The COVID-19 pandemic has disrupted the healthcare industry and affected physicians across the country, especially locum tenens doctors. While some have experienced a greater demand for their skills, many others have been furloughed, laid off, or had less work due to cancelled or postponed elective procedures. No matter your situation, it pays to start planning now so you can reap the greatest benefit when you file your 2020 taxes. These tax strategies for physicians can help.
If you earned a lower income in 2020
Jerry Callahan, CPA and director at Pearce, Bevill, Leesburg, Moore, P.C., has helped many physicians make tough decisions this year as their circumstances changed. One of his recommendations has been to ask for a three-month payment deferment on loans, especially for mortgage and auto loans. This will enable you to manage a loss in cashflow by reducing expenses for a short time.
For those nearing retirement age, Callahan suggests seeing if you are eligible to take money from an individual retirement account (IRA) and talking to your tax advisor to decide if it would be advantageous to do so and in what amount. The timing of and amount of those distributions can allow you to shift income into different tax years to take advantage of the appropriate tax brackets. “While there is a minimum known as the RMD (Required Minimum Distribution), there may be occasions where you would want to take more,” Callahan says, “for example, in a year where your business income is down or you have more deductions and, as a result, your tax bracket is lower.”
Locum tenens physicians who earned a lower income in 2020 should speak to their tax advisor about their fourth-quarter estimated tax payment. “Maybe you don’t have to make that fourth quarter tax payment — the only way you’re going to know that is to get with your advisor and do a calculation,” he says.
If you earned a higher income in 2020
Physicians in high-demand specialties may find their incomes higher in 2020, especially if their pay is productivity-based or they have worked extra locum tenens assignments.
Callahan recommends the following 2020 tax strategies for physicians who’ve earned a higher income:
- Maximize retirement plan contributions. “If your income has been pretty consistent, make sure you’re maximizing the amount you’re putting away for retirement,” he says. “If you’re self-employed and haven’t established a solo 401(k) or simplified employee pension plan (SEP) IRA, this would be a good year to shelter some of that incremental income from tax.”
- Prepay any expenses that would apply against self-employment income: Look at professional liability coverage, for example, and see if you can pay the premium (or several months of premiums) early.
- Pay down debt where possible. You can pay off student loans, put money toward your mortgage or office expenses, and even pay down a car.
- Invest in new equipment: If you need a new laptop, cell phone, or other tech tools, don’t put off the purchase. You can buy whatever you need this year and write off that item’s cost on your taxes. However, Callahan cautions physicians that a tax deduction is only equal to their tax bracket. “If you have to pay professional liability insurance or buy office supplies and personal protective equipment, prepay for those. Make sure it’s something you really need rather than just spending the money. A tax deduction is only going to be equal to whatever your tax bracket is, but you’re still spending that dollar so you’re still losing two-thirds of that dollar whenever you spend it.”
If you have a tax entity
Whether your income has increased or decreased in 2020, Callahan recommends keeping your monthly C corp or S corp withdrawal the same.
“Meet with your tax advisor about the S corp’s profit — how much you’ve paid as salary versus S corp earnings. You may need to pay out a bonus or modify estimated tax payments,” he says. “I like to take that money out quarterly, semi-annually or annually, because it’s an influx to your personal budget all at one time.”
Callahan notes that this money can help you make a big purchase, pay down student loan debt, or put a bigger chunk toward your mortgage.
“If you don’t change that monthly income but take a windfall instead and put it to good use, this bump in income allows you to do those things that you might not normally be able to do,” he says.
For physicians who experience a drop in income, Callahan notes that you may also be able to reduce the withholdings on the last two or three paychecks of the year. “You’ll need to evaluate with an accountant, because withholdings are based on the monthly withdrawal,” Callahan says. “The withholdings may cover both the salary and whatever S corp earnings remain.”
Planning ahead for 2021
Regardless of how COVID-19 has impacted your income, it’s important to look at how your income levels will affect your 2020 taxes now so you can benefit during the last couple months of the year. A tax advisor can evaluate your situation and help you decide whether to make changes before the start of 2021.