10 deductions physicians should check out
With a turbulent 2021 drawing to a close, it may seem like the end of year is already here and there’s nothing left to be done for your finances. However, there are some tax planning strategies physicians can still put into action to set themselves up for solid tax savings for year 2021, especially when it comes to deductions.
Here are 10 deductions physicians should explore. Not every deduction is right for every physician, but you won’t know until you ask. It depends on each physician’s individual circumstances, so speak to your tax professional.
1 Claim qualified business Income (QBI)
One important deduction we see people miss all the time, especially physicians, is something called the qualified business income (QBI) deduction. If you’re a self-employed physician, and let’s say you derive $100,000 from your practice as business income, you can write off 20% of this $100,000, or $20,000, as a deduction. A lot of times physicians say, “Hey, I don’t qualify; I’m a physician.” But if your income is below $315,000, you can qualify for the full QBI deduction, so please make sure you speak to your accountant or tax attorney about it.
2 Claim QBI in rental income
Second, there is also a QBI for rental income. Let’s say you have actively managed rental properties and you collect rent. You can write off 20% of the rent as a deduction as well. This is another one that physicians who own rental property miss all the time. The deduction equals 20% of rental income up to a maximum of 2.5% of unadjusted basis of depreciable property.
3 Accelerated depreciation
Third, in case you’ve purchased or you’re thinking about buying a vehicle before the end of the year, 2021 is a great year to do it. Accelerated depreciation, which Congress passed a few years ago, allows you to write off the full purchase of heavy SUVs, trucks and vans that weigh more than 6,000 pounds and are used for business purposes. Usually these big vehicles cost $50,000 to $70,000, and you can get the write-off for the full value of the vehicle by using accelerated depreciation.
4 Food expense deduction
The food expense deduction is another good one this year. When you buy food for your corporation, usually you can deduct only half the cost. This year, the deduction doubled, dollar per dollar, to almost 100%. I’m not suggesting that you have party every night at your corporation and spend lots of money on food, but speak to your CPA. This is most likely the last year you can get 100% write-off of food expenses for your corporation.
5 Itemize when you can
The standard deduction for 2021 is $12,550 for individual filers, $25,100 for married filers, and $18,800 for head of household filers. Instead of simply taking the standard deduction — most of the time when a physician sits down with a CPA they will do a standard deduction — you can do something called an itemized deduction. If you have itemized deductions — if you did home improvements this year, for example — those could be a part of an itemized deduction so you can go over the standard deduction the government has passed.
6 Gift stock, not cash
Many physicians probably bought stock this year that went up in value. And many physicians probably also do charitable donations. One of the mistakes we see is that they just give out cash as a donation. Now, if you have appreciated stock, the best way to donate is to give the appreciated stock as a donation. The beauty in doing it this way is you don’t pay any taxes on the gain, plus, you get the deduction as well. This is extremely beneficial. If you have a charitable trust and a donor fund, you can give the appreciated stock as a donation as well so you can get a bigger write-off.
7 SALT cap workaround
We all have to pay federal taxes, but we have state taxes as well. For local property and state taxes, altogether, the maximum state and local tax (SALT) deduction is $10,000. It used to be if you pay property tax, you can write off all of it. But now the government has capped it at $10,000. Certain states, including New York and New Jersey, passed workaround laws that allow pass-through entities to pay the taxes through the corporation rather than individually. In that way, you can write off the full amount of the taxes paid. Speak to your CPA about that as it may apply depending on your circumstances and the state you live in.
8 Opportunity zone investment
If you were lucky enough to have a lot of financial gain this year, speak to your financial adviser and look into something called opportunity zone investment. It’s an area designated by a state as an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. The good thing about investing in an opportunity zone is that as long as you hold the property for more than 10 years, there will be no capital gain taxes. This is a powerful financial tool that can be incorporated into your tax and overall financial planning as well.
9 529 plan contributions
In many states, residents can claim deductions for a certain amount for 529 plan contributions made during the year. This lowers state tax liability. As an example, a married couple filing jointly making contributions to a New York 529 plan may claim up to $10,000 per year as deductions when calculating New York taxable income. Contributions must be made by Dec. 31 to use this deduction in 2021.
10 Tax harvesting to offset profit
If you’ve been watching the S&P 500, you’ve likely observed that it is near a record year-to-date high. As a result, before the end of December, many actively managed funds will pay high taxable dividends and capital gains distributions. Tax-loss harvesting provides you the ability to minimize those gains and lower your tax liability by strategically selling securities, especially if they’re short term.
Syed Nishat, BFA, is a partner at Wall Street Alliance Group. He holds a bachelor’s degree in business administration from University of Nevada, Reno. Syed holds the FINRA Series 7, FINRA Series 63 and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance. He also has been awarded the Behavioral Financial Advisor (BFA) designation.
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