High-earning medical professionals eventually learn a hard lesson:
The more they earn, the more they pay in income taxes.
And since physicians and other medical professionals rank among some of the highest-paid individuals in the United States, they need tax planning and investment strategies that will protect their assets and build real generational wealth they can pass to their children and grandchildren.
Hard-working doctors and other healthcare pros can take advantage of all the tax deductions, tax credits and tax exemptions that Congress and the Internal Revenue Service (IRS) make possible to reduce their taxable income.
But there are also lesser-known strategies which, when leveraged correctly, can reduce your tax burden and deliver a sound financial plan that gives you what we call “time freedom.”
These include:
✅️ Setting up an S-Corporation and a Solo 401(K) ✅️ Setting up a 501(C)3 Non-Profit Private Foundation and investing in cash flow deals ✅️ Investing your tax savings in Short-Term Rentals or syndication deals that offer bonus depreciation |
Here I’ll introduce some of the tax, investing and legal strategies our medical professional clients use.
As a busy healthcare professional, you work hard to provide quality care to your patients, juggle administrative work, and balance your work with life and demands at home.
That’s why working to optimize your tax situation is probably not at the top of your priorities.
Deep down, however, you know that tax planning should be a key component of your wealth management strategy.
If you are employed by a hospital, a private practice, or a government healthcare department, you’re probably a W2 worker. W2 employees are taxed on gross income first, meaning the IRS takes their cut before you receive your paycheck.
But if you’re a business owner or investor (with the correct structures in place), you can pay the IRS quarterly on your net income after expenses.
To put it another way, when investing through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes.
If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs.
This simply isn’t true.
That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about. It's important to understand there are different tiers of CPAs:
Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies.
The right CPA helps our medical professional clients achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.
If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.
When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes, even if you're a medical professional with zero investment experience. And that savings can be invested in equally creative, equally overlooked ways.
Such as …
The median wage for medical professionals (everything from dental hygienists, physicians and surgeons, to registered nurses) was $80,820 in 2023—much higher than the median annual wage (for all occupations) of $48,060. (Source)
However, at a certain point these high-salary professionals realize they need to take steps to shelter their income from overtaxation. And while saving money on tax is important, but the real magic happens once our medical professionals start re-investing those tax savings into tax advantaged deals.
These include:
A Private Foundation is a self-funded nonprofit organization that shelters income, allowing you to bypass traditional capital gains tax and take advantage of a much lower excise tax rate.
When using the Private Foundation for income sheltering and high-performance investments, the compounding effect can lead to much better returns than traditional investing.
The Private Foundation can even replace your W2 income with a director’s salary for managing the Foundation.
Bonus depreciation is a tax incentive designed to stimulate business investment by allowing investors to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability.
Medical professionals can claim accelerated bonus depreciation as a limited partner when investing passively into a real estate syndication. As a limited partner (LP) passive investor, you get a share of the returns based on how much you invest.
Similarly, you get a share of the tax benefits as well, as documented by the Schedule K-1 you would receive each year. The K-1 shows your income for a particular asset. In many cases, particularly in the first year of the investment, that K-1 can show a loss instead of an income.
The magic of the K-1 is that it includes accelerated and bonus depreciation. In other words, even while you’re receiving cash flow distributions, the K-1 can show a paper loss, which in most cases means you can defer or reduce taxes owed on the cash flow you’ve received.
These deals don't offer tax benefits, but can generate so much income that they outperform potential tax savings. Investments in this category include things like algorithmic trading. You can invest in cash flow deals through a tax shelter, such as your Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.
Estate planning is something everybody needs to do at some point. Lawsuits can happen to anyone, and high-net-worth medical professionals are especially at risk. All it takes is a car accident, an injury on your property, a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to force you to settle out of court.
The way you protect yourself is to set up asset protection. Holding companies can shield anything of value, such as real estate properties and investments. Operating companies can be established for business activities like collecting rent, paying contractors, and signing contracts.
Trusts are a way to guarantee anonymity across all of your entities and assets. They allow you to look like a beggar on paper and transfer your assets anonymously to your heirs, taking the target off your back.
Here are a couple of other legal structures we help our clients set up:
Independent doctors or physicians can create S Corporations to handle their taxes. Unlike regular corporations (where profits get taxed twice), S corporations pass their income, losses, and deductions directly to their owners. An S Corp, or S corporation, is a “pass-through” entity, which means that the profits and losses of the business are passed through to the individual owners and are taxed at the owners’ personal income tax rates.
Instead of paying corporate taxes, each owner reports their share of the business’s money on their personal tax returns, paying taxes at their individual rates.
What about retirement?
If you are a medical practitioner who works as an independent contractor, The Solo 401(k) is an ideal retirement plan because it lowers your taxable income and enables you to build up retirement funds through high contribution limits and almost limitless investment capability.
The Solo 401(k) is a qualified retirement plan, just like hospital-sponsored plans. You can contribute to the plan on a tax-deferred basis. You can also contribute Roth funds to the plan and invest tax-free. With some of the highest contribution limits, the Solo 401(K) lets medical professionals lower their taxable income and grow their retirement quickly.
Even medical professionals with no investments need entity structuring. Here is what a full legal diagram could look like, which includes asset protection structures, estate planning, and tax shelters.
As you accelerate your tax and investing approach, it's important to add in measures to prevent a catastrophic reset. We can show you how to save $20k or more in taxes during the first year, but you will want to set up additional tax and legal structures over time to continue to reduce your taxes down to the 0-10% range.
Without entities, this would be impossible.
It's also important to protect yourself from catastrophic events, no matter how unlikely, so that you don't have any major setbacks on your journey to time and financial freedom.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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