In today’s world, physicians are often inundated with financial advice, tips, and anecdotes. While certain practices such as taking on side income (e.g., locum tenens) or maximizing retirement contributions have become standard knowledge, it’s not often that physicians can readily see how all these various actions concretely impact their bottom line.

Tax optimization

To help physicians visualize how and which key actions and optimizations can potentially lead to direct savings, we created a baseline illustration below for an average primary care physician. By roughly employing a handful of key optimization tactics, the physician in this illustration reduced his/her taxable income by ~$60,000, which led to ~$28,000 less in taxes paid. When considering the value of that tax savings invested each year over 10-20 years, the savings can become even more meaningful!

While this illustration represents a simplification of a primary care physician’s earnings and taxes, it was created to showcase how a few key levers can lead to meaningful differences.  

Tax Optimization Illustration*
Primary Care Physicians in CA

Main tax optimization levers

1.) Investment income and tax loss harvesting

Through a combination of moving taxable interest to tax-free interest and doing tax loss harvesting to offset gains, and the use of tax budgets, physicians can essentially reduce their taxable investment income.  

With the right technology, physicians and their advisors can automate tax loss harvesting and establish a $0 capital gains budget for the portfolio.  Furthermore, they can convert taxable bonds to tax-free municipal bonds.

2.) 1099 income and deductions

According to Medscape, ~40% of physicians are earning additional income from side gigs and other initiatives.  Once a physician is earning 1099 income, this significantly opens up the ability to take more deductions, which ultimately reduce taxable income.  While the home office deduction is a popular one and easier one to remember, oftentimes there are many expenses that are under-reported.  Be sure to accurately and maximally take your 1099 related deductions.

3.) 457(b) contributions

Generally, retirement contributions (typically through 401(k) or 403(b) plans) are a critical way for physicians to reduce their gross income, and should always be maximized.

Furthermore, many nonprofit hospitals and government hospital health systems offer additional retirement plans in the form of 457(b) accounts.  These plans work similarly to 401(k) and 403(b) plans except: (i) savers typically only need to be separated from an employer (not hit a certain age) to start withdrawals (in some cases, savers may even be required to liquidate the savings when they stop working for the employer); and (ii) you can typically contribute to both the existing employer-sponsored retirement plan, like a 401(k) or 403(b), and the 457(b).  

For the University of California, for example, physicians may contribute up to $23,000 annually in pretax dollars to BOTH the 403(b) and the 457(b) plans, a total of $46,000 or $61,000 (if over 50 years of age) in 2024.  These contributions are dollar for dollar reductions in gross income.  

Always read your employer benefit offerings carefully to ensure that you take every advantage of applicable offerings.  

The bottom line

In summary, it’s important to take a step back and make sure you’re doing the right things to save where you can.  At Earned, we’ve seen firsthand just how tax smart strategies have made a significant impact.  We are offering a complimentary analysis of your tax situation to see if there are potential opportunities for savings.

Sources:

Earnings and 1099 income

2023 Compensation Report

2023 Side Gigs Report

2023-2024 Tax Brackets and Federal Income Tax Rates

Assumptions:

• For physicians who take on 1099 side gigs, deductions can average ~ ⅓ of 1099 income
• Physician works at non-profit hospital in California that offers additional 457(b) account (such as University of California)
  

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