#2: Health Care Expenses

The second large deduction for physicians is health care expenses. I’m not talking about the medical and dental expenses itemized deduction on Schedule A. Since that is subject to a floor of 7.5 percent of income, few doctors will ever be able to claim that. I’m talking about paying for all of your health care expenses with pre-tax dollars. If you are an independent contractor or partner, you can deduct the entire cost of your health insurance premiums. This is a more favorable, above-the-line deduction that you currently take on Schedule 1 of Form 1040, right next to the self-employed retirement plan contributions. You get to buy your health insurance with pre-tax dollars. If you’re in the highest federal tax bracket and spend $1,500 a month on health insurance for your family, that deduction is worth $6,660 to you in saved federal taxes alone. But wait, there’s more! If your only health insurance plan is a High Deductible Health Plan (HDHP), you can also contribute $3,650 ($7,300 for a family) to a Health Savings Account (HSA). That money can then be used to pay your deductibles, co-pays, or uncovered expenses with pre-tax money. That knocks another $2,701 off your tax bill. If you don’t spend it all, you can roll it over to the next year and even invest it for decades until you spend it in retirement. It grows tax-protected, just like your 401(k), and as long as it is spent on health care (including Medicare premiums), it comes out completely tax-free.

If you are an employee, you don’t get a tax break on health insurance premiums paid. You’re probably not paying the whole premium, though, and your employer is able to buy your health insurance for you using pre-tax dollars, presumably saving enough in taxes to give you a raise!

#3: Standard Deduction

The final large deduction that physicians should know about is the standard deduction. That’s right, the one you get just for having a pulse. For 2022, the standard deduction is $12,950 or $25,900 married filing jointly (MFJ). You don’t have to do a thing to get it. So, if you are married and make $300,000, you don’t pay taxes on the last $25,900 of that income, saving you $6,216 in taxes. It’s possible you have enough itemized deductions to save even more. The three main itemized deductions are state income and property taxes up to $10,000 total, charitable contributions, and mortgage interest. If the three of those add up to more than $12,950 ($25,900 MFJ), you can save even more. Imagine that you were married and earned $500,000, paid $10,000 in state income taxes, donated $50,000 to charity, and paid another $40,000 in mortgage interest. That is $100,000 worth of itemized deductions. You just knocked $100,000 off your taxable income and $35,000 off your tax bill. Are you going to come out ahead financially paying state income taxes, giving lots of money away, and buying a fancy house? Of course not. But if you’re going to do those things anyway, you might as well get a tax break for it.