Five tax strategies to help physicians achieve financial independence

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Physicians spend many years training for the opportunity to earn higher-than-average incomes. Although the time investment is intense, the returns on that investment are real. According to the U.S. Bureau of Labor Statistics (BLS) Occupational Employment and Wage Statistics, the average annual wage for all occupations in the United States in 2023 was $65,470, while family medicine physicians earned $240,790 on average.

However, higher wages typically also mean paying more in taxes. Physicians tend to focus on expensive and often ineffective strategies to get into a lower tax bracket, either now or in the future. But there’s more than money to consider when setting such strategies. Physicians should first focus on what is important to them and then determine the most tax-efficient strategies to achieve those goals. When properly executed, such plans can help physicians pay less in taxes today, in the future, or in both instances.

Roth IRAs

Gretchen Cliburn, CFP
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One of the most often missed opportunities for tax-free growth is through funding Roth individual retirement accounts (IRAs). A Roth IRA provides tax-free growth. Due to income limitations on funding a Roth IRA, many physicians mistakenly think that they cannot fund one. However, there is an alternative way to accomplish tax-free growth using this vehicle. Regardless of income, physicians can make a nondeductible contribution to an IRA based on annual contribution limits. Then, if they do not have an IRA account balance at the end of the year, they can convert those same dollars into a Roth IRA, with zero tax liability. If they do have an IRA account, they can often transfer the IRA balance into their current employer-sponsored plan to zero out their IRA account. This strategy can potentially be carried out each year.

Real estate

Physicians are often interested in diversifying their investment portfolio into real estate because of potential tax savings. These investments typically involve leveraging current dollars for a down payment to purchase a property, then renting the property to cover the costs of ownership while building equity and future cash flow. This strategy becomes much more effective if the physician’s spouse is a real estate professional. A real estate professional must meet specific requirements established by the IRS. When this is in place, the revenue generated via rented real estate becomes active income, which may allow for losses to offset other active income, including physician-earned income.

Charitable giving

Charitable giving is another common avenue for employing favorable tax strategies while also supporting community needs. There are several important details to keep in mind to most efficiently accomplish this goal. Instead of simply writing a check to a favorite charity, physicians should consider gifting appreciated stock to a donor-advised fund (DAF) or, for those who are over age 70 1/2, making qualified charitable distributions (QCDs) from an IRA. These moves not only can provide an annual tax benefit but may also yield long-term tax benefits.

Using appreciated stock to give to a DAF or directly to charity may reduce the capital gains taxes paid in the future while benefiting the chosen charity. At the same time, appreciated stock in a taxable account will receive a step-up in basis at the time of the taxpayer’s death. Assets in an IRA will see income taxes paid on those dollars at the time of distribution unless they go directly to a charity. For those aged 70 1/2 or older with IRA balances, QCDs may be beneficial to minimize long-term tax impacts for beneficiaries. Taxpayers can use a QCD as part of or all of their required minimum distribution up to $108,000 in 2025 to reduce their taxable income.

Health savings accounts

Another powerful tax-efficient strategy is investing in a health savings account (HSA). To qualify for an HSA, one must participate in a high-deductible health insurance plan. HSAs provide a triple tax benefit: contributions are tax-deductible, the earnings grow tax-free, and distributions may be tax-free if used for qualified expenses. The true power of this strategy comes into play when using these dollars as an investment for medical expenses later in life, rather than using them to pay for current medical expenses each year. There is no requirement to use these dollars each year, and the money can be invested, just as any other investment account, and grow tax-deferred. Because most people see health care spending increase as they age, pulling these dollars out tax-free for qualifying health care expenses after retirement is a significant savings strategy.

Tax-loss harvesting

Physicians often incur large taxable gains during their lifetimes as a result of capital gains taxes on growing investment portfolios, mutual fund payout capital distributions, or the sale of real estate or their businesses. One way to offset those taxable gains is through tax-loss harvesting. While no one invests to lose money, occasionally there are times when an investment leads to a loss, even if temporary. If this investment is in a taxable account, it could be sold to lock in the capital loss for tax purposes, then immediately reinvested in something else that would perform similarly or better. Be mindful of the IRS wash sale rule to avoid negating the tax benefit. By doing this, the portfolio would then have capital losses that can be carried forward indefinitely to offset capital gains in the future.

Developing a holistic, long-term strategy

Any one or all of these five strategies can be used by physicians to help reduce tax consequences now or in the future. These strategies are most impactful when they are part of a well-designed financial plan with specific goals that align with the physician’s intent. Implementing a few tactics to save on taxes in the current year may be a win in the short term, but a truly holistic and long-term strategy is a far more effective use of time and resources — and can ultimately save more today and tomorrow.

After investing immense time and energy to reach their career goals in medicine, physicians may consider developing tax strategies that help make the most of the financial rewards they have worked so hard to achieve.

While running a half marathon, Gretchen Cliburn, CFP, suffered a cardiac arrest. Her life was saved by health care workers running the race, who performed CPR for over 20 minutes. This life-changing event led to a strong desire to give back to the medical community. As managing director of Forvis Mazars Private Client, she now specializes in serving and educating physician clients, helping them ensure they are on track to achieve their financial goals, which enables them to concentrate on patient care without the burden of financial stress.

Forvis Mazars Private Client services may include investment advisory services provided by Forvis Mazars Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax and related solutions provided by Forvis Mazars, LLP. The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments.