#3 Using Municipal Bonds and Bond Funds

A typical physician who wishes to invest in bonds in a taxable account should choose municipal bonds, typically using a bond mutual fund to minimize hassle and maximize diversification. Municipal bond yields are federal, and sometimes state, income tax-free. Although municipal bond yields are typically lower than treasury or corporate bond yields, on an after-tax basis, municipal bond yields are often higher for those in the upper tax brackets.

#4 Tax-Loss Harvesting

The natural inclination of many investors who own a losing investment is to hold the investment until they get back to even before selling it. However, this is completely wrong. There is rarely any reason to hold on to a losing investment in a taxable account, even if you believe it will come back in value in the near future. It is best to exchange that investment for one that is very similar but, in the words of the IRS, “not substantially identical.” This locks in that tax loss while still allowing you to enjoy the future gains of the investment. Professionals call this “tax-loss harvesting.” Not only can you use those losses to offset future investment gains, you can deduct up to $3,000 per year against your earned income. If you have more than $3,000 in losses in any given year, they can be carried forward to the next year.

There is rarely any reason to hold on to a losing investment in a taxable account, even if you believe it will come back in value in the near future.

#5 Taking Advantage of Depreciation

Savvy real estate investors know they can lower their tax bill thanks to depreciation. The IRS allows a typical residential investment property to be depreciated over 27.5 years, which means that an amount equal to 3.6 percent of a property’s initial value can be taken as a depreciation deduction each year, directly reducing the amount of rental income on which taxes must be paid in that year. Although depreciation must be recaptured when you sell, it is recaptured at 25 percent, which is a rate that is typically lower than a physician’s marginal income tax rate. Even better, if you exchange that property for another (instead of simply selling it), that depreciation does not have to be recaptured.

#6 Donating Appreciated Shares and the Step-Up in Basis at Death

If you do have investments, whether mutual funds, individual securities, or investment property, that you have owned for many years and that have appreciated a great deal, you can avoid paying the capital gains taxes on the investments in two ways. The first is to use them instead of cash to make charitable donations. When you give them to charity, you get to deduct the full value of the donation on your taxes but do not have to pay the capital gains taxes due. The charity also does not have to pay the capital gains taxes. So it is a win-win for everyone but the IRS.