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Physician and tax specialist Logan Foltz discusses the article “Physician tax strategies: Why your tax bill is so high and how to fix it.” Logan explains why the Internal Revenue Code patterns are often unfavorable to physicians, who typically rely on clinical labor and face high marginal tax rates with limited control over income timing. He breaks down the structural reasons for sticker shock after residency, including heavy payroll taxes and the inability to deduct unreimbursed work related expenses as an employed physician. The conversation explores how understanding the tax code as a problem to be solved can empower clinicians to leverage self employment, business entity structures, and geographic considerations to improve their annual tax liability. Logan also discusses the importance of diversifying income beyond labor alone and navigating a complex U.S. health care system that leaves doctors with little bandwidth for financial planning. Learn how to stop feeling trapped by your tax bill and start engaging with the system more deliberately to secure your financial future.

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today we welcome Logan Foltz, he is a physician and a tax specialist. Today’s KevinMD article is “Physician tax strategies: why your tax bill is so high and how to fix it.” Logan, welcome to the show.

Logan Foltz: Yeah, thanks Kevin. I am glad to be on.

Kevin Pho: All right, so as I mentioned in the introduction, you are a physician and tax specialist. As a physician, how did you get interested in taxes?

Logan Foltz: So, I finished my training around 2010 and I was kind of hooked on personal finance and investing. I just gravitated towards understanding how to improve my financial position as I started my new career. I quickly learned that taxes were intertwined with pretty much all areas of personal finance, and especially financial planning and investing. So I was self-motivated. I also quickly during training started moonlighting and had some extra income. As my financial literacy increased further, I realized that there was a lot of opportunity not only to take home more of what I made but also to help my colleagues.

I just started learning more and more. Over time I realized that I had gotten all I wanted out of medicine. The day-to-day wasn’t really stimulating for me, and so I found I was spending most of my free time learning about personal finance, studying for the CFP certification, and learning more about taxes. It was hard to keep up with CME when I had all these other intellectual interests. I found that I brought more energy to that day-to-day. So eventually I was able to pivot slowly from medicine. I had a foray in financial planning, but now I am really a tax specialist. I have a tax preparation and planning firm that I started last year after I became self-employed. I mostly work with physicians, first and foremost helping them with their financial and tax literacy, but also talking to them about what they can do to lower their taxes proactively.

Kevin Pho: All right, so you write about that in your KevinMD article, “Physician tax strategies: why your tax bill is so high and how to fix it.” This is, of course, we are talking in tax time. For those that didn’t get a chance to read your article, just tell us what it is about.

Logan Foltz: I wrote my article because I talk to a lot of physicians who are fresh out of training. Their income increases dramatically, but their take-home pay, their net income, and their cash flow overall are not as comfortable as they would like. There is a variety of reasons behind that. One is that life is expensive, and often physicians have delayed gratification for so long that they understandably want to loosen the purse strings a little bit. They also have potentially student loan burdens that they have to start paying back. Those payments can go up quite a bit with income if you are on certain kinds of student loan repayment plans. Most physicians’ taxes are an afterthought during training because our incomes are low, and also because residents are W2 employees. They don’t really see how much taxes they pay unless they are looking at their pay stubs frequently.

They might have been counting on having more disposable income. They might have had certain expenses they had planned or other ideas for how they wanted to manage their money, and those just aren’t available because their tax burden goes up dramatically. Not only does it increase in terms of dollar amount, but also in percentage amount because we have a progressive tax system with graduated income tax rates. It is natural for physicians when they first see that to compare with each other. Not only do they compare with each other, but they compare with their friends, their neighbors, and they compare themselves with celebrities and rich investors. They wonder if they are getting shortchanged.

They wonder if there is something that they are doing wrong or missing. You can find all kinds of stories about exotic or convoluted tax strategies that people take advantage of. If you don’t know the basics, it is natural to ask yourself what you are missing out on and what your accountant is missing out on. I compare it to chasing after a zebra diagnosis when you can’t figure out what is going on. That is where people start. They haven’t really had the time to learn the basics yet because of the nature of their medical training and just how much they work.

Kevin Pho: So what are some of the key pieces of advice that you most commonly give to these physician clients who come to you?

Logan Foltz: I tell them first to understand how their income is taxed. Different kinds of income are taxed in different ways, so most physicians earn most of their income just by being a physician and by working. So that is labor. Labor is taxed unfavorably compared to other kinds of income. Everybody pays income tax, obviously, but we also pay payroll taxes on earned income. That is one way it is disadvantageous. Because it is ordinary income, it is taxed at those graduated rates, and there are not really a lot of special breaks there as far as the tax framework is concerned.

I tell them first to understand what their marginal tax rate is because we make decisions on the margin about how much income we want to recognize in one year, how aggressive we want to be with deductions in one year, and especially if it is a matter of timing from one year to the next. Look at your marginal tax rate and also look to see if your income causes you to lose certain deductions or subjects you to certain additional taxes. There are quite a few tax deductions and taxes that take effect once your income crosses a certain threshold. It might be 200,000 dollars, it might be 400,000 dollars, or it might be 500,000 dollars. First understand that, and then you can understand how much you save by making one small decision or how much you might pay extra if you do the opposite. I tell them to do that first.

Second, I educate them on what tax breaks are available to them. It is a much different menu if they are employed compared to if they work for themselves or are self-employed. Even if you are W2, you can do a lot mainly by taking advantage of your benefits. First, understand what they are and if they fit your goals. Most of your audience is going to be familiar with things like 401(k)s or 403(b)s. It is important to understand how much you can contribute, how much is matched, and if there is any special structure to those plans. Some retirement plans have a special structure where you can contribute more beyond just the 24,500 dollars that can be taken out of your paycheck. I talk to physicians about that and I also talk to them about all the different taxes they pay.

I explain what tax they pay their state and how that changes with their income. Some people pay city taxes too, and that can be affected as well. Then I just talk to them about their lifestyle and what other parts of their lifestyle could be incentivized by the tax code or punished by it, for instance, owning a home or donating to charity. So that is broadly what I do in my consultations.

Kevin Pho: So you have seen a spectrum of physicians who come to you. What would you say are the biggest red flags or mistakes that you most commonly see?

Logan Foltz: What I see most often is when people have a change in their life or a change in their job, they don’t pay attention to their tax liability. If they are W2 and employed, they might be under-withholding. There are quite a few situations that can lead to that. One is working multiple jobs. One is filling out the W-4 incorrectly, and another is if you have other sources of income, because the W-4 only is based on the inputs from your employment income. If you have other income beyond that, then you are not going to be paying enough throughout the year.

If that is the case, especially if you don’t have any withholding—for instance, if you are working only 1099—not making estimated payments is a big problem. If you are unaware that you need to pay the IRS on your own, then you could have a massive tax bill the following year. That is a cash flow shock obviously, but it could also lead to significant penalties. So that is something I commonly see. Usually, it is not in the severe form that I just laid out, but often just people not paying taxes throughout the year on all of their income.

That is a stressful situation when you are not planning for it. You can sometimes underpay if you pay a certain amount and plan to pay in April if you save up for it, but if you are only finding out later, then that is problematic. Another area where I see physicians either making a mistake or not being aware of what they can do is just not maximizing their benefits. If they are self-employed, they could open up a solo 401(k). If you are employed, you don’t have to go to that trouble of setting up your own benefits. But if you are self-employed, it is important to know what deductions are available. I have talked a lot about retirement plans, but there is a whole range of business expenses you can take. A lot of those are probably pretty intuitive, but some of them aren’t, especially when you talk about traveling, auto deductions, and the home office. If you are not working with a tax professional and you haven’t done a lot of self-education, you might not know how that works and you could err by claiming deductions that you are not entitled to or you could miss out on them completely. So it is really important to know, especially if you are self-employed or 1099, what you can deduct and what you can do to lower your taxes because there are a lot more options on the table for you.

Kevin Pho: So give us an example of W2 versus 1099 income. The vast majority of physicians are paid by their clinical labor. They just have that single W2 job and are perfectly fine going forward. But we are seeing more and more physicians that have side gigs and have an additional source of income that is taxed as a 1099. Give us maybe a scenario of how that would impact their taxes that you commonly see.

Logan Foltz: Yes, I will keep it simple and try to make it apples to apples. I will talk about what it is like if you are practicing medicine as a W2 employee compared to if you are a 1099 independent contractor or doing locum tenens work, for instance. If you are employed, you have a W2, and your employer runs your income through payroll. That payroll system is going to withhold taxes according to how much you tell it to withhold when you fill out that W-4. You are also going to see other deductions besides tax that are withheld on your pay stub. They might be labeled differently and they might be taxed differently, but you will see benefits listed there as deductions too. You are paying into most of those. You are going to be paying something for health insurance, dental insurance, and vision, and you might be paying for disability insurance or life insurance through your employer.

Those have different tax implications, but you will see all that there. You will choose which benefits you want to participate in during open enrollment every year. Then you will see a steady deduction from your paycheck every time you get paid or every month. It is very predictable. The one difference I want to emphasize is that the benefits you have through your employer are limited to what they offer. They might not offer some of these at all. Some employers don’t even offer a retirement plan, so you won’t see a deduction, but you will take home more because of that, while paying a higher percentage of taxes as a result. Health insurance is another one. Almost all of us that work for large employers or hospital systems are going to have subsidized health insurance, but not everyone does. Some people have to buy in the open market, and if they are employed and it is not through their employer, they can’t deduct it. So that is broadly how W2 income works.

Now, if you are 1099, you get paid a flat amount. The payer, whether it is an agency or a hospital, doesn’t take out any deductions and doesn’t withhold any taxes. So you get to take home more typically, even if it is the same gross pay. For instance, even if you are paid 10,000 dollars for a week in both situations, you will take home more as a 1099 doctor. However, that is in large part because nothing is getting taken out. From a tax standpoint, you have to pay estimated taxes to account for that, and you should do it quarterly. That is based on your total tax liability, which you need to have some idea of. In other words, your total income tax for the year. It also doesn’t deduct for any of those benefits.

The good news is you can choose your own benefits and you can deduct many of them. You can deduct a lot of the ones I just mentioned such as health insurance, retirement plans, and also regular business expenses. One other difference I will touch on is that the employer can deduct eligible business expenses that the IRS says are ordinary and necessary for business. If you are self-employed and you are a doctor, you can deduct anything that is generally reasonable. You can deduct medical supplies, your white coat, CME, and your malpractice insurance. Your employer is going to do the same thing if they are paying it for you. But if you want to buy something that the IRS says is a reasonable expense, but the employer says it isn’t something they want to cover or reimburse you for, then nobody deducts it.

That is one way you have more optionality if you are self-employed. You pay for them yourself, but you can deduct them. Generally, you want the difference in gross pay to reflect that because you are paying more out of pocket if you are 1099. You are also paying all of the taxes, which the employer might cover for part of you when it comes to Social Security and Medicare. So that is something you want to take into account too. You want to decide roughly how much more you would want to be paid to be 1099 versus a W2 employee if it is with the same hospital system.

Kevin Pho: This, of course, can be overwhelming for the majority of physicians, especially those new doctors who are just coming out of residency. The last thing they want to do is navigate the tax code. So for those who don’t hire a professional like yourself, don’t go to an accountant, or just don’t pay any mind to their taxes, how much money can they lose just in a ballpark by not having appropriate tax planning when they are coming out and having their first attending job?

Logan Foltz: It is hard to really put an upper limit on that number because I guess it depends on the base scenario you start from. It is possible that someone could take extra shifts worth more than they want to and suddenly get bumped into a higher bracket and pay thousands more dollars. Something as simple as that. On the other hand, if someone files their tax return and doesn’t take into account certain deductions, they pay thousands of dollars or more in taxes. That could be very costly too. I also think of doctors who are 1099 and don’t set up any of these benefits, especially a retirement plan. In that case, you are losing out on whatever deduction you can take from those contributions, and roughly that could be 10,000 dollars just from the 24,500 dollars 401(k) contribution if you think of what your tax rate might be if it is over 40 percent.

So tens of thousands of dollars is potentially what it could cost you if you don’t do any planning. That doesn’t even account for how much you might pay in penalties if you don’t manage your tax obligations throughout the year. So if you really just don’t know where to start and if the basics seem overwhelming to you, having someone help you with your tax preparation and do some basic planning with you will pay dividends.

Kevin Pho: Now there are plenty of tax specialists and certified financial planners that market themselves to physicians. So for physicians who really don’t know anything about the space, tell us the type of questions they need to ask to make sure that they are being matched with the right financial planner or tax specialist.

Logan Foltz: That is a great question, Kevin. I think it is best to start by talking to people in your network and trying to get word-of-mouth feedback from people you know because the marketing is pretty ubiquitous. Financial planners and tax specialists understand the pain you are feeling and they are going to market to you with a similar message. I would say good questions you can ask are generally how clients learn from them and how they educate their clients. Some professionals are not set up so they can have a lot of one-on-one or meeting time with you. They might not also have the bandwidth to answer basic questions you have.

What I think is a good model is if you can have meetings outside of tax season, plan, and anticipate a good forecast of your income going into tax season. Then you look at it and a good tax advisor will tell you their first observations, tell you what they think you can do to lower your taxes, and what special deductions or other tax strategies might apply to you. So I would first ask what the cadence of their client interaction is. Then you can also just ask them how well-versed they are and how frequently they do things that you know you need to do. That could be as simple as asking how many clients of theirs are practicing locum tenens in multiple states, or how many clients do expert witness work. Ask how familiar they are with the deductions you can take and how familiar they are with retirement plan contribution limits, especially if you are also participating in a 401(k) with your employer.

Those are just examples I am thinking of off the top of my head. I think you should let curiosity be your guide. Identify what is painful to you and ask them if they can help with that and how they would help with that, even if it is your estimated tax burden. Ask how they determine how much you need to pay in taxes throughout the year and how their clients know what to pay and when. I think that is a good approach.

Kevin Pho: We are talking to Logan Foltz, physician and tax specialist. Today’s KevinMD article is “Physician tax strategies: why your tax bill is so high and how to fix it.” Logan, let’s end with some take-home messages that you want to leave with the KevinMD audience.

Logan Foltz: I have a few take-home points that I would like your audience to take home. I will start with the fact that it is worth understanding that your tax depends on the type of income you have and also the type of work you are doing. Income that you earn from labor is not as beneficial as income you can get from ownership and from investment. So if you have opportunities for that, if you can over time find business opportunities that appeal to you and can help you perhaps build a brand and build up equity, then that would be a way to lower your taxes over time if you feel burdened by the tax liability you have right now.

I want to emphasize that our tax system is progressive and that income is taxed year to year. The timing of income matters. It is generally better to have steady income than to have variable income. What I did when I was in training is I would sometimes not work as much at the end of the year because I felt like I had already made enough. Then I would work more at the start of the year. So understanding the timing and understanding the progressive nature of our tax system is a good way to be more efficient with your taxes.

A couple more things I will say. One is that if you can improve your cash flow and if you can save more of your money, there are generally more things you can do to lower your taxes. That would be retirement contributions and it could be charitable donations. If those appeal to you, then it is good to look at your tax planning in the broader light of your financial vision and your financial situation at that point in time. It is helpful to work with professionals not only for taxes but for that too, especially if you need help getting started.

The last thing I will say is that I have shared a little about my journey and my transition. You know as well as I do how widespread burnout is and how hard it is for many doctors to sustain practice from residency to retirement. I would think early on, even if you love medicine, about what other skills you can develop and fall back on. Also, develop your network. See if there are other interests that appeal to you, and other skills you have or want to develop. The landscape of medicine can shift a lot over decades as it has since we left training. So I think it is important to have other skills and other things that fill your cup besides being a doctor and seeing patients, even if you love it right now and couldn’t imagine doing anything else. Develop your network early and talk to other folks who do outside work, such as you or any other entrepreneurs. I think that will serve you well in the long run.

Kevin Pho: Logan, thank you so much for sharing your perspective and insight. Thanks again for coming on the show.

Logan Foltz: Thank you for having me on, Kevin.