provides you the opportunity to deduct expenses related to your side-hustle activities and to set up retirement accounts for yourself through that business.
That means your “business” can establish a SEP IRA or an individual 401K for your self-employment income. This enables you to save even more toward retirement, in a tax-advantaged way.
Saving for college in Michigan has some great tax benefits
Many physicians find themselves in a place where future education expenses are a reality. Many states have created programs that help anyone, no matter their income level, to save for college in a tax-advantaged manner. There are two primary programs to consider in the State of Michigan…
The Michigan Education Savings Program (MESP): This is a savings and investment account where you contribute money (and receive a tax deduction), invest the money so it can grow tax-free, then withdraw the money tax-free in the future to pay for college.
The Michigan Education Trust: This is a prepaid tuition program where you are allowed to buy college tuition at current day prices, to be used at a later date.
With both of these programs, you receive a deduction on your Michigan income taxes up to a certain dollar amount of contributions. There are no income restrictions regarding who can make contributions and receive the tax deduction.
If you take the time to listen to the entire episode, you’ll hear three additional tax strategies that can help you reduce your tax bill.
Resources & People Mentioned
- Blog post – tax planning as an attending physician
- Blog post – tax planning in retirement
- Blog post – tax planning while in training
- Blog post – leveraging your side income as a physician
- Blog post – using a 529 plan to save for college
- Blog post – what you can do in volatile markets
- Michigan Education Savings Program
- Michigan Education Trust