Although most physicians have only recently filed their taxes, financial experts say now is the perfect time to prepare for next year’s returns.

“There is a misunderstanding that how much you pay in taxes is determined by how you file your taxes, that if you just had the right person doing your taxes, you’d pay a lot less,” says Jim Dahle, MD, emergency physician and the founder of The White Coat Investor. “The truth is, the way you pay less taxes is by living your financial life differently,” 

Since most of those choices need to be made before filing your taxes, Dahle says it’s never too early to start thinking about planning for next year.

“At the end of the year, there’s nothing you can do. At that point, all there is left is to report what you did,” Dahle says.

Get Organized Early 

One key task to start now is to track expenses and organize documents, says Kim Hopkins, director of tax planning at Doc Wealth and an enrolled agent with the Internal Revenue Service. 

Major life events including getting married, having a baby, changing jobs, or buying a home can all affect your tax burden, Hopkins says. Keeping documentation organized and handy will help reduce the rush come next April. 

Ditto for tax-deductible expenses, including medical bills, insurance costs, and charitable contributions. “You can do yourself a favor just by tracking them throughout the year,” Hopkins says.

Early Tax Prep Key for Independent Physicians 

This advice is especially important for physicians who own their own practices or are paid via 1099 instead of W2. Maintaining separate business and personal bank accounts and ensuring that expenses and income are tracked along the way can all make tax time much easier, Botto says.

Like most high-income earners, one of the biggest and best ways to save on your final tax bill is by maxing out your retirement account contributions, including 401(k)s, 403(b)s, 457(b)s, and 401(a)s, Dahle says. The amount a person invests is deducted from their most highly-taxed income, so setting aside that money can be a huge win.

“A relatively high-paid doctor in a relatively high-tax state [who] puts, say, $30,000 into a 401(k) of some type might reduce their tax bill by $15,000 that year, just for doing that. And they still have the money,” he points out.

Financial planner Wesley Botto, co-owner of Hillcrest Financial Group in Cincinnati, says both age and income level affect whether a person would be better off opting for a pre-tax account, such as a 401(k), or a Roth IRA. 

A pre-tax account, in which an individual doesn’t pay taxes on the money they invest this calendar year but is taxed at the time of withdrawal, might be a better choice for those in the highest marginal tax bracket (around $750,000 for a married couple filing jointly). For a couple earning in the $200-300k range, however, a Roth IRA might make more sense. In those types of retirement accounts, individuals pay tax on the money at the time it’s invested but not when they pull it out later on. 

The Many Kinds of IRAs, FSAs, HSAs 

Some individuals can also create what’s known as a backdoor Roth IRA. “You have to put the money into a traditional IRA first, then convert it to a Roth IRA,” Dahle says. “All the growth it might have for decades and decades, you never pay any taxes on. It’s pretty awesome to have tax-free income in retirement.”

If the sheer variety of options starts making you see double, you’re not alone, Botto says. It’s why many physicians benefit from consulting with a tax professional.

“Not understanding their retirement plans and how they can best utilize them to maximize tax savings, as well as maximize their contributions and retirement balances over a lifetime is one of the biggest mistakes I see,” Botto says.

Don’t forget about your health savings accounts and flexible spending accounts, either, says Hopkins. While they might not have as big of an impact as many retirement accounts, setting aside money (and then making sure you spend it on the appropriate expenses) nonetheless can reduce a person’s tax burden.

Doctors who own their own businesses or are paid as contractors have some savings options unavailable to salaried employees, which are designed to help offset the extra payroll and Social Security taxes paid by the self-employed. They include a simplified employee pension(SEP) IRA, as well as a solo or independent 401(k).

“This year, a doc under 50 could put $72,000 worth of income in a solo 401(k), and they don’t pay taxes on it this year. That might reduce their tax bill by $30,000,” Dahle says.

An especially highly paid doctor who wants to save even more money can use a cash balance plan on top of their SEP and individual 401(k). Formally known as a defined benefit plan, Dahle says it’s really “an extra 401(k) masquerading as a pension.” Some physicians can put up to $200,000 in a cash balance plan in a single year. The rules around these plans can be tricky, so make sure you get expert advice before you invest.

It’s also important to pay attention to how your other types of investments are taxed, Botto says. Some investments are best held in a taxable, a nonqualified, or brokerage account; others might want to opt for nontaxable accounts if eligible. Then there’s the question of how long to hold on to an investment. Short-term trades can generate large amounts of capital gains that are taxed at ordinary income tax rates rather than the lower long-term capital gains and qualified dividend rates.

“It’s really a pretty awesome tax break if you can just be a long-term investor,” Dahle says.

Exactly how to make these decisions requires detailed knowledge of both tax law and investment logistics, which is why professional advice for these types of decisions is invaluable, Botto says.

Should You Do Your Own Taxes? 

Still, Hopkins says that most physicians with a straightforward W2 and not as much in the way of retirement accounts and investments are probably more than capable of doing their own taxes on their own using readily available software or online programs. What’s more questionable is whether this is the best use of their time, and if they might benefit from the other expertise an accountant or tax pro can bring to the table.

“As a [certified public accountant], I could obviously do my own taxes, but I have determined that my time is much better spent doing financial planning for my clients,” Botto says.

And to help soften the blow of being separated from your income, Dahle reminds his clients of this: “Paying taxes is simply the price of civilization,” he says.

The experts cited in this article had no relevant disclosures.