By: David B. Mandell, JD, MBA and Carole Foos, CPA
As a physician, do you realize that, after the tax increases of recent years—between income, capital gains, Medicare, self-employment and other taxes—you likely spend between 45 and 55 percent of your working hours laboring for the IRS and your state?
Given these sobering facts, the purpose of this article is to show you four ways to potentially save and possibly motivate you to investigate these planning concepts early in the year when you can best take advantage of them. Let’s examine them now:
1. Use the Right Practice Entity/Payment Structure/Benefit Plans
These areas are where the vast majority of tax mistakes are made by doctors today—and where many of you could benefit by tens of thousands of dollars annually with the right analysis and implementations. Issues here include:
- Using the legal entity with maximum tax/benefits leverage—whether that is an S corporation, C corporation, LLC taxed as S, C, partnership, or disregarded entity.
- Using a multi-entity structure to take advantage of two types of entities and their tax/benefit advantages.
- Managing the payment of salary, bonus, distribution, and partnership flow-through to take advantage of maximum retirement benefits and minimize income, social security, and self-employment taxes.
- Considering benefit plans beyond the typical profit-sharing/401(k) with which most medical practices start and end their benefit planning.
2. Don’t Lose 17-44 percent of Your Returns to Taxes; Explore Investment Managers Who Manage with Taxes in Mind
It is quite well known that most investors in mutual funds have no control of the tax hit they take on their funds. What you might not know is how harsh this hit can be. According to mutual fund tracker Lipper, “Over the past 20 years, the average investor in a taxable stock mutual fund gave up the equivalent of 17 to 44 percent of their returns to taxes.”
How to avoid this problem? Consider working with an investment firm that designs a tax-efficient portfolio for you and communicates with you each year to minimize the tax drag on that portfolio. In a mutual fund, you have only one-way communication—the fund tells you what your return is and what the tax cost is. Working with an investment management firm, you get two-way communication, as the firm works with you to maximize the leverage of different tax environments, offset tax losses and gains, and other tax minimization techniques.
3. Gain Tax-Deferral, Asset Protection through Cash Value Life Insurance
Above, you learned about the 17-44 percent tax hit most investors take on their investments in stock mutual funds. Similar funds within a cash value life insurance policy will generate NO income taxes—because the growth of policy cash balances is not taxable. Also, nearly every state protects the cash values from creditors, although there is tremendous variation among the states on how much is shielded.
4. Consider Charitable Giving
There are many ways you can make tax beneficial charitable gifts while benefiting your family as well. The most common tool for achieving this “win-win” is the Charitable Remainder Trust (CRT). A CRT is an irrevocable trust that makes annual or more frequent payments to you (or to you and a family member), typically, until you die. What remains in the trust then passes to a qualified charity of your choice.
This article gives you a few tax-saving ideas. For larger practices with $3-5 million or more of revenue, there are additional techniques that could offer significantly greater deductions. These are outside the scope of this article, but are mentioned in the articles on our website and are topics of our free e-newsletter. If you want to save taxes, the most important thing you can do is start looking for members of your advisory team who can help you address these issues in advance. Otherwise, you will be in this same position this April 15…and next April 15 and the one after that.
About the Authors
David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, including For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com, where Carole C. Foos, CPA is a principal and lead tax consultant. They can be reached at 877-656-4362 or email@example.com.
Readers of the Getting Paid Blog can receive a free hardcopy of “For Doctors Only: A Guide to Working Less & Building More” by calling 877-656-4362, or visiting www.ojmbookstore.com and enter promotional code KAREO027 free ebook download of For Doctors Only or the shorter For Doctors Only Highlights for your Kindle or iPad.
About the Author
David B. Mandell, JD, MBA, is former attorney, consultant and author of five national books for doctors, including “For Doctors Only: A Guide to Working Less & Building More,” as well a number of state books. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com. He can be reached at 877-656-4362 or firstname.lastname@example.org.
Disclosure: OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.