Pain Relief for Next April 15th

As a dermatologist, 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 to 55 percent of your working hours laboring for the IRS and your state? That is a lot of time with patients for someone else’s benefit. Given this, shouldn’t your advisors be giving you creative ways to legally reduce your tax liabilities? How many tax-reducing ideas does your CPA regularly provide you? If you are like most physicians, you get very few tax planning ideas from your advisors.

Given these sobering facts, the purpose of this article is to show you ways to potentially save and possibly motivate you to investigate these planning concepts now, 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 reading this 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, partnership flow-through to take advantage of maximum retirement benefits and minimize income, social security, and self employment taxes
• Consider 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% of their returns to taxes.” Obviously, over 20 to 30+ years of retirement savings, losing one sixth to about half of your returns to taxes can be devastating to a retirement plan. Nonetheless, too many physician investors settle for this awful taxation.

While a 17-44 percent tax bite is awful, these numbers will likely be worse now and in the near future, as federal capital gains and dividend rates now reach 20 percent for some taxpayers (where they were 15 percent before) and the Affordable Care Act tax adds another 3.8 percent for high income taxpayers as well. Of course, state taxes are an addition to these federal taxes. Such tax increases will only exacerbate the issue.

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. It is not by coincidence that we have two CPAs in our wealth management firm working on these issues with clients.

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.

Conclusion

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 15th…and next April 15th and the one after that. n

The authors welcome your questions. You can contact them at (877) 656-4362 or through their website www.ojmgroup.com.

SPECIAL OFFERS:  To receive a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code PRDERM for a free ebook download of For Doctors Only or the shorter For Doctors Only Highlights for your Kindle or iPad.

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 works as a tax consultant. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

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.