Tax and Financial Guidance -- 5 Smart, Tax-Advantaged Strategies Every Physician Can Use to Lower Their Taxes and Build Lasting Financial Security!

As a high-income physician, you’ve worked hard to build a successful career, but building true financial security requires more than just earning a high salary. Utilizing some timely tax and financial guidance can be very beneficial to most physicians who find that a whole lot of their income ends up going to the tax man.

You'll need to be strategic with your income and investments, leveraging tax-advantaged strategies to reduce your tax burden and grow your wealth. In this article, I'll cover five effective ways you may be able to save money on your tax bills and alos help secure your financial future by mitigating the deleterious effects of taxes on your financial security.

While this article provides a high level overview and introduction to the general concepts of ways in which you may be able to structure things to help save on taxes, I also think if you pay a lot in taxes it can be extremely beneficial to meet with a tax and financial advisor (ideally one who is well versed in the unique tax and legal circumstances that apply to physicians) who can help you decide which strategies (including those not listed on this list) might benefit you and who can educate you on how to executve and carry out these strategies all the way from implentation to proper tax reporting of these strategies. This article is educational in nature and it should not be taken as a substitute for doing your own research and discussing these issues with your own licensed advisor. And just to be clear, while I do have a license to prepare taxes for clients and provide advice on securities to my customers, as of April 2025 when this article is being written, unless we have a signed an written advisory or tax engagement agreement, you are not my client and I am not your tax or financial advisor. Additionally while I believe the information is accurate as of the time it was written on 4/2/25, I don't guarantee its accuracy and you should do your own research or talk to your own licensed advisor to independently verify this information or before acting on any information you read about in this article.

1) Maximize Contributions to Salaries (401(k) and Backdoor Roth IRA)

Your salary is likely your largest income source, and one of the easiest ways to save on taxes is to take full advantage of retirement accounts like the 401(k) and Backdoor Roth IRA.

• 401(k) Contributions: As a physician, contributing to a 401(k) allows you to lower your taxable income for the year. The contribution limit for 2025 is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and above. Contributions are tax-deferred, meaning you won’t pay taxes on them until retirement, or Roth which means that you pay income tax on the contribution but get to withdraw the investments and gains tax free in retirement.

• Backdoor Roth IRA: Physicians earning above the Roth IRA income limits can still benefit from a Backdoor Roth IRA. This strategy involves contributing up to $7,000 to a traditional IRA (or $8,000 if you are over 50) and then converting those funds to a Roth IRA. The benefit of this strategy is that the Roth IRA grows tax-free, and you can withdraw funds in retirement without paying any taxes, a huge win for your long-term financial security.  But be careful about your tax reporting because if you don’t fill out your tax forms correctly you can lose the advantages of the tax maneuver.  Most tax preparers in my experience, including about 80% of CPAs from what I’ve seen aren’t that familiar with this maneuver and often mess up the tax reporting so you may want your financial advisor to look over your taxes before filing them in order to catch this error (these days many financial advisors who work with physicians as their primary clients can do taxes and increasingly they are doing their clients taxes for them). 

  
  

By maximizing these contributions, you can reduce your current taxable income and grow your wealth with significant tax advantages. These can be effective ways for physicians to save on taxes.

2) Consider Utilizing Tax-Efficient Qualified Dividends Instead of Ordinary Income

Dividend income can be an attractive source of passive income for high-income physicians, but it's important to understand the tax implications. Qualified dividends—those paid by U.S. corporations—are taxed at a lower rate than ordinary income, like bank or bond interest or non-US company dividends.  High yield savings accounts can seem like attractive but remember they are taxes at ordinary income rates if you make more than $48k as a single person or $97k as a couple, you’ll be paying tax at the 22% marginal tax rate versus 15% if the money is earning tax efficient qualified dividends on US companies.

For lower income earners like residents, they may pay no tax on qualified dividends if they are married and their household income is under $97k.  For high-income earners, this difference can add up quickly.

Below is a table which shows qualified dividends and ordinary income tax rates for each tax bracket.  You’ll want to compare the left and right columns for the same level of income.

Tax Rate	Qualified Dividend Rates (2025)	Ordinary Income Rates (2025)
0%	Up to $48,475 (Single) / Up to $96,950 (Married Joint)	X
10%	X	$11,925 or less (Single) / $23,850 or less (Married Joint)
12%	X	Over $11,925 (Single) / Over $23,850 (Married Joint)
15%	$48,475 to $626,350 (Single) / $96,950 to $626,350 (Married Joint)	X
20%	More than $626,350 (Single) / More than $626,350 (Married Joint)	X
22%	X	Over $48,475 (Single) / Over $96,950 (Married Joint)
24%	X	Over $103,350 (Single) / Over $206,700 (Married Joint)
32%	X	Over $197,300 (Single) / Over $394,600 (Married Joint)
35%	X	Over $250,525 (Single) / Over $501,050 (Married Joint)
37%	X	Over $626,350 (Single) / Over $751,600 (Married Joint)

To build financial security, consider investing in dividend-paying stocks or exchange-traded funds (ETFs) that distribute qualified dividends. These can provide regular income streams while also allowing you to take advantage of more favorable tax treatment.

3) Understand the benefits of earning money in capital gains vs ordinary income

One of the most effective tax-saving strategies for high-income earners, including physicians, is to focus on earning capital gains instead of ordinary income.

• Capital gains are profits from the sale of assets like stocks, bonds, and real estate, and they’re taxed at lower rates than ordinary income. For example, long-term capital gains (on assets held for more than one year) are taxed at rates of 0%, 15%, or 20%, depending on your taxable income, while ordinary income (like salary or interest) can be taxed as high as 37%.

  
  

• The Capital gains rates match the qualified dividend rates above so you can see the side by side of how much more income you can earn in capital gains while keeping the same great rate.

  
  

For high-income physicians, this difference can be significant. By holding investments for the long term, you can qualify for the lower capital gains tax rates, which can help you keep more of your money. To build wealth efficiently, focus on investments that allow for long-term growth, like stocks or real estate, to take advantage of capital gains tax treatment.

4) Consider Earning Money as a Business Owner, Not an Employee

Physicians who work as independent contractors or business owners often enjoy more tax advantages compared to salaried employees. By setting up your own practice or side business, you can take advantage of business deductions that reduce your taxable income.

• Business Expenses: As a business owner, you may be able to deduct a wide range of expenses related to running your practice, such as some home office expenses, equipment, continuing education costs and sometimes transportation costs for business related travel (such as for a surgeon who sees patients at multiple locations in a day).

  
  

• Superior Retirement Plans: Many employers have to be concerned with their 401(k) or 403(b) plan getting “top-heavy” if they have too many non-physician employees in the group.  This means that often the matches are lower than the law actually permits.  Self employed physicians can set up their own retirement plans – fully utilizing the best tax benefits the IRS provides to any business owner as well as the best investments available.  You don’t have to use an off the shelf retirement plan – a physician specific financial advisor can often help you get a retirement plan that is customized to your needs and far superior to what your tax preparer or CPA might recommend since CPAs tend to not know as much about the investment vendors as financial advisors do (just like financial advisors don’t know as much about payroll providers as CPA do – some knowledge is just outside what these professionals come across each day).

  
  

Running a business also offers more flexibility with how you structure your income, giving you opportunities to optimize your tax situation and build wealth more efficiently.

The big pitfall here is always the S Corp.  You should understand that the Social Security system and the retirement plan system are like hand and glove and if you reduce your “wages” to too low of a level to save on payroll (Social Security and Medicare) taxes you actually going to reduce your social security payouts and possible the payouts to your spouse and children because only wages count towards your 35 highest years of average earnings for Social Security and S Corporation dividends don’t count towards this number.  So if you go too low on your “wages” for your self employed or contractor job to save on Social Security taxes you may be giving up the same amount or more in Social Security benefits down the road in exchange for that tax choice.

5) Avoid Excessive Lifestyle Inflation (Cars, Homes, Etc.)

It’s easy to fall into the trap of lifestyle inflation—the tendency to increase your spending as your income grows. While it’s tempting to upgrade your car, home, or vacation plans as your earnings rise, this behavior can seriously hinder your ability to save and build long-term wealth.

In fact, studies that we’ve seen have shown that about one-third of people making over $200,000 per year report that they can’t save any money due to their lifestyle inflation. If you’re in this situation, it’s important to reassess your spending habits.

Here are some tips to avoid lifestyle inflation and increase savings:

• Live Slightly Below Your Means: Continue to live as you did before your salary increased. This allows you to make sure you make progress towards your big goals and that you can leave medicine one day if you want.

  
  

• Be Mindful of Major Purchases: Instead of buying the latest luxury car or upgrading to an excessively larger home, think long-term and prioritize investments that will grow your wealth.  This doesn’t mean that you shouldn’t reward yourself for your hard work – it is just that there are certain ratios of spending to income that will keep you comfortable and banks will generally loan you more money than those ratios so you can end up house poor if you rely solely on the bank to help you be financially disciplined.

  
  

• Seek Professional Help: If you’re struggling with managing your finances, consider working with a financial advisor who can help you get organized and create a plan to save more effectively.  Financial Advisors deal with people who get too busy, too tired, or just too burnt out to pay attention to their money and many financial advisors like us are highly experienced and effective at helping you get control of your finances and move forward towards your goals.

  
  

By maintaining discipline around taxes and spending, you can ensure that your high income translates into long-term financial security rather than temporary lifestyle upgrades that disappear when our income often declines after we stop working.