Nothing is certain except death and taxes, right? April 15 will be here before you know it, but this physician tax guide can help relieve some of your stress. Jerry Callahan, a certified public accountant and director at Pearce, Bevill, Leesburg, Moore, P.C., who works exclusively with physicians, explains eight important considerations to be aware of when filing your 2019 taxes.
1. Employee business expenses are gone
In past years, doctors could itemize employee business expenses — such as dues or membership fees —as deductions. This is no longer available according to Callahan.
“They’ve eliminated those 2% employee business expenses in their entirety as a deduction, including tax preparation fees, business car use, and business home use. This really includes any expenses an employed physician might encounter producing their income,” he says.
2. There’s a lower limit on home mortgage interest
Home mortgage interest for new mortgages is now limited to the first $750,000 of acquisition debt, down from $1 million in previous years (mortgages originated prior to December 16, 2017, still have a ceiling of $1 million).
“If you have a mortgage that’s more than $750,000, the rest of that interest expense would not be deductible,” Callahan explains. “The IRS does still allow the $100,000 of home equity line of interest, but the big difference is that debt has to be associated with home improvement: paint, hardwoods, whatever you’re electing to do as home improvement.”
3. You can write off depreciation expenses
While some deductions are limited, physicians do have the option to write off depreciation expenses when buying equipment for their practice.
“You do have to report the asset you’re purchasing and then take that election to write it off as depreciation,” Callahan says. “As an example, if you bought a $3,000 computer, you have to make the election to expense that by putting it on your depreciation form. If you run that through as an office expense, you really haven’t properly documented that you’re claiming that expensing election.”
4. There are higher retirement plan contribution limits
If you’re 50 years old or older, you have an extra $6,000 in “catch-up contributions” for 401(k) deferral in 2019, making the total 401(k) deferral $24,000.
“It might be good to make sure you’re deferring that amount before the end of the year and set that withholding for your 2020 taxes. The amount increases to $19,500 this year, plus the catch-up contribution,” Callahan says.
Callahan explains many physicians miss the extra $6,000 because it’s a separate button to select in most payroll systems. “Make sure you handle that amount properly. Retirement plan contributions are one of the best tools we as advisors have in our pockets to reduce taxes,” he says.
And for the 2020 tax year, the catchup contribution increases to $6,500.
5. If you have student loans, you may want to file separately
Callahan cautions physicians — especially early career physicians — to look carefully at student loans when filing their taxes.
“Some loans are repaid based on income and ability to repay. If you’re married, you may want to consider doing a separate return from your spouse. That way, each of your incomes is independently considered as opposed to a jointly paired income. That can make a huge difference,” he says.
6. State and local tax deduction limits have changed
State and local income tax deductions are now limited to $10,000.
“If your state has an income tax, you’re easily going to cross that $10,000 threshold in taxes you pay. If you’re not in an income tax state, then your property tax and your sales tax are extremely high. Either way you go at it, they’ll limit you to a $10,000 deduction for those items,” Callahan explains.
7. You can be creative in your charitable donations
Callahan points out that charitable donations are still your best tax deductions, and you have several options for contributing.
“Some physicians have appreciated securities, so a stock has gone up in value. If you’re in that situation you might want to consider gifting that stock instead of cash. When you donate cash, you have to generate that cash as part of your budget. It’s better to donate the appreciated stock,” he explains.
Some physicians may want to consider the option of sending IRA distributions directly to a charity. “If you’re 70.5 and must take money out of your plan based on IRS rules, you can take the amount you’re receiving and send it directly to a qualified charity. Contributions are generally limited to 60% of your income, but if you send that money directly to a qualified charity, that never comes into play. If it’s a distribution from a 401(k) plan, it must go first to an IRA and then to the charity.” Callahan says.
He offers the example of a $100,000 IRA distribution where normally you’d be limited to $60,000 of contribution, or 60% of your income.
“If you send that money directly from your IRA to the charity, you could in effect send all of that $100,000. The income limitations come out of the equation if you send it directly to the charity,” he says. “If somebody is bumping up against their percentage of income limitation but still wants to do more, that’s an effective vehicle to do that. It’s called a qualified charitable deduction.”
8. An experienced tax advisor can help you maximize your savings
While you can file taxes on your own, Callahan recommends finding an advisor experienced with physician taxes to ensure you’re filing correctly and receiving all of your entitled deductions.
“A former office manager I worked with had loaned a company $40,000 and borrowed money on his equity line to do so. I asked if he’d ever gotten the money he’d loaned back, and he told me they went out of business without repaying him,” Callahan recalls. “I said, ‘You do know that’s a deduction, right?’ He said, ‘No, I didn’t.’ In a two-minute conversation, he picked up a $40,000 offset against his ordinary income.”
Callahan says it really does pay to speak with a good tax advisor before filing your taxes.
“You should be looking at your financial needs and tax implications as a holistic picture. A tax advisor should have a conversation with you, not just take your information and put it on a return,” he says.
Whether you’ve filed your taxes on your own for years or are simply looking for advice before heading to a certified public accountant, we hope this physician tax guide gives you more insights for the 2019 tax season.