Tax Planning for Physicians and Their Families

pexels.com/@n-voitkevich

**Editor's Note: Although the author of this article, Faith Coleman, is an accomplished physician and writer, she is not a tax professional. The content within this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.**

Tax planning for physicians takes advantage of all the tax deductions, tax credits, and tax exemptions that Congress and the Internal Revenue Service allows. This information, tax breaks, and tax strategies, offer ways for physicians to reduce their taxable income with their families in mind.

Estate taxes. The federal estate tax threshold is more than $22 million, making the probability low that physician families will pay a federal estate tax. That being the case, every family who is subject to the $15,000/year limit on gifts (which includes 529 college savings plan contributions) will get some relief since the $15K limit is part of the federal estate tax code.

Charitable deductions. The standard deduction is $24,400 for married physicians, so they may not be able to benefit from making smaller charitable donations. To work around this, physicians should consider making one large donation every other year. Consider donating appreciated securities to get a large tax break this year, then make smaller donations in the future.

Refinancing a home. For mortgages originating on or after December 15, 2017, only the interest on the first $750,000 of debt is deductible. To refinance a balance greater than this, consult a CPA about avoiding a sizable loss of the allowed deduction. In addition, interest on a home equity line of credit is deductible only if it is used for home improvements or for purchasing a home.

Pay for private school. Physician families can use Section 529 assets to cover the cost of private K-12 education up to $10,000 per child per year. In states that allow for deductions on 529 plan contributions, money put into the plan can be withdrawn to pay for private school.

Self-Employed Doctors. Most of the tax code benefits doctors who own their practices. They receive a virtually unlimited tax deduction for business-driven expenses like office equipment, office supplies, medical equipment, board exam fees, licensing fees, CME expenses, and membership dues. Employee physicians get no tax benefit for covering these expenses out-of-pocket. For rules about deducting business expenses, see IRS Publication 535.

Hiring Their Children. Physicians who own their business, including a sole proprietorship, partnership, or working as a contractor to another business, can add their children to the payroll to shift income out of their high tax brackets. It can be accounted for on their child’s tax return, where the standard deduction can zero out tax liability.

For example, a physician who hires her three children can pay each child up to $12,200 per year, an amount equal to the standard deduction set in 2019. That deduction shelters these earnings from taxes. If a physician is in the 37% federal income tax bracket, tax savings can reach $13,500 per year.

Wages must be consistent with the child’s age and skill level. The maneuver should be carefully and fully documented, to avoid problems at audit.

Roth IRA for Kids Offer Tax-Free Growth. Physicians who employ their children can contribute to a Roth IRA. The account can grow tax-free under the current tax laws.

ABLE Accounts for Disabled Children. The parent of a child who became disabled before their 26th birthday is eligible to create an ABLE account, to be included in a plan for long-term financial support of the child. These accounts allow physician families to make contributions to a tax-advantaged savings account. Individuals can contribute up to $15,000 per child per year, so a married couple could contribute up to $30,000 per child. Earnings in the account can grow, tax-deferred. When used for the disability expenses of the child or a designated beneficiary, the funds are excluded from the parents’ gross income for federal and state income tax.

ABLE accounts do not impair your child’s eligibility for federal benefits programs. Bear in mind, however, that only the first $100,000 of the ABLE account balance is not subject to the $2,000 personal asset limit that determines eligibility for Supplemental Security Income (SSI) benefits.

ABLE accounts are not available in all states, and physicians who want the tax-sheltered savings must enroll in their own state’s ABLE plan. To learn more, visit the ABLE National Resource Center.