Six Months Left: A Mid-Year Tax Planning Guide for Physician-Owners

This article is written for:

Physician-owners, medical practice partners, and healthcare entrepreneurs who want to reduce their 2026 federal and state tax liability by taking advantage of planning strategies that are only available if action is taken before December 31.

This article answers the question:

What specific tax planning steps should physician-owners be taking in the summer of 2026 to maximize deductions, optimize retirement contributions, and position their practices and personal finances for the most favorable possible tax outcome?

This article is relevant because:

The most powerful tax planning strategies available to physician-owners require months of lead time to implement properly. Retirement plan design, entity structure adjustments, capital investment decisions, and compensation structuring all have year-end deadlines, but none of them can be executed well in December. Physicians who begin this work now have every available tool at their disposal. Those who wait have fewer.

The Window That Closes Every December 31

The physicians who pay the least in taxes over a career are proactive. They are, more often than not, the ones who act in June rather than December. The tax code does not reward last-minute efficiency. It rewards lead time, and the strategies with the highest impact are almost always the ones that require the most preparation.

A physician who sits down with an advisor in July to model their 2026 tax position has access to every tool in the planning toolkit. A physician who has the same conversation in November has already foreclosed several of those options, either because plan documents needed to be in place earlier, because capital acquisitions could not be placed in service in time, or because income timing decisions that could have been made strategically have already been made by default.

The six months remaining in 2026 represent, for most physician-owners, an ideal planning window. Year-to-date financial data is available and sufficiently reliable to project a full-year income position. The compensation decisions, retirement contributions, and capital investments that will appear on your 2026 tax return are still largely in front of you rather than behind you. And December, when the pressure of year-end operations compresses the time available for thoughtful financial work, is still comfortably distant.

Planning Area 1: Know Your Number

No subsequent planning decision can be made intelligently without a reliable estimate of your 2026 taxable income. This sounds obvious, and yet the majority of physician-owners do not have this figure in hand at mid-year, either because their practice's financial reporting is not current, because their personal income from multiple sources has not been consolidated, or because they have not yet sat down with their advisor to build the projection. Correcting this is the first and most foundational step.

A complete mid-year income projection should account for every revenue stream: practice compensation or distributions, any income from an S-corporation or partnership, investment income, rental income from practice real estate held in a separate entity, moonlighting or locum tenens income, spousal income if you file jointly, and any anticipated capital gains events such as investment portfolio rebalancing or the sale of a business asset. Aggregate these into a full-year estimate, then identify which direction 2026 is tracking relative to 2025.

This directional comparison matters enormously for strategy. If 2026 income is tracking higher than 2025, deferring income into 2027 and accelerating deductions into 2026 is generally advantageous. If 2026 is likely to be a lower-income year, the calculus may reverse. The tactics remain the same; the timing of their application changes based on the multi-year picture. Advisors who plan your taxes one year at a time, without reference to the year before and the year ahead, are leaving money on the table.

Once the projection is in hand, verify that your estimated quarterly tax payments are on track. For 2026, the underpayment penalty applies when total payments fall short of either 90% of the current year's liability or 100% of the prior year's liability (110% for taxpayers with prior-year AGI above $150,000). If your income has grown materially from 2025, the prior-year safe harbor may be providing false comfort. Confirm the calculation with your advisor and adjust your third-quarter estimated payment, due September 15, if necessary.

Planning Area 2: Retirement Contributions

No other financial decision available to a physician-owner generates a more reliable, tax-advantaged return than maximizing pre-tax retirement contributions. The return is equal to the marginal tax rate applied to every dollar contributed, realized immediately and compounded over the investment horizon. For a physician-owner in a top federal bracket, that represents a guaranteed 37% return on every pre-tax dollar before it earns a single cent of investment income. No market investment, real estate acquisition, or business expenditure provides a comparable risk-adjusted return with this certainty.

The retirement plan landscape in 2026 offers several vehicles, each with distinct contribution limits and administrative requirements. The following summary is designed as a working reference for the conversation with your advisor, not as a substitute for it. Plan design decisions have legal and actuarial dimensions that require professional guidance, but understanding the landscape before that conversation makes it substantially more productive.

Defined Contribution Plans

• 401(k) or Profit-Sharing Plan: The employee deferral limit for 2026 is $23,500 for participants under age 50. Participants aged 50 to 59 and those 63 to 64 can contribute up to $31,000 under the SECURE 2.0 enhanced catch-up provision. When employer contributions (including profit-sharing) are combined with employee deferrals, the total plan contribution limit reaches $70,000 per participant. For a practice owner who controls both the employee and employer sides of the contribution, this structure can deliver a combined deduction in excess of $60,000 annually for those under 50, and higher for those in catch-up eligible age ranges.
• SEP-IRA: Allows contributions of up to 25% of net self-employment income, capped at $70,000 for 2026. This vehicle requires no plan document, carries minimal administrative burden, and can be established and funded as late as the tax filing deadline including extensions. The simplicity is attractive, but the SEP-IRA does not permit employee deferrals, which means it is structurally less efficient than a 401(k) with profit-sharing for high-earning physician-owners who can sustain larger contributions.
• SIMPLE IRA: Designed for practices with 100 or fewer employees, the SIMPLE IRA carries lower contribution ceilings than the 401(k) but offers a straightforward administration structure. Employee deferral limits for 2026 are $16,500, with catch-up contributions available for participants aged 50 and older. For smaller practices not yet ready to sponsor a full 401(k) plan, the SIMPLE IRA provides a meaningful step up from having no plan at all.
• Backdoor Roth IRA contributions: Physician-owners whose income exceeds the direct Roth IRA contribution limit can still access the Roth through the backdoor strategy, contributing to a non-deductible traditional IRA and converting it to a Roth. The strategy is legitimate and widely used, but it requires careful sequencing to avoid the "pro-rata rule" that can generate unexpected taxable income if other traditional IRA balances exist. Coordinate this with your advisor before year-end, and do not execute it unilaterally.
• Health Savings Account maximization: Physician-owners enrolled in a qualifying high-deductible health plan can contribute $4,300 as an individual or $8,550 for family coverage in 2026, with an additional $1,000 catch-up contribution available for those aged 55 and older. The HSA is the only account in the tax code that provides a triple tax benefit: deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. Physicians who are not maximizing this account are paying taxes on dollars that they could shield permanently.
• Charitable giving strategies: For physician-owners who are charitably inclined, the summer is a productive time to evaluate which giving strategy fits the 2026 income picture. Qualified Charitable Distributions directly from an IRA, available to those aged 70 and a half or older, satisfy required minimum distribution obligations and exclude the donated amount from income entirely. Donor-advised funds allow a current-year deduction for amounts that can be granted to charities over multiple future years, a useful tool in a high-income year. Charitable remainder trusts and charitable lead trusts offer more complex structures with estate planning dimensions worth exploring for larger gifts.
• Estate planning review: For physician-owners whose estates may approach or exceed the current federal exemption, a review of existing planning structures is warranted, particularly given the uncertainty surrounding future estate tax law. Family limited partnerships, irrevocable life insurance trusts, grantor retained annuity trusts, and spousal lifetime access trusts all have specific windows of opportunity for establishment or funding that do not remain open indefinitely. If your estate plan has not been reviewed in the past two years, scheduling that review now, while you have runway before year-end, is time well spent.

Defined Benefit and Cash Balance Plans

For physician-owners over age 50 with consistent, high levels of practice income and a genuine multi-year commitment to funding large retirement contributions, the defined benefit or cash balance plan deserves serious consideration. These plans allow annual tax-deductible contributions that, depending on age and income, can reach $200,000 or more per year. The return on those contributions, at a 37% marginal rate, is extraordinary.

The trade-offs are real and should be understood clearly. Defined benefit plans require actuarial management, carry minimum funding obligations, and are generally subject to IRS minimum coverage rules that may require contributions on behalf of eligible employees, not just the owner. They represent a multi-year commitment, and unwinding them before the intended horizon carries cost and complexity. They are not appropriate for every physician-owner. But for the right profile, a high-income physician in their 50s with stable practice income and a serious wealth accumulation goal, no other legal tax reduction strategy comes close to their impact.

One additional note that is frequently overlooked: most defined contribution plan types must be established by December 31 of the tax year in which the first deduction is claimed, while a defined benefit plan must be established even earlier to allow actuarial work to be completed. If a physician-owner has not yet established a retirement plan and wants to capture a deduction for 2026, initiating that conversation now is not early. It is, depending on the plan type, barely timely.

Planning Area 3: Entity Structure

Many physician-owned practices were structured years ago under circumstances that have since changed materially. Partners have come and gone. Income has grown. The practice has added associates or ancillary service lines. Tax law has evolved. The entity structure that was optimal five years ago may not be the one that serves the practice best today, and a mid-year review is the right moment to examine whether changes are warranted before year-end.

Three questions deserve particular attention in the current environment.

S-Corporation Reasonable Compensation

Physician-owners who operate through S-corporations must pay themselves a salary that the IRS would consider reasonable before taking additional income as a distribution. The distribution avoids payroll taxes, which creates the well-known tax advantage of the S-corporation structure for high earners. But the reasonable compensation requirement is not a formality. The IRS has consistently challenged S-corporation compensation arrangements that appear designed to minimize salary and maximize distribution, and settlements in those cases are typically unfavorable.

If your practice income has grown materially since you last reviewed your S-corporation salary designation, or if you are uncertain whether your current compensation level would survive IRS scrutiny, mid-year is the right time to revisit it. The appropriate salary should be benchmarked to what a similarly qualified physician would earn as an employee performing the same functions. Your tax advisor can help you establish and document that benchmark in a way that is both defensible and tax-efficient.

Qualified Business Income Deduction

The Section 199A deduction allows eligible pass-through business owners to deduct up to 20% of qualified business income, subject to income limitations that phase out for specified service businesses, a category that includes medical practices, above certain income thresholds. For 2026, the phase-out range begins at $197,300 for single filers and $394,600 for married filing jointly, with the deduction fully eliminated for incomes above $247,300 and $494,600 respectively.

For physician-owners whose income falls in or above the phase-out range, the question is whether legitimate planning strategies can reduce taxable income below the threshold and preserve access to the deduction. Maximizing retirement plan contributions is the most direct lever. Timing of income recognition and deduction acceleration are others. The precise interplay of these strategies at the margin of the phase-out range can produce significant tax savings, but it requires precise modeling rather than rough estimation. This is a conversation that benefits enormously from current income projections, which is why Planning Area 1 comes first.

Structural Changes Before Year-End

If a physician-owner is planning to bring on a new partner, acquire another practice, add a significant service line, or convert the real estate holding structure of the practice before December 31, the entity structure implications of those transactions deserve careful analysis now, not after the deal is done. The tax treatment of a new partner's buy-in, the treatment of goodwill in a practice acquisition, and the basis implications of a real estate transfer can each produce dramatically different outcomes depending on how the transaction is structured. The opportunity to structure these events optimally exists before they occur. It does not exist after.

Planning Area 4: Equipment and Real Estate Investment

Capital investment planning belongs in mid-year conversations, not year-end ones. The operational timeline for equipment acquisition, installation, and commissioning rarely accommodates a December rush, and a piece of equipment that is ordered in December but not placed in service until January produces no 2026 deduction regardless of when the purchase agreement was signed. The tax benefit requires the asset to be operational, not merely purchased.

Two provisions govern most practice capital investment decisions.

Section 179 Expensing

Section 179 allows the immediate deduction of the full cost of qualifying property placed in service during the tax year, up to the 2026 limit of $1,160,000, subject to a phase-out for total qualifying acquisitions above $2,890,000. Qualifying property includes medical equipment, diagnostic technology, office furniture and fixtures, computers and software, and certain qualified improvement property. The deduction cannot exceed taxable income from the business, but in most profitable practices, that constraint does not bind.

The practical implication for practice owners who have been deferring a significant equipment purchase is that the decision made before December 31 can produce a full first-year deduction rather than a multi-year depreciation schedule. Over the course of a useful life, the present value of an immediate deduction versus a seven-year schedule can represent tens of thousands of dollars in tax savings, depending on the asset cost and the practice's marginal rate.

Real Estate and Cost Segregation

For physician-owners who hold practice real estate in a separate entity, a cost segregation study may unlock depreciation deductions that the standard straight-line schedule leaves unavailable for years. Cost segregation analysis reclassifies building components into shorter depreciation categories: certain electrical systems, plumbing related to specific uses, flooring, and other components can be reclassified from 39-year property to 5, 7, or 15-year property, dramatically accelerating the depreciation deduction into the early years of ownership.

When cost segregation is combined with the applicable bonus depreciation percentage currently in effect, the first-year deduction from a recently acquired or renovated medical office building can be substantial. For practice owners who have acquired real estate in the past several years and have not conducted a cost segregation study, this is worth a conversation with your advisor. The cost of the study is typically recovered many times over in the first year's tax savings.

Planning Area 5: Compensation and Workforce Planning

The compensation structure of a medical practice has tax implications that extend well beyond the owner's own pay. How and when staff and associate physicians are compensated, how bonuses are structured and documented, and how retirement plan benefits are administered all carry direct tax consequences for the practice entity and, in some cases, for the physician-owner personally.

Three areas merit review before year-end.

Year-End Bonus Accruals

Practices that compensate associates or staff with discretionary year-end bonuses should understand the accrual method rules governing their deductibility. For practices that use the accrual method of accounting, bonuses that are approved and authorized before December 31 and paid within two and a half months of the fiscal year-end may be deducted in the year in which they are authorized, even if the payment occurs in the following January or February. This treatment requires proper documentation, specifically a board resolution or documented compensation committee approval before December 31, naming the recipients and amounts or the formula by which amounts will be determined. Practices that have historically treated year-end bonuses as informal arrangements are leaving a meaningful deduction timing opportunity on the table.

Retirement Plan Coverage Testing

Practices that sponsor qualified retirement plans must satisfy IRS non-discrimination testing requirements designed to ensure that the plan does not disproportionately benefit highly compensated employees, including physician-owners, relative to rank-and-file employees. If your practice has grown, changed its associate or staff mix, or modified its compensation structure since the plan was established, it is worth confirming with your plan administrator or advisor that the current plan design will pass coverage testing for 2026. A plan that fails testing can require corrective contributions or distributions that are costly and operationally disruptive, and the issue is far easier to address mid-year than after the plan year has closed.

Associate Physician Compensation Models

For practices that are negotiating or renewing associate compensation agreements, mid-year is a sensible time to evaluate whether the current model reflects both the current market and the current tax environment. The shift in the physician labor market toward blended salary-and-incentive models, documented by MGMA and other compensation survey providers in recent reporting, has tax planning implications for the practice. Higher guaranteed base salaries increase payroll tax obligations, while productivity incentives paid quarterly or annually may allow more favorable timing and structuring. These are not decisions to make on short notice.

Planning Area 6: The Broader Wealth Picture

The final planning area deliberately steps outside the practice. For physician-owners who have spent years building a successful medical business, it is easy to allow the practice to absorb virtually all financial attention and nearly all available capital. The practice is the center of gravity, and everything else orbits it. This is understandable, but it creates a risk that many physicians recognize only in retrospect: the practice is not a retirement plan. It is a business, with business-specific risks, and the personal financial lives of physician-owners deserve the same disciplined planning attention that the practice receives.

With the second half of 2026 ahead, the following personal planning areas deserve attention alongside the practice-level work described above.

The Six-Month Advantage

The competing demands of clinical practice, practice management, and personal life make it easy to defer financial planning conversations until they feel urgent. However, the strategies that require urgency to implement are the ones that have already been compromised by the delay.

At Baldwin CPAs, we work with physician-owners across Kentucky. Our healthcare-focused team understands the intersection of practice economics and compensation structures that make tax planning for physicians uniquely complex. To discuss how we may be able to serve your practice, contact us today.