COVID-19 has had a huge impact on every aspect of physicians’ medical practice, incomes, and business. Although this will probably not end soon, there are some key tax strategies that can help your financial position if you take some important actions by the end of the year.
Some of the ways in which physicians were hard hit include:
- Physicians who are self-employed are facing increased costs for personal protective equipment, cleaning protocols, and new telehealth infrastructure. Many are also facing staffing shortages as employees fall to part-time work or take time off work to care for family members.
- Even physicians working for large hospitals are not isolated from the financial impact of the virus. A recent survey conducted by Medscape concluded that over 60% of physicians in the United States have experienced a decrease in income since the start of the pandemic.
- Saving and investing have been affected: Physicians may expect to see that companies in which they are invested are cutting dividends. Interest rates (CDs, bonds) are lower, and capital gains distributions are reduced this year. Overall, that makes for a fairly grim financial picture.
While taxable income this year has mostly declined, the applicable tax rates overall are low. However, federal, state, and local budget deficits have been skyrocketing owing to the demands of the pandemic. That means, in all likelihood, there will be tax increases in the coming years to cover spending. However, this year’s financial challenges could lend themselves to a unique tax planning scenario that could potentially benefit physicians as they make long-term plans for their investments.
Given these circumstances, these 12 tips can help you to lessen your tax bite this tax season. Many of these tips entail actions that you need to take before Dec. 31, 2020.
1. Coronavirus stimulus rebates
If you have significantly depressed income this year or have lost your job, you may find that you qualify for an Economic Impact Payment, a refundable tax credit on the 2020 tax return. The credit is $1,200 for individuals or $2,400 for joint filers, plus an additional $500 for each qualifying child aged 16 years or younger. You begin to phase out of the credit at an adjusted gross income (AGI) of $75,000 for individuals and $150,000 for joint filers. People who had AGI below these thresholds in 2019 already would have received the credit in advance, but those who now find themselves qualifying will receive the credit when they file their 2020 tax return. No action is needed on your part; your tax preparer will calculate whether you are eligible for the credit when filing your return.
2. Look to accelerate income at lower brackets
With reduced earned income, many physicians will find themselves in significantly lower tax brackets this year. Once you fall below $200,000 for individuals or $250,000 for joint filers, you no longer trigger two additional surcharge taxes. The first is the additional Medicare tax, which is a further 0.9% applied to earned income above those thresholds, on top of ordinary income tax brackets. The second is the Net Investment Income Tax (NIIT), which is an additional 3.8% applied to your investment income on top of capital gains tax brackets.