How to maximize tax savings as an NP or PA locum

In a recent webinar, Cerebral Tax Advisors founder Alexis Gallati shared how NP and PA locums can maximize their tax savings. Specializing in tax strategies for medical professionals, Alexis provides valuable insights into proactive tax planning, optimizing employer benefits, and exploring investment opportunities with significant tax advantages. Whether you're new to locum tenens or looking to refine your financial approach, check out this webinar for key strategies to help you keep more of what you earn.

Watch the full webinar:

Tax webinar highlights

Why proactive tax planning matters (00:00:07 - 00:02:26)

Alexis Gallati kicks things off by introducing herself and stressing why proactive tax planning is a big deal for W-2 earners. It helps you save money, manage your cash flow better, and improve your overall financial planning.

How to make the most of employer benefits (00:02:26 - 00:06:21)

Alexis talks about squeezing the most out of your employer benefits, like retirement plans and health savings accounts (HSAs). She breaks down the contribution limits and the sweet tax perks that come with these benefits.

Backdoor Roth IRA hack (00:11:04 - 00:14:12)

For those who earn too much to contribute directly to a Roth IRA, Alexis explains the backdoor Roth IRA trick. She walks you through how to put money into a traditional IRA and then convert it to a Roth IRA without getting hit with taxes.

Charitable giving and donor-advised funds (00:17:42 - 00:22:03)

We dive into the benefits of charitable giving, especially using donor-advised funds. She explains how donating appreciated stock can give you a nice tax break and how to plan your donations strategically.

Real estate investments with tax perks (00:22:26 - 00:27:17)

Alexis gives an overview of real estate investments and their tax benefits, like depreciation and passive loss rules. She also talks about what it takes to qualify as a real estate professional and the perks of short-term rentals.

Explore other types of investments (00:27:17 - 00:31:58)

Alexis discusses the tax benefits of investing in oil and gas partnerships. She outlines the potential deductions and returns and emphasizes the importance of doing your homework and working with reputable companies.

To learn more about working locum tenens, vieww today's job opportunities below or give us a call at 954.343.3050.

Read the full transcript of the webinar below:

Royce: Thank you for joining us today to learn how to keep more of what you earn as a locum tenens provider. I'm Royce Johnson with Weatherby Medical Staffing. Weatherby Medical Staffing is an agency that places nurse practitioners, physician assistants, and CRNAs in temporary positions across the country. I'm very excited to introduce our presenter today, Alexis Gallati, owner and lead tax strategist of Cerebral Tax Advisors, the founder of Cerebral Wealth Academy, and the author of the book Advanced Tax Planning for Medical Professionals as both the daughter and spouse of physicians. She brings a personal perspective to this topic. I will let her take it from here

Alexis Gallati: Thank you, Royce. I really appreciate you having me here, and I'm very excited to be talking to everyone about the maximum tax savings you can have as a W-2 earner. So, I want to first take a moment to introduce myself. Again, my name is Alexis Gallati, and I am the founder and lead tax strategist at Cerebral Tax Advisors as Royce mentioned. I am married to a physician. I grew up in a physician household, and we are very much focused on tax advising for medical professionals. I come with 20-plus years in the tax and accounting industry, as well as hold many credentials that you in education that you can read on your screen. But I know we want to get right into the material. So, I hope that you enjoy learning a little bit about how you can maximize as only a W-2 earner.

Why proactive tax planning is important

So first, let's talk about what we're going to discuss now. Of course, it's important to understand why proactive tax planning is important. You might think it's a little bit of a duh, but we're going to go through that. We're also going to talk about maximizing employer benefits, maximizing retirement contributions, and taking a look at that backdoor Roth. And also, what can we be doing to just what can you deduct as a W-2 employer? And we'll also just talk about investments with tax benefits. So let's just get right into it.

So again, why proactive tax planning whether you're W-2 or you have real estate, or you own a business? Everybody should be tax planning and being proactive with it. That means doing something during the year because obviously, it saves you money. If you are being proactive, just like you are with your patients about their care, then you're going to be saving money, they're going to be staying healthy, and it also improves your cash flow. Of course, if you know that you're going to owe X by the end of the year you can go and change your withholding. So you're not withholding so much during the year. And you're not getting a huge refund. You're not owing anything, really.

That goal is to be 0 on your tax return. And again. it helps, obviously with just enhancing your financial planning. Knowing what your taxes are going to be is a huge step in creating a financial plan that will actually help with what you're going to be investing in, what you're going to be saving, and what you're going to be spending. And your financial advisor looks at tax strategies in order to help reduce your biggest tax or your biggest expense burden, which is taxes. We also are going to be looking at avoiding penalties, because if you don't pay enough tax during the year, you will owe what's called underpayment penalties. Some of you might have seen this on your tax return. Hey? Tax! Preparer! Why do I have this penalty here? Well, it's because you didn't pay enough during the year. The IRS wants their money when they want it, and also, too, I mean, it's just peace of mind. If you know what's coming down the road, it's going to make you happier. It's going to make you keep you calm and allow you to again plan.

But unfortunately, W-2 earners get the short end of the stick when it comes to the tax code. There are tons of tax strategies out there for business owners, real estate investors, etc. But for W-2-only earners, there's only so much that you can do. And that's what we're going to discuss today, because you're really limited in the deductions, and you really have a lack of control as well over timing. So there's a lot of physicians we work with when it comes to their income, you know. You might get a huge bonus at the end of the year. Sometimes, if you're in a private group, they'll allow you to defer that year-end bonus into January, so you can defer that income, but not everybody gets that option, especially if you work for a huge hospital system. So let's just jump right into it.

Make the most of your employer benefits

What can you be doing as a W-2-only earner? First off, you need to be maximizing your employer benefits. Take a look and see what is available to you. Most employers will have a retirement plan, for example, you know. Are they offering that where you can contribute that employee deferral into that plan in 2025? The contribution limit for the employee deferral is $23,500. But if you're over 50 or so, I should say between age 50 and 59 or 64 years and older. There's a $7,500 catch-up that you can do as well on top of that $23,500, and special for 2025, there's actually a $11,250 catch-up for those between the ages of 60 and 63. So know how old you are. Make sure that you are paying attention to what you're currently withholding or deferring on your taxes because the money that you're putting into that retirement comes from your taxable W-2 wages. If it's a pre-tax account, like a 401(k) or 403(b). Also, too don't forget that if your employer does have matching. Then you want to be putting money away. You want to be putting your own money away into that retirement plan at minimum up to the matching, because that's free money. Don't let that get out of the way.

And then these contributions, like I mentioned reduced your taxable income. So that's obviously going to lower your taxable liability. This is a great benefit. Make sure that you're taking advantage of it. They also might offer a health savings account. And so these are amazing just because they're triple tax advantages. This is one of my favorite strategies. So those contributions go in tax-free. You get a deduction, for on your tax return or off of your wages. You also get tax free growth within the account. and when you go to take that money out, you take those distributions as long as they're used for qualified medical expenses. Those are tax-free as well. So, what does it mean to have an HSA-eligible plan? That means that your health insurance has to be a high-deductible plan. So for individuals, that means that your deductible can't be less than $1,650. If you're a family, that means it's $3,300, and you have to have out-of-pocket medical expenses capped at $8,300 for individuals and $16,600 for families. If you notice it's doubled, if you're single, or sorry if you're a family member. If you have a family plan, then that's double what the individual rate is. And so that means you can contribute up to $4,300 for an individual and $8,550 as a family. So that can be a deduction on your tax return again, it's going and lowering your taxable liability.

But the huge benefit of the HRA is that in most plans, you're able to go and invest those funds. So let's say you put in $4,300, you're able to invest that $4,300 into the stock market. So you can put it into like an index fund, and let that grow instead of actually using it for medical purposes. So what happens is, and this is something my family does. What a lot of our clients do is they will contribute the full amount. They'll invest in it. Let that amount grow, and let's say, in 20-30 years. You want to get access to that money. You can go and submit those receipts. even if they're 20-30 years old. At a later time. when you want to get that money out. So you've given yourself the opportunity to go and grow those funds tax-free, and then you have a bigger pot of money to get that when you're older, and you're more likely to need those health funds. Now, of course. if something horrible happens and you need to access that money. By all means, use it; that's what it's there for. So this at least gives you the option. You're in a much higher bracket. This will allow you to take advantage of that long-term investment potential and, you know, almost keep it like another sort of retirement account because if for some reason you have more in there than you need for health, you know, reasons for qualified medical benefits, you can take the money out. You're just going to be taxed at the tax rate that you'll be at that time of distribution. So it almost acts like just a normal pre-tax IRA account. So something to definitely consider, and I highly recommend it.

All about the backdoor Roth IRA

Now, when it comes to maximizing your retirement contributions. Of course, as a W-2 employee. You have your employer options, but you also have the individual IRA that you can be doing each year. Now, if you make too much money. That means that you're not able to put money directly into a deductible IRA or directly into a Roth IRA, and so many of you have probably heard about the backdoor Roth IRA. and might find it a little bit confusing. But I promise it's actually quite simple. Once you understand the basics. So let's go through it. Now, when you have a pre-tax traditional IRA, what normally happens is you will put that money in, and you will get it this year. It's $7,000 that you can put in. That's the max. If you put your $7,000 in, you can get a deduction on your tax return for that $7,000. It saves you money, and that money will grow tax-free, and then you have to pay tax. Once you take a distribution at retirement time with a Roth IRA. You put that money in post-tax, and it grows tax-free, and then it comes out tax-free at retirement time because you've already paid tax on it. You did not get a deduction when you contributed it.

Now again, as you can see, box number 4, rules for high-income earners. If you earn over $165,000 as a single 246,000 as married in 2025. You will not be eligible to do that direct Roth IRA contribution, and you're also making too much money, like I said, to do to get a deduction on the front end for a pre-tax IRA. So that's where the backdoor Roth comes in. What you do is you contribute. Sorry, I should back up a second. So what you should do is have a pre-tax IRA open, a traditional IRA with 0 balance in it, as well as a Roth IRA open. And what you do is you put that money into the let's talk about. So you put that money into your pre-tax IRA, and then that is a non-deductible contribution because you're not able to get a deduction for it, and you. So you're contributing to it with post-tax dollars. Now, the post-tax dollars are then going to be converted to your Roth IRA.

So the Roth IRA. Normally you would have to pay tax when you do that conversion. However, since we're contributing the traditional IRA with Roth, or sorry with post-tax dollars. When you convert it to a Roth, you will not owe any tax. So again, that's how you get your money: your IRA money backdoored into your Roth IRA. So what happens if you have a balance in your pre-tax IRA the Big at the end of the year, and you can see what I have right there? No balance in your pre-tax IRAs by December 31st to avoid pro rata rules. Well. What are pro rata rules? That's where the IRS considers all IRA money. And so that's traditional pre-tax IRAs, simple IRAs, SEP IRAs, etc. Any of those pre-tax accounts. If there's a balance in that account. When you go to put that $7,000 of post-tax dollars into your traditional IRA. the IRS can't distinguish. If the money that you've now converted from your pre-tax IRA to your Roth IRA for your backdoor Roth, they don't know if that's pre-tax dollars or post-tax dollars.

So, for example, let's say that you have $1,000 in your pre-tax IRA balance as of December 31st, and you go to put $7,000 in post-tax dollars into your traditional IRA. What will happen when you go to move that $7,000 into your Roth IRA to do that non-taxable conversion, the IRS will say, Hey, wait a minute of that $8,000 that's in there. Remember, it's a thousand of pre-tax, $7,000 of post-tax of that $8,000 that's in there. When you converted that 7,000. We don't know how much money you used to move that to move over. You do. But the IRS doesn't remember, you know. They I don't want to be mean. They're they don't. They don't. They're not nice about it. So they're not smart about it. So what ends up happening is 1/8th of that money that you're moving over will be taxable again. So 1/8th of that 7,000 that you've now moved over is taxable again. So what's happening is you're being taxed twice on a portion of that $7,000 backdoor Roth contribution. So it's very, very important that you have. If you have any pre-tax IRAs. So it's a traditional IRA, SEP IRA, simple IRAs, open that. You move those funds into a 401(k), and that's tax-free because it's pre-tax to pre-tax in order to avoid those pro rata rules. So like, if your employer allows outside contributions into your 401 k. Plan, or your 403 B. See, go and ask, and then get that money moved over. And then, once that account is down to 0. Remember, if you want like, if you wanted to do it for the prior year, it would have to have been done by December 31st of the prior year. getting that down to 0, but once it's down to 0, then you are able to do your tax-free backdoor Roth without any issues, and that contribution is due by April 15th of every year. So this is just a really great way to do additional tax strategy and additional wealth building. Again, you're not getting a tax deduction in the current year, but it's then growing tax-free and will come out tax-free at retirement time.

Charitable giving and donor-advised funds

So, what can you deduct as a W-2 employer? Common deductions are really around charitable deductions, you know. You want to take a look at that schedule. Obviously you can be writing off your state and local tax. Unfortunately, if you're in a higher income state, you're going and limit being limited by $10,000 for that salt deduction. That state and local tax deduction and then you obviously can do your mortgage interest and your real estate taxes, etc. But what you can really have a bit more control over is your charitable contributions. One of the strategies that I love is using a donor-advised fund. If you have appreciated stock, or you have maybe a big cash windfall, you know, going and putting money into a donor-advised fund allows you to not only. you know, give with the flexibility and control that you need, but it also simplifies your charitable giving and gives a tax benefit. So there is an immediate tax deduction for that fair market value of the gift. So let's say you have a stock that you purchased for a hundred dollars. But the current value is $300. Well, you, by going and contributing that stock, you get a deduction for that $300, and you are avoiding the capital gains tax on that stock. which means that. So if you bought it for $100, and it's valued at $300, you're now going and saving tax on that capital gain of the $300 that, oh, sorry, the $200,000 gain. So that's super important. If you have some very large appreciated stock and you're really worried about it. You know, you want to get out of it. But you are really worried about that. Capital gains. Well, you can donate it to a donor-advised Fund. You want to donate the stock. You don't want to sell it and then donate it. You want to donate the stock, so you transfer in kind to the donor-advised fund. and this really will allow you to avoid capital gains, and it can continue to grow that stock. Or, if you. Let's say, like, Hey, you know what? I don't think it's going to go up anymore. I'm going to sell it. You avoid that capital gain, and then you can invest it in something else. But this is a really great way to, especially when you start to get towards your older years, where if you. you know, like, Hey, I want to do charitable giving. But I know, you know, in retirement I'm going to be on a fixed income this, that money is now earmarked for your charitable giving, and you don't have to worry about getting it taken out of your retirement. Fixed retirement income. Just be aware that if you do donate stock, then you're only allowed to deduct up to 30% of your adjusted gross income in that fair market value, so that donation, anything that you've done over that will get carried over into future years to use for future years. But just be aware of that now with cash. It's a different number. It's, you know, 50, 60% depending upon the year that you're doing it now.

One great thing to think about, you know, especially like Hey, Alexis, I don't itemize, you know. I don't have enough mortgage interest, or maybe I paid off my mortgage. I don't have enough. Maybe you live in a state like me. Where I'm in Tennessee, and there's no State income tax, so I don't have a whole lot of state and local tax deductions. Well, what you can do is strategically plan when to give those charitable deductions, and instead of maybe giving it at the end of the year. You do it at the beginning of the year, and then you know what's called a bunching of your donations. So that way, you can get over the standard deduction for the year and be able to get an actual benefit out of your charitable deductions. If you're not doing more than the standard deduction, you are going to end up taking a standard deduction, which is more so, something to think about with that. And the donor-advised fund does apply to that bunching strategy as well.

Real estate investment for tax benefits

So let's talk about investments with tax benefits with you has, like, hey, Alexis, I've done all these things I know about them. What can I be doing that, you know Hey? I have some extra money. I want to put. Get some tax benefits from those investments. One really is real estate. It's a really great way to get a tax benefit through depreciation and other measures that will allow you to reduce your liability. It's important to know that there are different types of real estate investing. There are real estate syndications as well as direct ownership of those investments, and then other partnerships, of course, too.

But let's talk 1st a little bit about the passive loss rules. This is a very expansive subject but in a nutshell. Real estate is always considered a passive investment to the IRS unless you meet some certain extension. Excuse me certain exceptions which we'll discuss in a moment. So what that means is that unless you are materially participating in that investment, any losses that occur from the real estate you're not allowed to take in the current year get suspended and carried forward until you either have passive income to put against it. or you sell that investment, and then those passive losses are released, and any of those losses can be used against your ordinary income or your W-2 income. So if I were to go out and buy a rental property, but you know I had a property management company taking care of it. I wouldn't be able to take any of those losses but believe me; if there's income, I have to report it, you know, to pay tax on it, of course. But if there are any losses. Unfortunately, I'm not able to take advantage of that loss in the current year, and again gets suspended, and I'll get to use that in later years.

Now, if you want to do real estate syndications, that's exactly kind of what we just talked about. Your passive investor. You're just the money. You're a limited partner. You're not dealing with the day-to-day management of that real estate syndication that's usually a group, a partnership, a group of people getting together and investing like in an office building or, you know, an apartment complex, etc. So again, any losses that occur with that, there's no way to make that div, unless you are, you know, in the daily management of that investment, which is unlikely. But let's say that you are retired, or you have a spouse who could obtain real estate professional status, then you're able to write off the loss from that investment, and that includes any depreciation or things like that. But in order to qualify as a real estate professional, you need to spend at least more than 50% of your working hours doing real estate activities. That is very, very difficult for a full-time W-2 working individual. However, if you have a spouse who is not working, or maybe working part-time, he or she would be able to obtain that status and then be able to spend what's the 750 minimum hours doing real estate activities. So then, that way, you change that activity from passive to active, and any losses that occur can be used to offset your W-2 income.

You can also do this with short-term rentals. This is a much lower hurdle than the real estate professional status. You must be a person who spends the most time on that property and spends at least 100 hours or more a year on that property. So, really, you would have to be the one doing the, you know, like the management of that unit. You know, maybe looking at tenants deciding on who can come, you know, could come in dealing with the plumber going in, you know, doing the painting, etc., whatever those you know, hours that you're able to put in. That's real estate activity-related. Then if you meet those 2 requirements, then you're able to again change that from being a passive activity to an active activity in the current year and take a loss. Now, it's important to know that for short-term rental, those rental periods must be an average of 7 days or less. So there are a few criteria. It's very important to do your research work with a professional to make sure that you are qualifying right and doing documentation properly as well. So once you decided, hey, yeah, I want to own real estate directly. Think about that real estate and professional status. Look at the short-term rental as well. So then, that way you can decide. Is this really for me? And don't always let the tax benefits wag the tail of the dog. You want to make sure that you're going to be comfortable. Being a landlord dealing with tenants, you know all the things that go with that as well.

Additional types of investment strategies

Let's talk about another tax strategy with investments, and that's oil and gas. And this is a much more conservative investment. You are. Technically, it's a passive investment. But you are able to deduct, especially in that 1st year's loss against your W-2 income. So what happens is in year one, you get a deduction equal to the average. It's usually about 75% to 90% of your investment which reduces your ordinary income. And so in years 2 through 5, you usually earn 100% of your investment back. And then, between years 5 and 12, you earn, historically, about a 70% appreciation on your investment.

So let's look at this example. Let's say you make a hundred $1,000 investment. And so you're putting money into a partnership that owns oil and gas wells. So in the 1st year, let's say conservatively, you get an $80,000 loss from the partnership that reduces your overall income. So remember, you put in 100. We say it's an 80% deduction. Then that's $80,000 loss, and that saves you about $30,000 in tax birth year one. Now, in years 2 through 5, you will earn 100% of your investment back. So you're getting back your $100,000, and depending on the type of partnership you go into, sometimes that can be considered passive income, and so you would need to pay tax on that passive income because you've got a deduction in that 1st year.

However, there, you can obviously do other strategies to help reduce that 100,000 like real estate investing. If you're going to have that loss, you can't use that loss because you are a passive investor in that. Well, that loss can go against this passive income from this other investment, so they can help offset each other. So you can see where you can use different strategies to help save you money depending upon what you're doing now. In years 5 through 12, you earn approximately $70,000 in appreciation. This is about historical. So overall, if you put in 100,000, you're getting back about $200,000 in earnings. So it's about 2 the return on your investment. Now, this is obviously very basic. And it will depend upon the program that you go into. You have to obviously do your research. Make sure that's reputable companies. They've been around for a long time like us. Energy that will, you know have a great track record in what you know you're investing in. But it's important to know, just like any investment. It's the same thing with real estate. these sorts of investments.

You could lose your money, you know you could. There's no guarantee of the well performance again. That's why you have to make sure that you're working with somebody who has a good reputation and a good track record. Do your vetting, and do your homework. But of course, like any investment, you may lose your entire investment. If you do, then you get to write it off against your taxes. But you know, obviously, we're not in this for just the tax deduction. You want to make sure that there is good ROI on the investment, and the same thing goes with real estate. You want to make sure there's good cash flow, and that's going to appreciate in value, etc. So, with any sort of these investments with tax benefits, the tax savings are amazing. I love it. But you have to be a smart investor and make sure that it is the right fit for your lifestyle as well as your portfolio. So, hopefully, everything that we've discussed today gives you an idea of what you could be doing in addition to just even the normal tax benefits of being a W-2-only employee. So I hope that you found everything very helpful, and if you have questions, please feel free to reach out, I'll be happy to expand on any topics

Royce: Awesome. Well, thank you so much. A big thank you to Alexis for sharing her expertise and guiding us through some critical tax strategies. We hope you've gained some valuable insights into how you can keep more of what you earn as a locum tenens provider. If you have any tax questions, as Alexis mentioned. Please reach out to her, and if you'd like to learn more about how Weatherby Medical Staffing can support your locum tenens career, please don't hesitate to reach out to us. We are here to help you make the most of all your opportunities. So thank you again for joining us. and we look forward to connecting with you again soon. Thanks again, Alexis.

This summary article was created with the assistance of AI technology.