The COVID-19 pandemic has touched just about every aspect of our lives — and that includes income taxes. Several changes may impact your 2021 physician taxes, so it’s important to pay attention to the little details and get help from a tax expert when needed. Here are nine key things to pay attention to when filing your taxes this year.
1. Paycheck Protection Program loans
Many self-employed physicians and medical business practice owners received a second round of Paycheck Protection Program loans in 2021. “They’ll need to make sure they properly account for that on their personal return,” says Jerry Callahan, a director at Pearce, Bevill, Leesburg, and Moore, a firm that specializes in physician taxes. “In short, the Payroll Protection Program (PPP) loan forgiveness amounts are not considered taxable income.” However, you may deduct eligible expenses which were paid for with the PPP loan amounts.
2. HHS stimulus funds
Since April 2020, Health and Human Services has provided Provider Relief funds to eligible physicians and/or their practices “to in effect help them offset the negative effects of the pandemic,” he says. “Unlike the Paycheck Protection loans, these actually are considered taxable income.”
3. Deductible expenses
“One of the big items this year,” Callahan says, “is the fact that you can deduct 100% of business-related meals and entertainment in 2021.” This deduction applies to both self-employed physicians and those who are employed by a healthcare organization.
The home office deduction is also worth taking a close look at. “Some people view the home office deduction as taboo, or they’ve been told the IRS is going to break your door down if you try to take advantage of it, but that’s not necessarily the case,” he says. “The key is that the home office space must be used exclusively for business purposes.”
“You can claim a percentage of the upkeep of the home — the taxes and interest against ordinary income — if you’re not able to itemize for the portion of the home for that use. There’s another method, though, if people don’t want to keep up with the records,” he says. “You can actually use a simplified method, which is $5 a square foot for the amount of space that you’ve dedicated for that home office.”
If that space was 300 square feet, for example, then that would give you a $1,500 personal business use of a home that would be offset against ordinary income and self-employment income.
Similarly, Callahan says, “Remember that any equipment bought during the year — computers, cell phones, any kind of technology items, briefcases — if it’s only for use for work-related things, you can expense all of those items immediately when purchased.”
4. Deduction for qualified business income
If you’re self-employed in the healthcare industry, you’re most likely not eligible for a qualified business income deduction — unless your adjusted gross income falls below a certain threshold. “Don’t assume you’re in one of those industries that doesn’t allow the qualified business income deduction,” says Callahan. Instead, check your income against the limit. “It’s pretty material if you qualify,” he says, “because you’re basically deducting 20% of the profits off of taxable income.”
5. Charitable giving deduction
The standard deduction is large enough now that “a lot of folks might fall out of that threshold of being able to itemize their deductions,” Callahan says. However, an extra nuance for this year is that single filers will be allowed to deduct up to $300 for cash donations to a charity; married, joint filers can deduct up to $600.
6. Considerations for locums and self-employed physicians
Locum tenens physicians and self-employed physicians may have access to some “above the line” deductions that are 100% deductible against ordinary income, Callahan says. For example, if a physician personally pays health or dental insurance premiums, those are fully deductible. “The other one would be remembering that one half of your Social Security and Medicare tax that you’ve paid as a self-employed individual is also an ‘above the line’ deduction.”
8. Self-employed retirement plan contributions
Self-employed physicians should be mindful of retirement plan contributions. “Whether it be a solo 401(k) or an SEP type plan, make sure that you’re taking advantage of those tax deductions,” he says. “And for taxable purposes, you actually have until the due date of your tax return to make the contributions, including the extensions that you might file to make that payment — so a 2021 contribution can be made as late as October 15, 2022.”
9. Required minimum distribution on qualified plans
The IRS requires those age 72 and above to take annual distributions from their qualified retirement plan. This required minimum distribution was suspended in 2020 but was reinstated in 2021. Those who turned 72 within the 2021 calendar year have until April 15, 2022 to take that distribution without any tax penalty, Callahan says.
Tax planning for 2022
It’s not too early to begin planning for 2022 physician taxes. One big consideration, says Callahan, is the 401(k) contribution limit, which changed on January 1, 2022, for those on a payroll. The new limit is $20,500 (up from $19,500). Those age 50 and older can add a “catch-up” contribution of $6,500, bringing the total to $27,000.
“One other item to keep on our landscape is the fact that the ‘backdoor’ Roth is still going to be available to us in 2021, but that’s been eliminated as part of the new tax deals that are rolling through,” he says, so this option will likely not be available going forward.
The first of the year is always a great time to re-evaluate your financial goals and strategies. Callahan advises his clients to formulate a short- and long-term strategy, “making sure you’ve evaluated what cash needs you might have in the near term, but at the same time continuing to focus on long-term wealth accumulation and preservation. It’s a good time to re-evaluate the amount of risk you are willing to take.”
When to get tax help
Working with an experienced tax advisor helps many physicians achieve their financial goals. Callahan recommends seeking professional tax advice any time you have a structure change in your employment relationship — meaning you have become self-employed or, conversely, changed from self-employment to a W-2 earner. “That’s a good time to have a consultation with a tax expert just to make sure that there are no surprises, whether it be in the form of under- or over-paying established estimated tax payments.”
Other significant times for physicians to consult a tax advisor would be when coming out of residency, moving to another state, or reaching the age of 55 or older.
“We are always the worst at taking care of our own personal finances,” Callahan says. “Having someone that does nothing but focus on those activities is generally going to give you the best long-term result on your overall wealth accumulation.”
The information contained herein is general in nature and is subject to change. Tax information contained in this document is not intended to be used, and cannot be used, by any person as a basis for avoiding tax penalties that may be imposed by the IRS or any state. We recommend each taxpayer seek advice based on their circumstances from an independent tax advisor.