How do professionals such as physicians minimize their tax burden?

[Habeed]

Physicians are paid salaries that on average put them in the highest tax brackets. In practice, it seems like this penalizes them because other professionals with shorter training periods but lower annual incomes earn similar amounts of total money, just spread out over more time.

Also, as I understand it, the enormous costs associated with becoming a physician can't be deducted, while they could if they were incurred the same year you were paid income.

Instead, when you finally pay back the huge student loan, you first have to pay 40% or more taxes on the income you use to pay the loan with.

Are there ways to avoid paying 40% of, say, a $200k income in taxes? (including federal, state, and medicare/medicaid taxes)

I know that physicians who have their practices organized as a business can deduct certain things that everyone has to have, such as a desk at home and a truck ("home office", "company vehicle") but this seems to be a drop in the bucket. A few k, tops. Most of these deductions have strict dollar caps, leaving the hypothetical physician with most of an $80k tax bill.

It's considered "common knowledge" that the wealthy have tons of ways to reduce their taxes, and I'd like to know how the heck physicians and other professionals can take advantage. Warren Buffett must make billions in capital gains, taxed at 15% with no medicare/medicaid contribution or state taxes. But income made in a practice, after expenses are paid...is income, subject to 35% corporate or personal tax rates.

How can a hard working professional legally reduce his or her taxes significantly?

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[southerndoc]

Physicians who have their practices organizes as incorporated businesses cannot deduct home office equipment, vehicles, etc. You can deduct depreciation on said items if you are using them SOLELY for business purposes. Most physicians do not have the income to own a separate car for business purposes.

If you have a good accountant, you can minimize your tax burden. However, you're still going to be paying a lot no matter how much finagling you do. You'll still have income in the highest tax bracket.

This goes to show that most physicians are in it to help people, not for the money. If I wanted to just make money, I would have gotten a masters in health administration (2 years) instead of medical school and residency (8 years). I could've became a hospital CEO and made a million or more every year.

 

[Habeed]

can deduct depreciation on said items if you are using them SOLELY for business purposes.

Not what it says here :
http://www.mdtaxes.com/news1206.html

Must be self employed as an independent contractor. At this point, you can declare an area of your house your "home office", and deduct your computer, desk, books, ect. This area must be used solely for business purposes, but your car is not.

And the rules seem to allow for any car.

 

[southerndoc]

Not what it says here :
http://www.mdtaxes.com/news1206.html

Must be self employed as an independent contractor. At this point, you can declare an area of your house your "home office", and deduct your computer, desk, books, ect. This area must be used solely for business purposes, but your car is not.

And the rules seem to allow for any car.

What applies in 2006 doesn't always apply to 2008.

 

[edmadison]

There are a couple of issues here. First, you can minimize taxes on your income by organizing yourself like a business. This is what some prior posters alluded to. If you are not an employee, you can put money in retirement (essentially a personal 401K) and save on taxes that way as well. In terms of investing, this is a bit more difficult. Municipal bonds can be a great way to make money investing and tax free. Of course we may see a heap of towns declaring bankruptcy (Chaper 9!).

Ed

 

[LADoc00]

Answer: when you are making well over 300K, it is VERY difficult to minimize taxes unless you can make several million a year and utilize questionable off shore shelters.

Basically 300K-roughly 5million is a tax doughnut where you get totally killed, especially if you have zero mobility in going to low tax burden states/countries.

 

[radslooking]

As an independent contractor, is your best bet starting an IRA then...?

 

[dragonfly99]

I for one will be grateful if/when I ever make enough to be in the higher tax bracket(s)...LOL.
But I get where you are coming from Habeed.
IRA's and/or other retirement plans like 403(b) are good (which type of retirement account really depends on your status...employed vs. independent contractor, etc.).
Also, those who are still residents/fellows should really try to pay off the student loans...at least enough payments so that you can get your student loan interest tax credit. You can deduct some of the interest you pay on your student loans...it's either $2000 or $2500 that's the max you can get a tax credit for. It gets phased out at a certain income (used to be 55k/year for a single person) so you can still get it if you are a resident or fellow.

 

[dragonfly99]

Oh yeah,
I guess this is basic for some of you, but maybe not for some students and residents:
you may be able to do a lot better by itemizing deductions on your tax return than just taking the standard deduction.

Last year was the first year I did this...I figured that since I give money to charity, and I had expenses related to job hunting, and medical expenses, I would try it and see how well I could do. I actually was able to save a little money that way.

When folks (such as doctors in a group) open their own businesses they often get an accountant to do their tax returns...definitely the business one and perhaps your personal one as well. There are so many changes in the tax laws that at some point (i.e. business owner or higher income) it becomes better to consider letting somone else do your taxes. For the rest of us plebians, I'm actually in favor of doing your own - I can't imagine that one of those two-bit tax preparers would do better than me and my $19.99 Taxcut softwar!

 

[AndyFromMDTAXES]

While most doctors pay a ton of taxes, there are steps you can take to minimize your tax burden. For people who work as employees, max out your retirement plans and take full advantage of any pre-tax opportunities available through your employer's benefits package.

If you have your own practice, or so some moonlighting or consulting on the side, there are a lot of ways to be creative and save some taxes. I wrote an article about this last December available at: http://www.mdtaxes.com/news1207.html. Please let me know if I left anything out of this article.

 

[MOHS_01]

What Andy said... basically, if you're a doc and work a lot, you will pay a lot of taxes (arguably more than your share). There really are very few, if any, ways around that fact. One way or another the revenuers always get theirs....

 

[drfunktacular]

Warren Buffett must make billions in capital gains, taxed at 15% with no medicare/medicaid contribution or state taxes. But income made in a practice, after expenses are paid...is income, subject to 35% corporate or personal tax rates.

Is it wrong that I think the capital gains tax should be changed so professional investors and hedge fund managers can't get away with this? I mean, certain conservatives tend to act like capital gains cuts are the solution to all economic woes (cf. Repub. calls for capital gains cuts as part of the bailout plan).

But if Warren Buffett started paying 35% on his income like physicians do, that would take an awful lot of strain off our national financial health.

I guess the counterargument would involve forcing capital to flee the US to other markets, or something?

 

[Pulpal Insult]

Answer...(although not easy)
Real estate. Get your spouse to qualify for "real estate professional" status. This puts all your expenses into 'active' income category instead of the typical 'passive' category and therefore makes any losses on the investment (startup, operational expenses, and yes in some cases car) go against your earned income at the practice. This will show a paper loss on your IRS form and you get back say 40% of every dollar spent and still have a tangible assest, which if you bought right, will also produce a profit. For the years where you can't claim 'RE professional' your investment is deemed 'passive' and any profit with not have Social Security or Medicaid/medicare taken out of it. Obviously, this is nutshell with many more caveats to it but its what I'm doing.

 

[LADoc00]

Is it wrong that I think the capital gains tax should be changed so professional investors and hedge fund managers can't get away with this? I mean, certain conservatives tend to act like capital gains cuts are the solution to all economic woes (cf. Repub. calls for capital gains cuts as part of the bailout plan).

But if Warren Buffett started paying 35% on his income like physicians do, that would take an awful lot of strain off our national financial health.

I guess the counterargument would involve forcing capital to flee the US to other markets, or something?

I HATE government, I support people like Ron Paul, but even people like me are getting SICK of bankers and high profile investors abusing capital gains rates. I personally fee capital gains rates should NOT be flat. They should scale exactly like earned income.

Why the hell do we penalize EARNING income? Shouldnt we as a society promote going to work in the morning rather than living off investments with unhealthly doses of hookers-n-blow??

 

[drfunktacular]

I HATE government, I support people like Ron Paul, but even people like me are getting SICK of bankers and high profile investors abusing capital gains rates. I personally fee capital gains rates should NOT be flat. They should scale exactly like earned income.

Why the hell do we penalize EARNING income? Shouldnt we as a society promote going to work in the morning rather than living off investments with unhealthly doses of hookers-n-blow??

Hear, hear.

 

[The White Coat Investor]

Here's what I do:

Maximize retirement accounts such as SEP-IRAs, solo-401Ks, IRAs, Roth IRAs etc.

Invest as much as possible in tax-efficient investments in taxable investment accounts. This converts your income from the classic employee quadrant to the investing quadrant; you'll defer many of your taxes and those you do pay will be at 15%.

Understand the tax code and make sure you're getting all the deductions you're entitled to. Give to charity, buy a house, if you're an independent contractor write off your home office etc.

Work part-time. This allows you to still use things such as ESAs, Roth IRAs, and student loan deductions your income would otherwise disqualify you for and pay a lower overall tax rate on your income.

Live in a state with no income tax or local tax. (AK, WA, NV, FL, TX For goodness sake get out of New York and California. They're physician hell. Same income, higher taxes, higher cost of living. Bad bad bad. Go live in Indiana where physicians still live like the upper, upper middle class instead of Manhattan where you can't afford a condo.

Remember that you don't pay SS taxes (12% of your income for contractors) on money you make over ~$100K.

Don't get suckered into variable annuities, cash-value life insurance and other "tax-shelters." Physicians are suckers for these because they hate paying taxes. Don't let the tax tail wave the income/investment dog.

Join the military. Although you'll be paid much less, because a good chunk of your income is tax-free, you'll pay hardly anything in tax.

Be grateful you are make enough to pay taxes.

 

[edmadison]

Join the military. Although you'll be paid much less, because a good chunk of your income is tax-free, you'll pay hardly anything in tax.

You'll do especially well during the 12-15 months you're deployed in Iraq of Afghanistan every two years because of the combat zone tax exclusion.

Ed

 

[The White Coat Investor]

Not what it says here :
http://www.mdtaxes.com/news1206.html

Must be self employed as an independent contractor. At this point, you can declare an area of your house your "home office", and deduct your computer, desk, books, ect. This area must be used solely for business purposes, but your car is not.

And the rules seem to allow for any car.

I started as an IC this year. After reading the relevant IRS publications, I have decided NOT to try to claim a home office. You have to use the home office regularly AND exclusively (meaning you don't use the room for anything else) or see patients there. Just making phone calls, sending emails, and finishing charts doesn't count.

 

[Nirv]

Don't join the military: only your housing is tax-free unless you go to Afghanistan for 6 months every other year. You would make half of what you could in private practice. And you have zero say in running your clinic, as well as running your personal career: how about no money for your CME this year.

 

[touchadream]

Physicians are paid salaries that on average put them in the highest tax brackets. In practice, it seems like this penalizes them because other professionals with shorter training periods but lower annual incomes earn similar amounts of total money, just spread out over more time.

Also, as I understand it, the enormous costs associated with becoming a physician can't be deducted, while they could if they were incurred the same year you were paid income.

Instead, when you finally pay back the huge student loan, you first have to pay 40% or more taxes on the income you use to pay the loan with.

Are there ways to avoid paying 40% of, say, a $200k income in taxes? (including federal, state, and medicare/medicaid taxes)

I know that physicians who have their practices organized as a business can deduct certain things that everyone has to have, such as a desk at home and a truck ("home office", "company vehicle") but this seems to be a drop in the bucket. A few k, tops. Most of these deductions have strict dollar caps, leaving the hypothetical physician with most of an $80k tax bill.

It's considered "common knowledge" that the wealthy have tons of ways to reduce their taxes, and I'd like to know how the heck physicians and other professionals can take advantage. Warren Buffett must make billions in capital gains, taxed at 15% with no medicare/medicaid contribution or state taxes. But income made in a practice, after expenses are paid...is income, subject to 35% corporate or personal tax rates.

How can a hard working professional legally reduce his or her taxes significantly?

You have asked above questions so very well, but I'm afraid its more than 40% lots of places. Yes, there are ways to avoid paying, not EVADE, AVOID. Critical distinction.

Do successful investors ask their doctors for investment advice? Wonder why not? When you need complex medical care for a family member, do you call your tax advisor? Of course not, you call your colleagues around the country. When my pathologist dad had an acoustic neuroma removed in the 60’s, he found a neurosurgeon in Canada who had done more of those surgeries then than anyone else at the time, right? So why would you think that the sophisticated advice you need is or should be at the CPA downtown? The principle is the same. You need someone who has done a lot of the same procedures again and again so it is familiar and easy for them.

The info you want IS common knowledge in my circle, but it’s a small circle of financial advisors who utilize teams of real tax lawyers, pension specialists—and I don’t mean IRAs, corporate lawyers, corporate executive benefits experts, etc., and a huge information base from hundreds of companies who serve those corporate executive needs. We have the teams in place and leverage them so they can be affordable to doctors, as you couldn’t afford to do this one on one, like Warren can.

Often doctors know more about the restaurants in cities they visit than they do about the education, background and knowledge of their most important advisors-- financial advisors, bankers, investment advisors, brokers, CPAs, health care attorneys, tax attorneys, group managers, payroll companies, retirement administrators, etc. It would open your eyes to attend a meeting of investment advisors and just anonymously listen to what they say about doctors. Shop talk about doctors in the investment industry—talk about profiling—you have been profiled, and yours is high. Think you aren't discussed in the bank board room? Think again.

So when seeking advice, you can’t just take the first person to come along and you can’t believe everyone who says “I specialize in helping doctors.” You just ask exactly what you asked above, then listen to the answer. Or rather listen for your answer. You will know right away because you will probably hear the same old stuff on here you have just heard and as you already correctly pointed out, they are all talking about chump change. OR, you will be offered a chance to have them manage your investment accounts (most advisors know so little of doctors’ actual earning patterns they don't even realize you don't HAVE any personal brokerage accounts) and then quickly move to wanting to manage your 401K money, and sell you life, disability, and long term care insurance, which is just what ActiveDutyMD expected, smugly and probably accurately, smelling a "ripoff." MOVE ON. Wrong person.

You need to ask an insider. There are few of us, nationwide, but we know or know of each other. I happen to have a tax law background, but I have advisor colleagues who are former CPAs, lawyers, or not so credentialed, but have the knowledge and the access you need because they DO actually specialize in helping doctors, and they won’t be asking for your assets. They will be asking if you pay too much in tax. These are the people you will want to ask about investments, business strategy, your practice set-up, insurance questions, etc. We also know those who are pretenders or more often nice people with inadequate knowledge who would love to help you but it’s not within their capacity (these are the ones ActiveDutyMD has seen a lot of which is what makes him such a profiler now(!)) and some of them are quite prominent. I know a couple of advisors who are top tier on the lists of "best financial advisors in America for doctors," according to Medical Economics magazine, and the best in America, period, by other periodicals, and I wouldn't let them manage my barn cats' feed rations. So wait until you hear what you want so badly to hear. You are ahead of the game to be AWARE that taxes are your biggest problem once you start earning.

So, how can you access this information (without paying for it!)?

I teach CME for free (schedule permitting and location appealing) when invited by an institution or society that is ACCME accredited. Doctors need to ask their CME directors to seek me out; although the ACCME standards specifically permit practice management and risk management as appropriate topics, which is what we are talking about here, many CME directors are not MDs and do not feel comfortable stepping out of the clinical comfort zone unless prompted by your requests. I will also come and teach residents and fellows if asked by an institution and will do this without a fee, also. I talk about tax planning for doctors and practices, not about saving hundreds and thousands, but how to avoid overpaying by tens of thousands and hundreds of thousands of dollars.
I also review contracts offered to first time resident and fellow graduates for free. Although this can’t be considered legal advice, (I’m only licensed in two states and if its free, I'm not taking liability )I hope forum members will feel free to ask, as I have seen contracts (and collect them for comparison) from across the country and in many specialties and different sizes of groups. So if anyone wants to start a discussion on that topic, I would think many here could benefit. AndyfromMDTaxes has some great info, but he stopped in the last paragraph, which is what I think you are asking about. It’s not for everybody, which is WHY its not common knowledge. But it sure does fit a lot of MDs, DOs, DMDs, and DDSs, or any high earner with high taxes, inlcuding poker players and athletes.

Circular 230 Disclaimer: To comply with IRS requirements,please be advised that, unless otherwise stated by thesender, any tax advice contained in this message and its attachments is not intended or written to be used, andcannot be used, by the recipient to avoid any federal taxpenalty that may be imposed on the recipient, or to promote,market or recommend to another any referenced entity,investment plan or arrangement.

 

[RiseAbove]

1.) There is no legal way to really make money. Think about this!

2.) If you got into medicine to make $300K-5million/year...you are fantacizing and perhaps mentall ill. Plan on making 2cents/hour for all the demands that will be put on you.

3.) If your goal is to make large amounts of money, you must speak with people with that expertise. Corporate lawyers in banking law, mitigation, mergers acq etc. in financial centers such as London, NYC, Dubai...would be a good start!

4.) How is it that artists can be the most fulfilled human beings and they never think about money. Sometimes they are super famous and make millions to billions. Think about this!

5.) Think discovery and creation...then follow up with patents and copyrights and you may have the good life, not just a title of degree which means nothing...it means more work!

As for Warren Buffet...he is who he is because he has the principles, virtues and mindset for making billions. Some of it was fearless experimentation and discovery, while some of it was luck...regardless, it was the amount and quality of his energy that made him such a financial success. Most doctors that I know are very impure and mislead!!!

 

[attendingDO2003]

If I wanted to just make money, I would have gotten a masters in health administration (2 years) instead of medical school and residency (8 years). I could've became a hospital CEO and made a million or more every year.

I know this is a very old post, but it's so, so painful to see these types of replies to very legitimate questions. Because, as we all know, "a masters in health administration" often leads to a position as "a hospital CEO" and "a million or more every year."

It's no wonder southerndoc is a mod.

 

[TexasPhysician]

I started as an IC this year. After reading the relevant IRS publications, I have decided NOT to try to claim a home office. You have to use the home office regularly AND exclusively (meaning you don't use the room for anything else) or see patients there. Just making phone calls, sending emails, and finishing charts doesn't count.

I know this is in response to an old post, but ActiveDutyMD likely did not read the cases defining what "regular" use is. It is very possible to start a home office as a physician.

 

[The White Coat Investor]

I know this is in response to an old post, but ActiveDutyMD likely did not read the cases defining what "regular" use is. It is very possible to start a home office as a physician.

Why don't you provide a link to the cases?

I still think it is a high hurdle for an independent contracting physician (especially one working at only one site) to claim a home office deduction. It's a big flag for the IRS. Doesn't mean you won't pass the audit, but it is MUCH more likely you'll get to go through it.

 

[TexasPhysician]

Why don't you provide a link to the cases?

I still think it is a high hurdle for an independent contracting physician (especially one working at only one site) to claim a home office deduction. It's a big flag for the IRS. Doesn't mean you won't pass the audit, but it is MUCH more likely you'll get to go through it.

Commissioner v Soliman

Feel free to google that and use whatever link you wish.

Every home office deduction taken by a high income individual is a huge RED flag. I'm not denying it. You are likely to get audited no matter what because this deduction is highly abused. When you pass the audit, be prepared to be audited again in a few years. The problem is that many people are afraid of being audited.

The first time you get audited - get some professional advice from an accountant/tax attorney or whatever. Read a good book on the rules of the home office deduction. You will quickly learn how to play "the audit game".

I would argue that if you aren't audited at least once every 5-10 years, you are giving way too much money to the government.