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Top 5 Ways to Lower Your Tax Bill

Tax Day is just around the corner. Be sure to file your tax return (or file for an extension) before it’s too late! If you’re like me, this was taken care of weeks ago. If not, you (or your CPA) have some work to do. Have fun with that!

Did you know that America’s retailers and restaurants now “celebrate” the date with weird deals, including free document shredding, $10.40 meals and bagel bundles, and free cookies? I’m a sucker for a good deal, and I’d never turn down a free cookie, but I won’t be out chasing deals on Tax Day.

Our consumerist society will use just about any excuse to turn a holiday or paperwork deadline into a retail event. A few weeks ago, there were St. Patrick’s Day sales. Before that, we were enticed to Leap into Savings on Leap Day. And of course, all the tax refund “deals”. Retailers aren’t happy unless you’ve spent that refund before it hits your bank account. End Rant.


The Top 5 legal ways to reduce taxable income.


1. Tax deferred retirement savings


If you, like most physicians, have a high marginal tax rate, you are generally better off deferring as much tax as possible by taking advantage of traditional tax-deferred retirement plans. Employees may have access to a 401(k), 403(b) or 401(a), and perhaps a 457(b). Contractors and the self-employed might use a SEP-IRA, SIMPLE IRA, solo 401(k), or a defined benefit plan.

If you are in a position to have a high deductible health plan, an HSA is another tax deferral / avoidance strategy you should utilize. Individuals can contribute $3,350, families $6,750, with an additional $1000 if age 55 or up.

Take advantage of these. Max ’em out if you can. You’ll lower your tax rate now, and there’s a better than decent chance you will find yourself in a lower tax bracket when you withdraw the money, particularly if you are planning to retire early.

In certain instances, you may have the option of making Roth contributions to some of these retirement accounts, foregoing the tax deduction. While some people like to do this, and it could be beneficial under certain circumstances, I’m not a fan. I make Backdoor Roth contributions for my wife and I, but my 401(k) and 457(b) contributions are 100% traditional and tax-deferred.

How much can a physician save on the tax bill by maxing out his available tax deferred retirement space? If we look at a single physician with a $300,000 salary, plugging numbers into TurboTax TaxCaster gives me a federal income tax of $79,665, with the standard deduction and exemptions. If she does what I do, maxing out a 401(k), 457(b), and HSA, she will deduct $18,000 + $18,000 + $3,350 = $39,350, dropping taxable wages from $300,000 to $260,650. Federal Income Tax drops to $66,247. At a 33% marginal tax rate, she saves $13,418 on her tax bill this year.



If she doesn’t live in one of the seven states without a state income tax, she’ll see additional savings on the state bill. With a 5% state tax, she’d save about another $2,000. In a high tax state, the additional savings can exceed $4,000.


look familiar?
look familiar?



2. Be Self-Employed.


The self-employed can take many deductions, whereas an employee is much more limited. Some physicians have the benefit of being both an employee and an independent contractor. One such physician is Dr. Jim Dahle who practices emergency medicine and has an influential personal finance blog, and wrote a book, and speaks at physician meetings, and canyoneers, and has 4 kids, and… how does he do it all?!? Do yourself a favor and take a look at his 2016 tax report if you haven’t already.

There are some downsides to being self-employed too, of course. You are responsible for acquiring your own benefits package, and you will pay both the employer and employee portion of social security and medicare taxes.


3. Give to Charity.


I think we all know that giving to charity is a good way to lower the tax bill. Of course, giving to charity doesn’t build wealth, but giving can be done in ways that give the most benefit with the least cost to you.

When you give to charity and have a marginal tax rate of 40%, you’re saying “I’d rather give this charity $100 than give $40 to the government.” I make that choice quite often, like when I donated $100,000 in 2016, and now have a balance of $250,000 in donor advised funds, all donated when I was in a higher tax bracket than I may ever be again.

Of course, if you don’t itemize deductions, you won’t see any benefit, so the sum of your itemized deductions (which includes charitable giving) must exceed the standard deduction ($12,000 for singles, $24,000 for married filing jointly).

Donating assets (stocks, mutual funds, property) directly to a charitable organization, or indirectly via a donor advised fund, has the additional benefit of eliminating capital gains taxes. You don’t pay them, the charity doesn’t pay them. They just disappear, much like my boys when it’s time to brush teeth.


child toothbrush
a lonely toothbrush


Also, the Pease Provision, which was interpreted by some as a reason to give less, although for most, it was about a 1% surtax disguised as a limit on itemized deduction for high earners.


4. Have a Family.


It’s true that combining two incomes can lead to a “marriage penalty“, a situation that arises when the total tax bill of a married couple exceeds the sum of the tax bills they would have paid if they had filed separately. However, when most or all of the income is earned by one partner, adding a spouse lowers your total tax.

Adding children can lower the tax bill further with a $4000 exemption for each child. This phases out with income exceeding $309,900 for married couples. There is also a $1000 tax credit for each child, but unfortunately that phases out much lower, at $110,000 for married couples. Most physician families won’t get to enjoy that juicy credit of a grand per child.

Visiting TurboTax TaxCaster again, we’ll compare a single man with a $300,000 salary with his contemporary, who has the same salary and supports a wife and 4 kids.

If these doctors haven’t read my first way to reduce taxes and don’t max out their available tax-deferred space, the single doc owes $79,665 in taxes while the Married with Children doc owes $66,424, a savings of $13,241. Love pays.


5. Work Less.


Like the last two ways to reduce your tax bill, this one isn’t going to make you any richer, but working and earning less will certainly reduce your tax bill substantially. As we learned when Dr. A chose to work part time, her salary was cut in half, but her federal income tax dropped by more than 80%! One more visit to Turbotax TaxCaster shows Dr. A’s federal income tax bill on a $300,000 salary equals $49,391 (married with 2 children, $12,000 in mortgage interest, $5000 in donations, $42,750 in tax-deferred retirement and HSA contributions). Dropping her income to $150,000 lowers her federal income tax to $8,219. 

Half the work, half the income, less than 20% the tax. To be fair, I should point out that she won’t see much, if any savings in social security tax, property tax, sales tax, etc… but still, the federal (and state) income taxes are drastically lower, demonstrating just how progressive a tax it is.




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Which of these do you do? What’s your #6? Sound off in the comment box below. And don’t forget to pay your taxes!


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23 thoughts on “Top 5 Ways to Lower Your Tax Bill”

  1. Hi, Anon,
    PoF asked me to respond to the tax questions in your post. He’s already done a great job, but I’ll see what I can add.

    The reason for setting up an LLC or corporation is primarily for asset protection, not tax savings. Although there are ways you can save taxes with a S-corp, you will also be required to set up payroll filing for yourself and the extra administration and cost, along with the cost of filing an S-corp tax return can really eat into the savings. Depending upon your income level and goals, I’d probably recommend a SMPLLC (Single Member PLLC) for you. You might be interested in this article comparing the benefits of the different business choices I wrote for WCI a couple of months ago:

    There should be a rather long list of deductible expenses associated with your business. And, of course, you’ll definitely want to set up and fund a SOLO-401k. This is a discussion to have in depth with your CPA. It sounds as if (s)he may not have given it much thought or perhaps just gave you a brief answer on a phone call. I’d revisit the subject. However, even if you do not incorporate or form a SMPLLC, you’ll still be able to deduct your business expenses as a sole proprietor.

    Working in another state gives you “nexus” or a legal “footprint” in the state. Because TX does not have an income tax code, you will be required to pay taxes in the states in which you have nexus. If, for example, you lived in a state with income taxes, you would most likely calculate and pay taxes to the state(s) where you have nexus and then receive a tax credit in your home state. To be able to avoid state income taxes, you must both live and work in a state with no income tax code, but they do not have to be the same state.

    If you have further questions, I’ll be happy to help. ~ Johanna

    • Good evening Dr PoF and Ms Johanna
      I really apologize for my late response. I’m only just seeing your kind reply to my original question (as this is my back up email that I don’t check often especially since I’m studying for the boards)
      May I contact you in a week ( I’ll be done with my exams by then )
      Thank you Dr PoF for asking for me Johanna’s input.
      Enjoy your week.

    • Good evening Ms Johanna
      Thanks for your input.
      I do have a lot of questions however most importantly do you accept remote clients and how may i set up a phone appointment so we may discuss my financial goals (long and short term) and your remuneration for your services. I really need a cpa who understands coz I’ll be working in 2 different states both with state taxes whilst living in Texas as a single person. Those taxes will be heart breaking.
      I look forward to hearing from you.

      • Click on her picture in the right sidebar and that should take you to her website, which should have all the contact information you need.

      • Thanks for your inquiry, eadfan – Most of our clients are remote (almost all doctors are) and I would enjoy the opportunity to chat with you. PoF directed you to my website on the sidebar and I hope you’ll be able to take a look around to find out if what we do may be what you are looking for. We have several doctor clients in Texas and are quite familiar with multi-state taxation. You can schedule a free initial consult at Cheers, Johanna

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. Good afternoon Dr PoF
    How are you?
    I do have a few questions that must appear really silly.
    So I’ve started the locum tenens job, relocated from the east coast to Texas. However my locums tenens position is NOT in Texas.
    I’m also looking for a second position in another state altogether.
    I didn’t known I was going to pay state tax in both these states despite not residing in either of them.
    The accountant I spoke with didn’t think a c-Corp would help my situation since there’s little I can truthfully deduct. The agency pays for flights and hotels.
    All I can deduct is a small stipend for my meals and work clothes, i guess.

    2) should I pay liability insurance? The agency pays liability for the days I work. Should I get liability for extra protection?

    3) this question may be hard for you to answer since you most likely have a family health insurance plan: I recently purchased a limited health care insurance plan for myself. I didn’t get a full plan (I think that’s what it’s called ) because I’m single, healthy and not on prescription meds.
    I hear that folks on these limited health plans have to pay extra taxes at the end of the year. I was advised to call for more info but the lady who picked the phone wasn’t knowledgeable about this.

    4) what do you think about buying a home with cash within 1-2 years post residency.
    I remember your post stating that dream homes cam and should wait.
    I’m the poster who mentioned anxiety about mortgage and wanting to purchase a little place I can call mine with cash. I’m frugal, have no dependents and would like a home my aging parents (they’ll be mad to hear me call the that; 65 and 62) can live in should they decide to join me semi-permanently from Nigeria.i don’t want to worry about where they can live comfortably not lavishly. I can live anywhere and hustle but I want them in comfort.
    This will be deferring home retirement savings for 1 or 2 years but I’m thinking at least we’ll have a home.
    At this point not sure if I want to apply for surgery residency again afterall. Lol

    Thanks, sorry for the epistle.

    • Hello and thank you for the questions. I do remember you from before. I’ll do my best to address those that I feel qualified to answer.

      Yes, you will owe taxes in the states that you worked that have a state income tax.

      It can be worthwhile to have an S-corp (not C-corp) not because you’ll have a lot of expenses to offset income, but because you can take a portion of your earnings as distribution rather than salary, which can have favorable tax consequences.

      In addition to work clothes and meals, you can deduct other expenses not provided by the locums company. That may include cell phone, internet service, accounting fees, computer and software used for business purposes, etc…

      I’m no malpractice expert, but make sure you are covered, including tail coverage. Insurance provided by the locums companies seemed sufficient every time I used them, but again, I’m no expert.

      As far as health insurance, if the “limited” plan is a high deductible health plan with HSA, you should put in the maximum to the HSA. For a single person, that’s $3,350 that you can deduct, lowering your taxable income by that amount.

      Buying a home is a very personal decision. I bought my most recent home with cash, but that was after I had significant retirement assets. If I were in your shoes and confident that I would be in the same place for years to come, I would probably opt for a 15-year mortgage. You can always pay it off more aggressively. Tying up that much capital if you don’t have much retirement savings might not be the best bet. But that’s entirely up to you.


  4. Good evening PoF
    Thanks for your blog and this interesting topic.
    I have questions actually not comments. I know you are a busy man but will appreciate your opinion greatly.
    I’m finishing residency in 27 days, IM. I’m not doing fellowship for now.
    I do have locum tenens lined up.

    I was advised by a senior to open an S or C corp or an LLC in order to reduce my taxes which will be exceedingly high. I’m single
    I’ve be doing some research but sadly I’m not financially savvy.

    Do I need to be incorporated in order to open a 401k?
    Do you advise a fresh physician doing locum to be incorporated?

    When you write tax deferred retirement plans, does this mean does investments will be taxed eventually, that is the money you pay into 401K etc is tax deferred not tax deductible?
    I’m told that either the s/c corp will involve having payroll, opening a business account. I will hardly be home during this locum and in all honestly can’t claim to have a business. I don’t want IRS issues. How do these corporations help one safe and just what can be claimed without getting into IRS problems?

    My goal is to be able to pay cash for a small house within a year, I’m a foreigner, I have no student loans, and I’m unused to the concept of mortgage. It’s a beautiful system I’m sure. But I’d like to do like I’d do in my country and but what I can afford.
    My goal is one year because I plan to apply for another residency so will return to a low salary after a year. This is why having a mortgage isn’t a good idea either for me.

    Thanks sir. I do have more questions.

    • Happy to try to help, Ead. Congrats on your upcoming graduation! I’m exactly 10 years removed from your situation, albeit in a different specialty.

      There are benefits to an S Corp, which is what I did when I practiced exclusively as a locums doc for several years after completing residency. C Corp is not a consideration for you. With an S Corp, you take some of your income as salary and some as a dividend. You will save on taxes this way. You will also be able to deduct more expenses to reduce taxable income. My internet friend MMM, made some fun sketches to illustrate the benefits in this post. For further information, consult with a CPA. A good one is listed in my right sidebar 🙂 You might also ask your attendings and resident colleagues for a local recommendation.

      Saving money in an account such as a solo 401(k) will be tax deductible (in the current tax year) and tax-deferred. Eventually, when you withdraw the money and its growth, you will pay taxes on the withdrawal. The assumed advantage is that you will likely be in a lower tax bracket in the future when you are no longer working, and it is better to pay taxes later than taxes now. That isn’t a guarantee, but is generally considered a good enough bet to make.

      Another residency? Not a fellowship?

      • Good afternoon PoF
        Thank you for taking the time to respond. I’m sorry for my late response, just returned from work.
        Yes, another residency because surgery was my first love, lol. But the reality of being an IMG with no surgical experience in my home country (Nigeria) was great. I mean I got 3 surgery interviews but in spite of ranking all three with the prelims ahead of IM I still didn’t match 🙁
        For the sake of professional fulfillment I wanna try and see if I’ll be favored this go around.

        Thanks for your clarification on c-corps. After my initial introduction to the topic another senior colleague told me weeks ago that it wasn’t worth the hassle and CPA fees for me to do it. But I decided to persist and find info.
        He’d advised me to religiously put aside 40% of my earnings monthly into an account and pay my taxes quarterly. I mean if a person earns $500K that’s 200k as taxes. That’s aside paying for health insurance, buying 401K. I was worried that I’d never be able to buy my tiny house within 1 year 🙁
        I was discouraged, lol. I have no problems with paying taxes but if there’s a legal way to reduce it so I can reach my goals I’d never turn it down.

        So in your opinion the way for a locus person to go is to open a c-corp.
        On the average how much do you think a single person who makes say, 600K will pay as taxes using the c-corp approach.

        I will read your friends blod and check out that CPA you mentioned.

        Lastly I worry that I can’t set a corporation up fast enough. I need to study for my boards in August and for now I have a coloroda locum to start in July.
        Can I change it for them to pay into my c-corp after it’s set up.


        • S corp is what you want. Not C corp. Congratulations on landing a surgical residency; that’s wonderful for you.

          With the volume of questions you have, you should most definitely get a CPA or other professional to help guide you through your options and the process. One of my first 2 site sponsors happens to be a CPA. It sounds like you will want to find help sooner than later, so I would not hesitate. In the meantime, start keeping track of every dollar that your earn from your locums work, and every dollar that you spend and mile that you drive related to locums work. Use a spreadsheet. Having separate accounts for the business eventually will make it easier to track, but I wouldn’t wait. Best of luck to you!


        • Oh sorry, I know you had mentioned it was one not the other. I have to repeat to myself it’s S not C.

          No I haven’t landed a surgery residency yet, I was narrating how I ended up in IM.
          I’ll apply this sept Godwilling and hope to match next March.
          Have a great weeknd.

        • Hi, Ead,

          Thought I’d expand on PoF’s great responses. You do NOT have to incorporate or form an LLC to have a SOLO-401k. You can deduct all of the same expenses as a sole proprietor. I think this article I wrote for WCI a couple of months ago will be helpful:

          Also see my below answer to Anonymous. Your CPA is vital to making the right decision and then being able to deduct all expenses that are appropriate for your situation. There are many “legal” ways to reduce your tax liability but don’t make tax savings the only priority. You should have a financial plan in place and let it be your north star.

          Incorporating for only 1 owner is fairly simple. The laws vary by state so go to your Secretary of State’s office online and read what you need to do. Or ask your CPA for guidance.

          You can find more info on the Doctor Dilemmas blog on our website at and also in the Financial Guides for Doctors we wrote for the different stages of your career. If you have more questions, just let me know.

  5. Nice list!

    We’re considering doing #5 by becoming a one-income couple or working part time. The original plan was to do that as a sort of semi-FIRE plan when we reach a 4% withdrawal rate, but I may have to do some very specific calculations to see what would happen if we started earlier…and possibly explore self-employment options…thanks for the food for thought!

    • Sounds like a good plan, Felicity. Mrs. PoF has been home with our boys, so I suppose we work part-time, on average. Her work has been more taxing that mine for the most part, though. Best of luck in your endeavors.


  6. Love the post! Here’s my dilemma I work at a place with a nongovernmental 457, I’m maxing out my 401k. Not at the point just yet where I can do both IRA for me and spouse and max out 457. Which should I do?
    11K to IRA with backdoor conversion (husband only as I have a traditional IRA with to much to convert) vs
    18,000 in nongovernmental 457. The hospital/organization I work for is pretty solid, not really worrying about them going under. But I am afraid of changing jobs and having to take that money out prior to retirement.

    • I think tax deferral is the best deal going, so if it were me, that’s where I would focus. At typical physician’s marginal tax rates, it only costs you about $11,000 to put a full $18,000 into the 457(b). I also have a non-governmental 457. When I retire, I plan to set it up to pay me $1500 to $2000 a month. There’s a good chance it could last 20 to 25 years at which point I’d be subject to RMDs from the 401(k).

      I don’t worry too much about the risk of the employer becoming insolvent, but stranger things have happened.

  7. Very good list. Any way to lower taxes I’m interested in. I currently do 1-4 and can’t wait to work less! Thanks for the post.

    • Thank you, Green Swan. There’s only so much you can do to reduce taxes on earned income, especially when it’s W-2 income.

      If I had a #6, it would be tax loss harvesting. A great way to take a paper loss and reduce your taxable income by $3,000 per year. I didn’t include it because a) it’s a Top 5 list, b) requires a sizable taxable account, and c) confuses the heck out of people.

      It can be done simply and can be quite powerful when executed properly.

  8. The benefits of number 5 are very tangible, although they are partially offset by the carrying costs of simply being a physician. These are not so much financial, but the time aspect. From my own personal experience half-time cuts down on the actually work of medicine, but the administrative meetings, committee obligations, CME, etc. make it more than a half time job. It’s a pretty tricky calculation to make and is going to be very different based on the specialty and job arrangement. Also state income tax code will be a factor. Medical specialties with more shift like scheduled lend themselves to part time better than others (anesthesiology, ER, hospitalist, radiology, etc.).

    • I hear that. When I contemplate whether or not I might want to work part time, I think about the mandatory CME, ACLS, BLS, PALS, MOC, and so on that must be maintained to continue to do the job. 1 or 2 years full time sounds better than 2 to 4 years part time, although the taxes work out better if you can spread the income out.

      In the right practice, part time could work for pretty much any specialty, but it helps not to have an ongoing relationship with patients who count on you as their personal physician.

      In small groups though, it can be tough regardless of specialty. If you’re one of 3, 4, or 5 docs sharing call, you can’t just decide not to take call anymore. The others aren’t likely willing to pick up all the slack.

  9. Great list! I only do 1 and 3, but that’s on purpose. Maybe 2, 4 & 5 down the road. #1 is #1 for a reason, that’s the easiest and most important in my mind.

    • Thank you, Fervent Finance. I do 1, 3, and 4. The blog may eventually provide some self-employment income, and I earnestly look forward to #5 eventually.


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