Strategic Tax Planning: A Guide for Surgeons

The Tax Cuts and Jobs Act (TCJA) changed the tax code significantly, affecting various professionals, including surgeons. As a surgeon, one of the key implications for you is managing tax brackets and rates, potentially lowering the taxes you owe on your income. 

The Act also introduced a 20% deduction for qualified business income from pass-through entities, which could benefit you if you operate as a sole proprietor, partner, or S corporation shareholder.

You may also be impacted if you live in a high-tax state, as there is a cap on state and local tax (SALT) deductions. This could impact how much you can deduct. The TCJA also modified the rules for medical expense deductions, which could impact how you plan to deduct personal or practice-related expenses.

Changes to the alternative minimum tax (AMT) thresholds could also impact you, potentially reducing your AMT liability. 

Lastly, the TCJA's emphasis on equipment and technology investment, through expanded Section 179 deductions, offers an opportunity for you to invest in your practice while being more tax efficient.

If you're filing taxes as a 1099 contractor or business owner, there's some good news: you can access many tax deductions that W2 employees can't use anymore. These deductions can seriously lower your taxable income. 

Here are some deductions you might be able to claim:

• Home Office: If you use a part of your home strictly for business, you can deduct a portion of your home expenses. Work out the percentage of your home used for business and apply that to your home costs. This includes mortgage interest, property taxes, utilities, and repairs. Just remember, homeowner association fees aren't included.
• Office Supplies and Equipment: Items like computers or furniture for your home office might be deductible. If they're not, you can spread the cost over several years through depreciation.
• Vehicle Expenses: Driving for business? That mileage can count as a deduction. Whether it's trips between your home office and other work locations, you can calculate this by using a standard mileage rate or actual expenses.
• Continuing Medical Education (CME): Costs to keep your professional licenses up to date are deductible.
• Business Travel: Those expenses can be deducted if you're traveling for work or CME.
• Business Meals: 1099 filers can still deduct business meals. That counts if you're discussing work or drumming up business over a meal.
• Medical Malpractice Insurance: If you're covering your malpractice insurance, you can deduct it.
• Annual Dues: Membership fees for professional societies or hospital privileges can be deducted.
• Cell Phone: If your cell phone is used for work and personal use is minimal, you can deduct it.
• Retirement Plans: Contributions to Solo 401(k) or SEP IRAs can be deducted.
• Qualified Business Income Deduction: This one's complex, but in simple terms, you can deduct up to 20% of your self-employment income, significantly lowering your taxable income.

Tax-loss harvesting is a strategy that investors, including surgeons with investment portfolios, use to reduce their tax liability. The technique involves selling securities at a loss to offset capital gains tax liability on other investments. 

As a surgeon, this can be particularly useful for managing the impact of taxes on your investment and professional income.

For example, let’s say you invested in two different stocks, where Stock A gained $5,000 in value (winner) and Stock B lost $3,000 (loser). You could sell Stock B to realize the loss. By doing this, the taxable gain on Stock A would be reduced to $2,000 ($5,000 gain - $3,000 loss). 

It's a smart way for surgeons to manage their investments more efficiently, create tax benefits from losers, and reduce taxable events without compromising the growth of their portfolio.

Asset location strategy involves placing investments in the most tax-efficient accounts to optimize after-tax returns. As a surgeon, you may be in a higher tax bracket due to your income-earning ability, so deploying an asset location strategy may significantly reduce your tax liability and enhance your wealth accumulation over time.

The core concept of asset location strategy is to recognize the different tax treatments of various investment accounts, like tax-deferred retirement accounts (401(k)s, IRAs) and taxable accounts. 

The goal is to place assets that are taxed at higher rates, such as interest-bearing bonds or investments that produce short-term capital gains, in tax-advantaged accounts. 

Conversely, assets that benefit from lower long-term capital gains rates, like stocks or equity funds held for more than a year, are better suited for taxable accounts.

Here are a few examples of an asset location strategy:

• High-growth investments like stocks should be placed in taxable accounts to benefit from lower long-term capital gains tax rates. 
• Tax-inefficient assets like bonds or high-turnover funds are better suited for tax-deferred accounts (e.g., IRAs, 401(k)s) to defer taxes on interest or short-term gains.
• Utilizing Roth IRAs for growth-oriented investments allows earnings to grow tax-free and be withdrawn tax-free in retirement, which is ideal for assets that may experience significant appreciation.

A Roth IRA conversion involves moving assets from a traditional IRA or 401(k) into a Roth IRA. This strategy can be a smart tax planning move for a surgeon who likely falls into a higher tax bracket due to substantial income, especially if you anticipate being in the same or a higher tax bracket in early retirement years.

When assets are converted to a Roth IRA, the amount is added to that year's income and taxed at your current income tax rate. For example, let’s say you convert $50,000 from a traditional IRA to a Roth IRA and are in the 35% tax bracket; the tax due on the conversion would be $17,500. This upfront tax payment can be seen as an investment in future tax savings.

The key benefit comes in the future: withdrawals from a Roth IRA, including income and appreciation, are tax-free as long as they are qualified distributions, which means the account has been open for at least five years and the withdrawal is made after age 59½, due to disability, or for a first-time home purchase.

Another strategy to offset your taxable income while also supporting causes that are important to you is contributing to charitable organizations. 

Here are some of the more popular strategies to consider: 

• You can donate appreciated assets such as stocks or other assets with significant appreciation. This approach allows you to avoid capital gains taxes you would have incurred if you had sold the asset yourself. 
• By creating a Donor-Advised Fund (DAF), you can make a charitable donation and receive an immediate tax deduction, but you can distribute funds to charities over time. This can be particularly useful for managing income in high-earning years.
• Charitable Remainder Trusts (CRTs) allow you to place appreciated assets into a trust, receive income from the trust for a period (life of both spouses), and designate a charity as a beneficiary when both spouses are gone. This can provide immediate tax benefits and potential income for retirement.
• Using Qualified Charitable Distributions (QCDs) could be effective if you are 70 ½ or older. QCDs allow you to donate up to $100,000 directly from an IRA to a charity, which can count towards a required minimum distribution without being added to your taxable income.