6 Tax Planning Strategies for Doctors to Consider
The Tax Cuts and Jobs Act (TCJA) was the largest change to the tax system in over 3 decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers, including hard-working physicians like yourself. Although the new tax law closes many loopholes, there are still tax breaks and strategies that offer ways for physicians to reduce their taxable income. Below we have highlighted 6 tax strategies physicians should consider for 2018.
1. Bunching Charitable Donations
While the new tax reform does not eliminate charitable deductions, it does limit the tax incentive for charitable contributions. The standard deduction for married physicians has increased to $24,000, which means you may no longer benefit from making smaller charitable donations. Instead, consider making one large donation every other year. Another way to maximize your charitable tax break this year is to consider donating appreciated securities, including stock, bonds, and mutual funds, directly via donor advised funds (DAF). The contribution grows tax-free and serves as a charitable fund from which the taxpayer can recommend gifts to charity in subsequent years.
2. Paying State Income Taxes
Under the TCJA, you can only deduct the first $10,000 of state and local taxes; this includes the property tax on your home. Before you pay state income taxes, speak with one of our tax professionals. Certain states, such as California and New York, are drafting legislation to work around this limitation.
3. Refinancing Your Home
Effective January 1, 2018, your mortgage interest is only deductible on the first $750,000 of new acquisition debt on a primary or secondary residence for mortgage debt incurred after December 14, 2017. Refinancing your home could cost you a portion of your deduction. Before you refinance or borrow against your home, speak with one of our tax professionals.
4. Paying for Private School
The TCJA allows physician families to use Section 529 college savings plan to pay for the cost of private K-12 education, up to $10,000 per child per year. Physicians may also consider 529 plan contributions for their grandchildren.
5. Draining UTMA/UGMA Accounts
Doctors who are beneficiaries of Uniform Transfer to Minors Accounts (UTMA/UGMA) are now subject to the ‘kiddie tax’ rule. The TJCA ties this ‘kiddie tax’ to trust rates. Ordinary income is no longer tax-free, and only the first $2600 of capital gains are tax-free. Doctors will want to consider how they will harvest capital gains going forward and how they can use the funds for the child’s benefit.
6. Managing Your Qualified Business Income
One could argue that the new tax code is written to benefit self-employed physicians. The Qualified Business Income Deduction (QBI) allows self-employed physicians, with pass-through entities, to deduct 20 percent of their business income. Qualifying for the QBI deduction, however, can get complicated. Contact one of our tax professionals today to determine your eligibility.