Tax Planning for Physicians and Dentists

The High W-2 Problem

A physician earning $500,000 on a W-2 faces a specific structural problem. Wage income is the most heavily taxed and least flexible form of income in the Code. It carries the top marginal federal rate, full Medicare tax with the 0.9% Additional Medicare Tax above $200,000 single or $250,000 joint, state income tax in most jurisdictions, and it is reported before the taxpayer sees a dollar of it. The Tax Cuts and Jobs Act eliminated the miscellaneous itemized deduction for unreimbursed employee business expenses, so the professional dues, licensure, continuing medical education, and equipment a physician pays for personally produce no deduction at all.

At the same time, income at this level triggers a series of phaseouts and additional taxes: the 3.8% net investment income tax under IRC Section 1411 above $200,000 single or $250,000 joint, the phaseout of the child tax credit, the loss of direct Roth IRA eligibility above $165,000 single or $246,000 joint for 2025, and for owners of a medical or dental practice, the phaseout of the Section 199A qualified business income deduction because medicine and dentistry are specified service trades or businesses.

The timeline compounds it. A physician who finishes training at 32 with substantial student debt has fewer compounding years than a peer who started earning at 22, and is trying to close that gap while paying tax at the highest rates in the Code. The planning question is not how to find more deductions on the W-2, because there are essentially none. It is how to shift income into tax-advantaged vehicles, how to structure practice ownership if it exists, and how to generate deductions from assets outside the practice.

Backdoor Roth and Related Roth Access

Direct Roth IRA contributions phase out at modified AGI between $150,000 and $165,000 for single filers and $236,000 and $246,000 for joint filers in 2025. Nearly every attending physician is above those limits. The backdoor Roth restores access.

The mechanic is a nondeductible contribution to a traditional IRA, which has no income limit, followed by a conversion to a Roth IRA. Because the contribution had no deduction, basis equals the contribution, and if the conversion happens before meaningful earnings accrue, the taxable amount is close to zero. The conversion is reported on Form 8606. Done annually for a married couple, this places $14,000 per year into Roth accounts that grow and distribute tax-free and are not subject to lifetime required minimum distributions.

The trap is the pro-rata rule under IRC Section 408(d)(2). The taxable portion of any conversion is determined by the ratio of after-tax basis to the total balance across all traditional, SEP, and SIMPLE IRAs as of December 31 of the conversion year. A physician with a $400,000 rollover IRA from a prior employer who converts $7,000 will find roughly 98% of the conversion taxable. The fix is to move the pre-tax IRA balance into a current employer 401(k) or a solo 401(k) before year end, since employer plan balances are excluded from the pro-rata calculation. That single step is the difference between a clean backdoor Roth and an unnecessary tax bill, and it has to be completed by December 31, not by the filing deadline.

Where the practice or employer plan permits after-tax contributions and in-plan Roth conversions, the mega backdoor Roth extends the same idea to a much larger number. The overall IRC Section 415(c) limit of $70,000 for 2025, or $77,500 with catch-up, applies to all contributions to a defined contribution plan. After the employee deferral and employer contribution, the remaining room can be filled with after-tax contributions that are then converted. For a practice owner who controls the plan document, this is often worth $30,000 or more per year of additional Roth funding. We cover the plan design requirements under mega backdoor Roth for business owners.

Cash Balance Plans and Retirement Plan Design

For a practice owner, the largest single deduction available in most years is a retirement plan contribution, and the largest version of that is a cash balance plan.

A cash balance plan is a defined benefit plan expressed as a hypothetical account balance. Each participant receives an annual pay credit and an interest credit, and the employer contributes what an actuary certifies is required to fund the promised benefit. Because the limit is actuarial rather than a flat dollar cap, it rises sharply with age. A 45-year-old physician can often support $100,000 to $150,000 per year. A 58-year-old physician approaching the IRC Section 415(b) maximum benefit can frequently support $250,000 to $300,000 or more. That is stacked on top of a 401(k) deferral and profit sharing contribution, so a combined deduction above $350,000 is realistic for an older high-earning owner.

The constraint is staff. A cash balance plan must satisfy minimum participation under IRC Section 401(a)(26), generally covering the lesser of 50 employees or 40% of eligible employees, and it must pass coverage and nondiscrimination testing, usually on a cross-tested basis combined with the 401(k) and profit sharing plan. In practice this means the plan must provide a meaningful contribution to staff, commonly 5% to 8% of pay in the combined design. For a dental practice with six employees and $400,000 of owner profit, that staff cost might be $30,000 against an owner deduction of $180,000, which is a favorable trade. For a practice with 40 employees and thin margins, it may not be.

Cash balance plans also carry real obligations: an annual actuarial valuation, Form 5500 filing, PBGC coverage for most plans covering more than the owner and spouse, and a genuine expectation of ongoing contributions. The IRS expects a plan to be maintained as a permanent program, generally at least three to five years, so this is not a strategy for a single high year. Where the income spike is temporary, a profit sharing plan or a defined benefit plan with a conservative funding target is the better fit. We model the design and staff cost before adoption on our cash balance plan page.

S-Corporation Structure for Practice Owners

A practice organized as a professional corporation, professional association, or PLLC generating meaningful profit above the owner's clinical compensation is usually a candidate for S-Corporation treatment. The savings come from splitting profit between W-2 wages, which carry Medicare tax at 2.9% plus the 0.9% Additional Medicare Tax at these income levels, and distributions, which carry neither.

Note what is and is not saved at physician income levels. Once wages exceed the Social Security wage base of $176,100, the 12.4% Social Security component stops, so the savings on incremental profit is the 2.9% Medicare rate plus 0.9% Additional Medicare, or 3.8%. On $200,000 of profit distributed rather than paid as wages, that is roughly $7,600 per year. Meaningful, but far less dramatic than the savings for a lower-income business owner, and it must be weighed against the reasonable compensation requirement discussed on our reasonable compensation page.

Medicine and dentistry are specified service trades or businesses, so the Section 199A qualified business income deduction phases out completely above the threshold, which sits at $197,300 single and $394,600 joint for 2025 with a phase-in range above that. For most practice owners the deduction is gone, which removes one of the usual arguments for pass-through structure and removes the tension between wages and QBI that other business owners face.

There are structural considerations specific to health care. State law governs who may own a professional entity, and corporate practice of medicine doctrines in many states restrict non-licensed ownership. Multi-owner practices need buy-sell agreements that respect the single class of stock rule. And the practice real estate, if the group owns its building, should generally sit in a separate LLC that leases to the practice rather than inside the professional entity, both for liability separation and because appreciated real estate inside a corporation is very difficult to remove without triggering gain.

Cost Segregation on Medical and Dental Real Estate

Physicians and dentists who own their office building, or who own rental real estate as an investment, hold the most reliable deduction generator available outside the practice.

A cost segregation study identifies building components that qualify for shorter recovery periods than the 39-year commercial or 27.5-year residential life. Medical and dental buildings reclassify unusually well because of the specialty infrastructure. Dedicated plumbing and central vacuum lines serving operatories, medical gas piping, lead shielding for radiography, dedicated electrical circuits and data cabling for chairs and imaging equipment, specialty millwork and casework, decorative finishes, and site improvements including parking lots, curbing, sidewalks, and landscaping all move into five-year, seven-year, or 15-year property. Reclassification of 25% to 40% of depreciable basis is common, against 20% to 25% for a plain office building.

With 100% bonus depreciation restored for property acquired and placed in service after January 19, 2025 under the One Big Beautiful Bill Act, the entire reclassified amount is deductible in the first year rather than spread over the shorter lives. On a $2,000,000 dental building with $400,000 of land, a study reclassifying 32% of the $1,600,000 building basis produces roughly $512,000 of first-year deduction. For a building already owned, Form 3115 allows the missed depreciation to be claimed as a catch-up adjustment in the current year without amending prior returns.

The deduction is only worth what it can offset, and that is where planning matters more than the study. If the building is owned in a separate LLC that leases to the practice, the loss is generally passive and can offset only passive income unless the self-rental rules or grouping elections apply. If the practice owns the building directly, the deduction offsets active practice income. If the property is a separate rental investment, deducting the loss against W-2 income requires real estate professional status or, for a short-term rental, material participation with an average stay of seven days or less. Physicians rarely qualify for real estate professional status themselves because of the 750-hour and more-than-half-of-personal-services tests, but a non-working spouse frequently does. That combination, a spouse qualifying as a real estate professional against a physician's W-2 income, is one of the more powerful structures available to a two-earner medical household, and it is documented in advance or not at all. See our real estate professional status and cost segregation pages for the substantiation requirements.

Sequencing the Strategies

The order matters, because each strategy changes the inputs for the next.

Start with the plan that produces the largest deduction relative to its cost, which for a practice owner is almost always retirement plan design. That decision sets W-2 compensation, which in turn constrains contribution limits, which feeds back into the reasonable compensation figure. Entity structure follows, because the salary and distribution split is meaningless until the retirement plan target is known.

Roth strategies come next, and they run in the opposite direction. Roth conversions and backdoor contributions add taxable income or use after-tax dollars, so they are sized against the deductions already claimed. A year with a large cash balance contribution is often the right year to convert a legacy IRA, because the deduction absorbs the conversion income.

Real estate deductions are last in the sequence and first in the calendar, because a cost segregation study has to be commissioned and the property placed in service before year end. A study identified in February for a property purchased the prior October is fine; a strategy identified on April 10 for a property not yet purchased is not.

Everything above assumes the compliance foundation is in place: quarterly estimates sized correctly so the deductions are not offset by penalties, state filings for any multi-state practice or property, and documentation contemporaneous with the events rather than reconstructed. We handle the sequencing as a single annual plan rather than a series of disconnected transactions.