By John Golway, CPA and Founder of Financial Designs Tax Services, LLC
Updated to reflect 2024 information.
It’s that time of year… cheery music, crisp weather, shiny lights… and wrapping up your taxes for 2023. Don’t worry – if you have a good CPA, it shouldn’t be as intimidating as it sounds. See below for our top 5 year-end tax tips for doctors with independent contractor (1099) income.
1) Significantly reduce your taxable income
To ensure you are maximizing your tax savings, you want to reduce your taxable income as much as possible. Here are some key items you can deduct as a 1099 provider:
- Health insurance premiums
- HSA contributions
- Retirement contributions (see more below)
- Deductible business expenses
- Heavy vehicle purchase – e.g SUV
- Qualified Business Income (QBI)
2) Take advantage of high retirement contribution maximums
As a self-employed doctor, you have a few options for retirement savings, and many times this can be one of your biggest deductions. The two most common accounts for 1099 doctors are the SEP IRA and Solo (or “Individual”) 401(k). The maximum you can contribute in 2023 is $66,000 (with a $7,500 “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 lesser known fact is that a Defined Benefit Plan can allow you to save well over the typical $66,000 (more than $100k for some of our clients). Not ready for the commitment of a Defined Benefit Plan? Consider hiring your spouse to save a little more in a tax-deductible capacity. Work with your financial adviser and CPA to determine the right retirement savings strategy that also maximizes your tax deductions.
Additionally, please note, 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, it is possible to open and fund a retirement account for 2023 in October 2024 if an extension is filed. This varies for S-Corps. Work with your CPA and investment advisor for more information.
3) Determine if you can take advantage of the QBI deduction
The QBI deduction is a huge deal. Historically, your retirement contribution was likely the largest deduction you were taking as a 1099 doctor. It’s possible your QBI deduction might exceed your retirement contribution amount. The key is to lower your taxable income to be between $383,900 and $483,900 for married filing jointly (lower than $383,900 receives the full benefit), and between $191,950 and $241,950 for filing single (lower than $191,950 receives the full benefit). See a full explanation here. If you have an S Corp, you might want to consider if it makes sense to dissolve the entity, so you can take full advantage of the QBI deduction. See more here about entity formations and talk to your CPA.
4) Don’t forget to fully fund your HSA if applicable
The max tax deduction is $4,150 on a single plan and $8,300 on a family plan. You can still fund 2023 by April 15, 2024. Your self-employed health insurance premiums are fully tax deductible as well. To qualify for an HSA tax-deductible contribution, you need to be enrolled in an HSA-qualified high deductible health insurance plan.
5) Evaluate the use of the standard deduction
The standard deduction increased. If your state/local/property taxes (cap at $10k), mortgage interest, and charitable contributions add up to lower than $29,200 for joint filing or $14,600 for single, then you will want to take the standard deduction. Some people are choosing to exceed the $29,200 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.
Don’t let the holidays 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 our experienced team (we have been helping doctors manage their wealth for over 40 years).
Contact your tax adviser for more details if applicable.
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