Tax Planning for Doctors and Lawyers in Los Angeles: How to Cut a Six-Figure Tax Bill

A Los Angeles physician earning $600,000 in W-2 income faces a combined marginal tax rate that can exceed 50 percent. Federal income tax at 37 percent. California state income tax at 13.3 percent. Medicare surtax on investment income. The SALT deduction cap limiting how much of the state tax is deductible federally. By the time the return is filed, the IRS and the FTB together have taken more than half of every dollar above a certain threshold.

Most high-income professionals in California accept this as the cost of earning well. The ones who work with a CPA who plans — rather than just files — consistently pay significantly less. Here is what that planning looks like in practice.

The Retirement Account Arbitrage

A W-2 physician contributing the $23,000 annual maximum to a 401(k) is capturing roughly $11,500 in federal and California tax savings. That is meaningful but not the ceiling. A physician who has set up a solo 401(k) through a professional corporation or partnership can contribute up to $69,000 per year in 2024. A defined benefit plan — essentially a private pension — can allow annual contributions exceeding $200,000 for older, high-earning professionals.

The strategy depends on income level, age, and how income is structured. A physician in a large health system with no practice ownership has fewer options than a physician who controls their billing entity. An attorney at a firm partnership has different levers than a solo practitioner. The planning starts with understanding the structure.

The S-Corp Election for Practice Income

Many physicians and attorneys receive income through a professional corporation or LLC. If that entity is taxed as a C-Corp or a sole proprietorship, they are paying more in self-employment or payroll taxes than necessary. An S-corp election allows the professional to split income between a W-2 salary (subject to payroll tax) and a pass-through distribution (not subject to payroll tax). At $300,000 of net practice income, the payroll tax savings from an appropriately structured S-corp election often exceed $15,000 per year.

California does not make this simple. The state charges its own 1.5 percent S-corp tax plus the $800 minimum franchise tax. The entity-level tax has to be modeled against the payroll tax savings to confirm the election is beneficial at your specific income level. It almost always is for professionals earning over $150,000 in net practice income.

The California PTE Election

For professionals with pass-through income from a partnership, S-corp, or LLC — including law firm partners and physician group owners — the California Pass-Through Entity tax election is one of the most valuable planning tools currently available. It allows the entity to pay California income tax at the entity level at a 9.3 percent rate and deduct it federally, partially restoring the SALT deduction that was capped at $10,000 federally. With the cap increased to $40,000 for 2025 through 2029, the benefit is somewhat reduced but still real for most California professional practice owners whose state tax burden exceeds the cap.

Real Estate as a Tax Planning Tool

High-income professionals who purchase real estate — particularly those who qualify or can qualify as real estate professionals — have access to depreciation deductions that can offset active income. A physician who owns a medical office building can, with the right entity structure and time documentation, use depreciation losses from that property to offset a portion of their practice income. Cost segregation accelerates those deductions.

This is not a strategy for every professional, but for those who are actively purchasing real estate alongside their practice income, the interaction between real estate professional status and accelerated depreciation is one of the most powerful planning combinations available under current law.

When to Act

Most of the strategies above have to be set up before the year ends. Defined benefit plan contributions, S-corp elections, PTE payments, and retirement account elections all have deadlines. A conversation in November is worth having. A conversation in April, after the year has closed, is mostly documentation of what already happened.