- February 23, 2021
In Partnership with: Financial Designs Inc.
The Internal Revenue Service officially kicked off the 2020 tax season on Friday, February 12th, which means less time for individual tax filers to get their documents in. This year’s delayed start was a result of tax law changes due to the second round of Economic Impact Payments that occurred on December 27th. While tax preparation can be stressful, it should feel manageable with the help of an experienced CPA.
See the below five tax preparation tips for physicians with independent contractor (1099) income.
1. Reduce taxes owed
If you’ve been working with an experienced financial planner and CPA, you know how important reducing your taxable income is to ultimately reduce what you owe. Here are some of the most significant items you should discuss with your CPA:
- Health insurance premiums – 100% of your health insurance premiums are tax deductible as an independent contractor physician.
- HSA contributions – Contributions to a Health Savings Account are deductible (and the excess rolls over year-to-year). In addition to that deduction, the value of the account grows tax free. Lastly, withdrawals for medical expenses are tax free. A rare triple tax advantage!
- Retirement contributions– Further details are outlined below in the second tip.
- Deductible business expenses- There are a number of deductible business expenses to track. A few examples to remember while you prepare for this year’s filing include, but are not limited to: professional association dues, medical journals, work-related clothing, continuing medical education, stethoscope or similar equipment, home office equipment/supplies, business automobile. View a full list from the Financial Designs team here.
- Heavy vehicle purchase- If you purchased an SUV, ask your CPA about Section 179.
- Qualified Business Income (QBI) – QBI is one of the newer, more complex tax rules that allows for specialized exempt professions to lower taxable income. It is often referred to as the 20% pass-through deduction. Learn more about the QBI deduction in tip three.
2. Maximize retirement contribution options
As a self-employed physician, you have the unique opportunity to save more for retirement, and therefore ultimately save more in taxes. Many times, this can be one of your biggest deductions. The two most common accounts for 1099 physicians are the SEP IRA and Solo (or “Individual”) 401(k). The maximum contribution for 2020 was $57,000 (with a $6,500 “catch-up” option for the Solo 401(k) if you are 50+ years of age). Each plan has its own advantages. The Solo 401(k) allows you to also fund a Roth IRA (or Backdoor Roth IRA) if it makes sense to do so.
A Defined Benefit Plan (DBP) can allow you to save well over the $57,000 (more than $100k for some physicians). How? Essentially a DBP allows you to build a pension plan. Those who didn’t start saving early or individuals who want to save every penny possible may be interested in this option.
However, a DBP is a large commitment and isn’t for everyone. If you are not ready to commit to a DBP, another option to save a little bit more in a tax-deductible capacity is to hire your spouse. Work with a financial adviser and CPA to determine the right retirement savings strategy that also maximizes your tax deductions.
Don’t forget in most instances the deadline to open and fund a retirement account is typically the tax filing deadline. If you file an extension, you can use the extension deadline. For example, opening and funding a retirement account for 2020 in October 2021 is possible if an extension is filed. This varies for S-Corps. For more information, consult with your CPA or an experienced investment advisor.
3. Put the QBI deduction to work
The QBI deduction is a significant tax deduction for specialized exempt professions, including 1099 physicians – regardless of your specialty. For most, retirement contributions were the largest deduction available for 1099 income earners. Now, it is possible the QBI deduction could exceed your retirement contribution amount. The key to this deduction is to lower taxable income to between $326,600 and $426,600 for married filing jointly (lower than $326,600 receives the full benefit), and between $163,300 and $213,300 for filing single (lower than $163,300 receives the full benefit).
The QBI deduction is best explained with an example. Learn more from the Financial Designs team here. If you have an S-Corp, making changes to dissolve the entity might be something to consider, so you can take full advantage of the QBI deduction. To learn more about entity formations, see more here and talk to your CPA.
4. Account for the CARES Act
With the unfortunate COVID pandemic, the CARES Act was passed, and many of the components are applicable to independent contractor physicians. If you received a PPP loan, work with your CPA on the strategy to apply for forgiveness. You have 10 months from when you received the PPP funds to submit the forgiveness application, and the more intricate rules around this have been slow to be finalized.
If you had loss of income due to COVID-19 and took a retirement plan distribution (up to $100,000), you have three years to pay back the funds and not be taxed. If you do not plan to pay back the funds, you can extend the tax payments over three years. Work with a CPA and investment advisor to formulate the best strategy for your situation.
If you experienced a loss of income due to contracting COVID-19, provided care for a family member who was sick, or had children home because of school closures, tell your CPA because you may be eligible for a tax credit based on the Families First Coronavirus Response Act (FFCRA).
5. Don’t forget the standard deduction
The standard deduction for those filing jointly is $24,800 and $12,400 for those filing as an individual. If your state, local, property taxes (cap at $10k), mortgage interest, and charitable contributions add up to less than the standard deduction, you might want to consider using it. Some people choose to exceed the $24,800/$12,400 with charitable funds deposited into a Donor Advised fund. This allows donors to receive an immediate tax deduction and then distribute funds at their discretion over time. If you are interested in learning more, contact your tax adviser or one of the Financial Designs CPAs.
This year’s tax deadline remains the same as previous years – April 15, 2021. For those filing an extension, the deadline is October 15, 2021. Don’t stress or let the unknown get the best of your tax planning and preparation. For more information about how to find the best tax strategy for your situation, contact your tax professional or the experienced members of the Financial Designs team.
ApolloMD Disclaimer: The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding federal tax penalties. Described in this text are some of the many advantages of being paid as an independent contractor (IC). The scenarios provided regarding tax saving and retirement planning strategies are neither recommendations nor suggestions but are merely examples. Individuals are encouraged to seek advice from their own financial advisor, CPA and/or legal counsel.
Financial Designs, Inc. Disclaimer: The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Tax and legal advice offered through Financial Designs Tax Services, LLC and Financial Designs Legal Services, LLC. Members of Financial Designs, Inc. who are also Cambridge representatives do not offer tax or legal services. Please see your tax or legal advisor. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Financial Designs, Inc., Financial Designs Tax Services, LLC and Financial Designs Legal Services, LLC are not subsidiaries or affiliates of Cambridge Investment Research, Inc. Cambridge Investment Research, Inc. does not offer tax or legal advice.