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Saving Money on Taxes After a Low Income Year

a woman doctor sitting and doing taxes at her desk Popov

**Editor’s Note: The content within this post is available for informational purposes only. It is not intended to substitute for obtaining tax or financial advice from a professional accountant.**


Once I completed residency and received board certification, it didn’t occur to me that I would ever have my income drop, or lose a job, or worry about covering my expenses (work or family) or wonder when I would next receive a paycheck.  How absurd – a physician plan for a drop in income? Why? I was very fortunate that the pandemic did not affect my income. For many people, however, including physicians, PAs, and NPs, 2020 was a lean-income year. The COVID-19 pandemic, with businesses lost, layoffs, difficulty finding a new job, and the general economic downturn, has taken its toll on finances. Many physicians and APPs have been overwhelmed by the stress of treating patients, have become ill themselves or were exposed to the virus, leading to time off work to quarantine. Others lost work time taking care of their children at home, some schooled, some unschooled.

Even with careful tax planning for physicians, some of the money-sparing methods may not be helpful for 2020 taxes. Let’s hope 2021 is a better-income year. These tips, however, could save you thousands, should another year have similar circumstances. The general idea is to take as much income as possible while in a lower tax bracket and defer expenses until a year when your income and tax bracket will be higher.


Accelerate income into the lean year.

Contact your patients, insurance companies, and anyone else who owes you money. Encourage them to pay what they owe before the year’s end.

If the business is a professional corporation, there are other strategies to consider. Most physician corporations (PC) want to zero out the books for the year so that the income matches the expenses, eliminating corporate tax. If the PC will receive a large payment for services early next year, consider paying the money out of the corporation in the lean year when the tax bracket will be lower. This may result in a net operating loss (NOL) for the PC, so no corporate taxes will be due.


Defer expenses to the following year

In most years, accelerating deductions will lower taxable income. In a low-income year, the reverse is true, because the goal is to move income to a lower tax bracket. Then use the deductions in another year at a higher tax bracket.

If you don’t need it, don’t buy it. If you do need to buy a deductible item such as a computer or piece of medical equipment for your business, defer the purchase until the start of next year.

If you are buying a business asset (computer, medical equipment, etc.) that you want to buy this year (getting a discount if you buy it before the year ends), buy it but don’t put it into use until the new year. A business asset can only be deducted in the year it is put into service.


Take capital gains in the lean year

If you are in a low tax bracket, consider taking any capital gains you have on stocks, bonds, real estate, etc. The strategy is to balance capital gains with capital losses. Defer selling the losing assets until a year when the losses will be more valuable at a higher tax rate. Take the gains now at the lower tax rate.


Review relief grants: You can still do this for 2020 taxes

Many physicians received money from the Payroll Protection Program (PPP) or the Provider Relief Fund (PRF) authorized by the CARES act due to the COVID pandemic. The PPP money is in part or entirely tax-free if you seek forgiveness, so it does not in and of itself increase your taxable income for the year, possibly keeping you in a lower tax bracket. The PRF money is tax-free. It will not increase your taxable income.


Lastly, the three best things you can do

  1. Get professional tax help.
  2. Get professional tax help.
  3. Get professional tax help.
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About Faith A. Coleman, MD

Dr. Coleman is a graduate of the University of New Mexico School of Medicine, and holds a BA in journalism from UNM. She completed her family practice residency at Wm. Beaumont Hospital, Troy and Royal Oak, MI, consistently ranked among the United States Top 100 Hospitals by US News and World Report. Her experience includes faculty appointments to a family practice residency and three medical schools, as well as Director of Women's and Children's Health Promotion Programs with the NE Texas Public Health District.

Dr. Coleman is the Expert on Gifted Children for the New York Times, parenting writer for Demand Media Studios, as well as health and medical writer for several online information services. She writes professional management material for health care providers and about the personal experience of being a physician. Faith treasures most the role of mother. Her passions include the well-being and education of children and families.

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