If you are frustrated by your high tax bill, you are not alone. I have spoken with many doctors who experience sticker shock when they see their total annual tax liability after completing residency. Stories in the media, such as The Atlantic’s recent study on billionaire taxes, about how rich people avoid taxes only fan the flames. It is no surprise, then, that one of the most common financial questions physicians ask is why their tax burden feels so high, and whether anything can be done about it.
The Internal Revenue Code is at times irrational and vague, and if nothing else, it is very complicated. However, if you understand it, patterns emerge, and many of them are unfavorable to physicians. Specifically:
- Most physicians are employed: Meaning unreimbursed work-related expenses are nondeductible and benefit options are limited to what an employer offers.
- Physicians rely on labor for their income: While other professions, and the very wealthy, receive greater proportions of income from capital.
- Heavy payroll taxes: Physicians must pay FICA or self-employment tax on essentially all of their earned income.
- High marginal tax rates: Physicians are generally high earners, which results in high marginal tax rates and elimination of certain phaseouts and deductions.
- Limited control over income timing: Physicians, especially employed physicians, have limited ability to control their income and the timing of it. You cannot defer income at will or stockpile untaxed labor you perform.
- The pressure of student debt: Physicians often have mountains of student debt, creating immense pressure to earn a high income over a shorter working career. This high income is taxed heavily. Scaling back is financially and logistically difficult.
- A lack of bandwidth: Physicians are very busy with limited free time, and they practice in an equally, if not more, Kafkaesque system: U.S. health care. This leaves limited bandwidth to engage with yet another complex system like the tax code.
Know the enemy and know yourself
At first glance, the deck seems stacked against you. However, you may have more control than you realize. As Sun Tzu observed in “The Art of War,” “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”
The key to using the system to your advantage, legally and ethically, is to first understand it. This may start with a shift in mindset. Instead of viewing your tax bill with anger and a feeling of helplessness, it can be more productive to see it as a problem to understand and solve. As it starts to make sense, identify what the IRS favors and decide which incentives are worth accepting or forgoing.
Leveraging self-employment and benefits
For example, self-employed physicians often have a greater ability to deduct legitimate business expenses and design benefit structures that fit their needs, rather than relying on employer reimbursement policies. In those settings, physicians also gain far more autonomy over the amount and type of benefits they offer. You are no longer limited to the benefit structures chosen by someone else.
If they are not employed, some physicians may choose business entity structures that can reduce the portion of income exposed to payroll or self-employment taxes.
Navigating progressive tax brackets
It is also important to understand that our tax system is progressive, which means that your marginal tax rate increases along with your income. Annual retirement contributions have a ceiling, no matter how much you earn. In many cases, additional hours worked are taxed less efficiently than most physicians realize.
Understanding how income interacts with deductions and credits can also influence financial decisions. In some cases, changes in income timing or structure may affect eligibility for benefits that would otherwise be unavailable.
Geography and diversification
Geography matters as well. Comparing compensation across jobs or locations without accounting for taxes can be misleading. After-tax income ultimately determines financial flexibility.
Finally, some physicians gradually diversify their income beyond purely clinical labor. This does not require abandoning patient care, but it can mean exploring ownership or capital-based opportunities that are taxed differently than labor alone.
The tax code was not designed with physicians in mind. But understanding how it works, and how it does not, allows physicians to engage with it more deliberately, rather than feeling trapped by it.
Logan Foltz is a physician and tax specialist.
