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Rx Wealth Advisors

Rx Wealth Advisors

Physician-Focused Firm

New to RX Wealth? Start Here

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    • How We Do It
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Tax Planning

What Is the Best Entity to Run My Business?

February 1, 2023 by crystal

Creating a new business is exciting. Yet, knowing which legal business entity to operate under can be difficult since there are several options, each with its benefits and concerns. [1]

When choosing a business entity, you must consider the legal aspects, such as asset protection, who owns the entity, and how it will be taxed. Moreover, consideration needs to be given to the amount of annual administration needed to maintain the business entity. For example, corporations need to hold annual meetings and maintain minutes, or else there is a possibility that if sued, the liability protection afforded by the corporate structure may be lost. 

It is extremely important in operating a business entity to respect the formalities. Many business owners operate the business like their personal piggy bank, which could bring about unwanted legal and tax issues.

There is always a need to save money during the initial setup of starting a business, but you shouldn’t skimp on forming the business entity. You should always consult a qualified attorney and a CPA before making any decisions on the business structure. Do your research and understand the pros and cons of each business entity and how it protects your personal assets. 

While not a replacement for professional advice, this overview of the common business entities can help you choose the right one for your situation.

Sole Proprietorship

Sole proprietorships are businesses owned by just one person and easily established. A sole proprietorship provides no personal asset protection to the business owner. 

Forming and maintaining a sole proprietorship is easy, and no separate income tax return is needed. The business income must be reported on the Schedule C of the owner’s income tax return. [2]

With no protection between personal and business assets, owners become personally liable for their business’s financial obligations. However, it is recommended the business owner maintain a separate checking account for the business and keep appropriate accounting records.

This entity is generally best suited for businesses such as consulting, retail, freelance work, or other services provided directly by the owner and with no employees other than the owner. Since the owner is the sole employee and provides all services, other business entities may offer little asset protection.

Partnership

These are business entities owned by at least two people. Partnerships are not taxed at the partnership level but pass through their taxable income and losses to each partner based on their ownership percentage. The partners report the income or loss on their personal income tax return. [3]

If you are a general partner in a partnership, you will have exposure to the partnership’s liabilities. However, if you serve as a limited partner, your liability is generally limited to the money invested.

As for business control, general partners usually run the business. The operations are defined by a partnership agreement. As a limited partner, you have by definition, a “limited” say in the business operations. 

Additionally, partnerships cost more to form than sole proprietorships due to the fact an attorney will need to draft the partnership agreement.

Finally, smaller groups of similar or complementary professionals, such as medical professionals, lawyers, and CPAs, generally operate as a partnership since they are looking to market their services under a single name and share business operations and control. 

Limited Liability Company (LLC)

An LLC is treated as a separate legal entity that is distinct from its owners. It provides a layer of asset protection for the owner’s personal assets. However, an LLC provides great flexibility on how it is taxed. Depending on the number of owners, it may be taxed as a sole proprietor, partnership, corporation, or S-Corporation. LLCs can provide great flexibility. [4]

There is a default tax treatment for an LLC based on the number of owners and whether it is foreign or domestic. However, owners may elect to be treated differently for tax purposes under certain circumstances. [4]

Also, certain states, such as Wyoming, Nevada, and Delaware, provide better laws for forming and operating an LLC. However, when forming an out-of-state LLC, there are additional costs. 

Businesses and their owners looking for the protection and separation of personal assets from the business while gaining ultimate flexibility with the corporate formalities may consider forming an LLC.

C-Corporation

A C-Corporation, also commonly known as a C-Corp, operates as its own distinct entity and offers personal liability protection to its shareholders. However, C-Corps also require more annual administration, such as meetings and recording of meeting minutes. Moreover, the corporation files its own income tax return and pays its own taxes on profits. Additionally, it may pay a higher corporate income tax rate than an individual shareholder might pay if the income were taxed on their personal tax return. 

Full personal protection, the ability to generate funds through the sale of stocks, and potential tax advantages give C-Corps the support to operate for years to come. Additionally, the Federal tax code provides for gain exclusion in certain circumstances on the sale of corporate stock. [5]

The inherent disadvantage to operating a C-Corp is double taxation. C-Corps are taxed on their profits, and shareholders are taxed when they receive their dividends. This can result in a Federal tax as high as 39.8%.

With the introduction of the Qualified Business Income Deduction on pass-through entities, operating as a C-Corp may just be too costly. [6]

On the other hand, for businesses that will earn little money in the start-up phase but provide a large gain on a future sale, C-Corps may be a good operating structure.

S-Corporation

S-Corporations, also commonly known as an S-Corp, provide the same personal liability protection as a C-Corp while eliminating double taxation. However, S-Corps have their own restrictions on who can be a shareholder. [7]

S-Corps cannot tap into some of the tax advantages of a C-Corp and are required to have no more than 100 shareholders, all of whom must be U.S. citizens. [1] 

Businesses and owners may gain advantages from the C-Corp structure while avoiding double taxation. Additionally, business owners who meet certain requirements may qualify for the Qualified Business Income Deduction, thus lowering the effective Federal income tax rate on taxable income. [6]

Consult a Tax or Legal Professional

Keep this information in mind as you go through the process of establishing your business entity, but remember that this is only a general overview and should not replace professional, personalized advice and recommendations you may receive when collaborating with a lawyer or CPA. Make sure to consult an expert and do not be penny wise, pound foolish when starting a new venture. 

If you are considering starting a new business and need a complimentary consultation, please reach out to Rx Wealth.

Sources: 

  1. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
  2. https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships
  3. https://www.irs.gov/businesses/partnerships
  4. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
  5. https://www.law.cornell.edu/uscode/text/26/1202
  6. https://www.law.cornell.edu/uscode/text/26/199A
  7. https://www.law.cornell.edu/uscode/text/26/1361

 

This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, in conjunction with Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

2022 Tax Planning Opportunities

December 6, 2022 by crystal

Ideally, tax planning should be a continuous process undertaken all year long, possibly over multiple years, to achieve the greatest gain. However, it tends to be more top of mind at the end of the year when the time to take action to lower the current year’s tax burden is running out. Here is a list of a few tax planning strategies you may want to take advantage of as we approach the end of 2022. 

  • Shift ownership of business entities to lower-income taxpayers or entities. This may also help you take advantage of the Section 199A deduction, which allows qualified trades or businesses to deduct 20% of qualified business income, subject to certain limitations.
  • Consider “bunching” charitable donations through a donor-advised fund (DAF), especially if you are in a high tax bracket this year and expect to be in a lower one in the future.
  • Another reason to consider bunching donations: The $300 above-the-line charitable contribution deduction was not extended past 2021, so the only way to deduct your charitable contributions this year is to itemize rather than take the standard deduction. Bunching donations for multiple years into a single year will help you accumulate enough deductions to make that possible.
  • If you have children in a lower tax bracket, hiring them to work for you in the business can be advantageous. You’ll receive a nice tax deduction for the salary you pay them, and they will pay little to no taxes on the income (depending, of course, on their tax bracket). For example, in 2022, your child will be exempt from Federal income tax for the first $12,950 of earnings. (Physicians, read my full article on the benefits of hiring your child here: Should I Hire My Child in My Physician Practice?)
  • If you are considering selling your business before year-end or next year, consider setting up a defective beneficiary trust for your child in a lower tax bracket and gifting an ownership interest. This may allow for capital gains to be taxed in a lower bracket.
  • If you are selling your business and you’re charitably inclined, consider contributing the shares of the business to a donor-advised fund or using a charitable remainder trust to defer gain. Note that if you are taxed as an S Corp, gifts to donor-advised funds come with special rules, and a charitable remainder trust is not an eligible shareholder.
  • If your 2022 income is low, consider triggering tax on your accounts receivable to accelerate income into the low tax bracket year.  Also, consider deferring your accounts payable until next year when you are in a higher tax bracket.
  • If your business is generating a net operating loss this year, consider a Roth IRA conversion. The income created by the Roth can be offset by the net operating loss, and there’s no limit on the amount of income that can be offset. This can reduce or eliminate the income tax liability on the Roth.
  • So long as you have no Traditional IRAs at the end of 2022, you can make a backdoor Roth IRA contribution.
  • Make sure you are on track to maximize your 401(k) employee contributions of $20,500 if you are under 50 and an additional $6,500 if you are 50 or older for a total of $27,000.
  • Evaluate your business retirement plan and see if it is designed to allow the owner(s) to maximize profit-sharing contributions. 
  • Consider if a cash balance plan is right for you and your business. This type of retirement plan allows for large tax deductions.
  • If you are in a lower tax bracket than you expect to be in the future, you may want to consider contributing to a Roth 401(k) rather than a tax-deductible retirement plan such as a traditional 401(k). This way, you pay taxes on your contributions now at your lower tax rate.
  • Consider converting a vacation home to a rental property. If the property is rented, and you later sell the home at a loss, you will get to claim a capital loss. Otherwise, the property is considered personal use, and capital losses are not allowed. 
  • Depending on your current tax structure, it may be beneficial to set up a complex trust to make charitable contributions from in the future. While individuals can only take a charitable contribution deduction of 50% of their adjusted gross income (AGI), complex trusts can deduct up to 100% of their net income.
  • If you own mutual funds, check to see if you’ll be receiving any distributions this year, and if so, determine if it is more cost-effective to sell the mutual fund before the distribution.
  • Evaluate the tax efficiency of your taxable portfolio. For greater tax efficiency, consider reinvesting any distributions or new cash using exchange-traded funds instead of mutual funds.
  • If you are over 70 ½ and have not yet taken your required minimum distribution from your IRA for 2022, consider donating part of it to charity as a QCD – Qualified Charitable Donation. This allows you to reduce your AGI without having to itemize your deductions. 

These are just a few opportunities to save tax dollars. Should you need advice on your personal situation or want to discuss a strategy you believe will work for you, please feel free to reach out for a free consultation.

While we are providing this as general advice, you should always consult your tax advisor or attorney before implementing any of these strategies.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

Open Q&A for Physicians & Healthcare Professionals

November 23, 2022 by crystal

Chris recently hosted an “Ask Me Anything” open Q&A webinar for physicians and healthcare professionals. In it, he answered questions that participants brought to the meeting, such as:

  • Should I contribute to my Roth 403(b) or should I contribute to a tax-deductible 403(b)?
  • What should I be doing from a tax planning perspective if I am simply employed by a hospital?
  • How do I know how much I need to save for retirement?
  • Given that this has been a rough year, what should I be doing with my investment portfolio and how can I combat inflation?

Watch the recording here:



Should I Hire My Child in My Physician Practice?

June 1, 2022 by crystal

As a practice-owning physician, what a great opportunity you have to employ your child in your practice! Employment helps develop life skills, such as responsibility, work ethic, and money management, while simultaneously providing you with some income tax benefits.

But before you run out and hire your child, there are a few things you need to know.

Staying Within the Law

In Pennsylvania, a minor must be 14 years old to be employed. Additionally, the child needs to obtain a work permit. Each state has its own child labor laws and hours that minors can work during the school year, so be sure to speak to an employment attorney or accountant to ensure state law compliance. 

After ensuring compliance with state law, you need your child to do actual work within your practice—not be a ghost employee—to get paid. Develop a job description and use a timesheet to track hours worked to ensure compliance. Some of the common things your child can do around the office are filing, helping to promote your medical practice, cleaning, answering phones, taking notes, or setting appointments. 

Whatever tasks you choose to have your child perform, their duties should be discussed and documented in their employee file. And when it comes to payday, your child should be included in your payroll and paid on the same schedule as your other employees.

Income Tax Benefits

Employing your child is just like employing any other individual, with a few exceptions. Suppose you operate as a sole proprietor, single-member LLC, or a partnership in which all partners are the child’s parents, and the child is under the age of 18. In that case, you will need to withhold income taxes, but the child is not subject to social security and Medicare taxes. However, if your child is 18 years or older, the wages would be subject to social security and Medicare. If you operate as a corporation or an S-Corporation, the child’s wages will be subject to employment taxes regardless of age.

Additionally, your child will be exempt from Federal income tax for the first $12,950 of earnings (in 2022), while you get a tax deduction for paying them. Depending on your marginal tax bracket, you may save $2,500 – $4,000 plus per year in income taxes—a nice added benefit for working with your child and teaching them life skills.

What Should My Child Do with the Paycheck?

A common concern amongst physicians is that they are reluctant to give their children all this money. We recommend opening a bank account in the child’s name to deposit their paychecks. Rather than having their check conveniently deposited electronically, pay them by paper check so they can have the experience of walking into the bank and working with a teller.

Secondly, have your child begin to pay for some expenses you usually cover, such as clothes, meals, or activities. This will help them learn to budget their own money and understand the cost of such items. 

Third, have your child save some money for future schooling needs.

Finally, have your child contribute some money to their Roth IRA. Since your child is in the zero or lower tax bracket, it makes sense to contribute to a Roth IRA and get tax-free accumulation over their very long lifetime. It is almost certain they will be in a higher tax bracket later in life.

Below is a chart from Fidelity Investments showing the value of contributing early in life to a Roth IRA.

Fidelity IRA investment chart

At Rx Wealth, we work with you to coordinate your child’s employment and other areas of your financial life. To schedule a free consultation, please contact us or schedule your consultation here.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Benefits of Becoming an Independent Contract Physician

December 1, 2021 by crystal

Considering an independent contract physician position can be scary. After all, as an independent contractor, you’ll be solely responsible for paying your taxes, the cost of medical malpractice insurance, and maintaining health and other benefits.

It’s natural to fear the unknown, but before you choose to remain a W-2 employee simply because it seems easier and more comfortable, educate yourself on the advantages and disadvantages of transitioning to an independent contractor role.

Employee vs Independent Contractor – What’s the Difference?

When you’re a big healthcare employee, your pay is a salary, and earnings are reported on tax form W-2. Income taxes tend to be fairly straightforward since your employer withholds all federal, state, and local income taxes (if applicable) along with your portion of FICA and Medicare tax. Employers also cover their portions of the FICA and Medicare tax.

Plus, your employer usually offers a nice a la carte menu of benefits like health, group life, and disability insurance. Employers also might cover the costs of certain business expenses like professional licensing and medical malpractice insurance. For these reasons, being an employee is easy. 

However, everything has a downside. First, your take-home pay, on an after-tax basis, might be significantly lower when working as an employee versus contracting as an independent physician. Secondly, you’re stuck with employer-provided benefits, whether or not the options are good. For example, your employer may only match a small percentage of your 401K contribution. Plus, you’re unable to deduct any employee business expenses incurred but not reimbursed on your tax return, as a result of 2018 tax changes. Employee business expenses may include travel, books, meals, office supplies, or vehicles. Conversely, independent contract physicians can deduct a plethora of expenses, giving them a definite tax advantage.

As an independent contract physician, your pay is reported on Form 1099-NEC. The company paying you does not withhold taxes, so you receive the gross pay agreed upon in your contract. So, taxes are more complicated and require quarterly estimated tax payments. Additionally, you’ll be responsible for paying self-employment taxes. You’ll also need to seek out your own health care coverage as well as disability, life, and medical malpractice insurance. That said, you’ll be able to deduct certain business expenses like vehicles, business meals, business travel, continuing education, and office expenses against your gross income.

As an independent contract physician, you’ll file a Schedule C on your income tax return after receiving the Form 1099-NEC. However, you may decide to operate your practice through an S-Corporation or other business entity, which will make your tax filings more complex but potentially offer additional tax advantages. Note that Congress recently put forth proposed legislation to curtail S-Corporation benefits so you’ll need to explore this option further. 

In addition to the deductions already mentioned, self-employed health insurance, 401K contributions, and half of your self-employment taxes are also deductible. While being self-employed might entail some up-front hassles, you may realize higher after-tax income in the long run. Remember, increasing income is generally never the easiest path to take.

Benefits of Independence

One key benefit of being an independent contract physician is simply the word “independent.” When you oversee your own destiny, the freedom to design the benefits and retirement plans that work best for you and your family exists. When an employer provides benefits, you’re limited to their offer because it’s usually part of the entire compensation package and is cheaper than declining and paying for your own benefits on an after-tax basis. As an independent contract physician, you don’t have to settle for inferior benefits.

Medical Malpractice Insurance Cost

One of the biggest concerns when contemplating an independent contractor route is the medical malpractice insurance cost. In our experience, though, the increased compensation realized more than covers the after-tax cost of medical malpractice insurance and other benefits. Most companies that contract with independent physicians have negotiated preferred third-party arrangements to provide medical malpractice insurance and other benefits at favorable rates.

Health Insurance Cost

Another fear we hear is health insurance costs a lot more. While your health insurance costs will likely be greater than within a large group plan, remember the following: 1) You now have the ability to choose the right plan for you and your family, 2) You have the ability to choose a high deductible plan and make tax-deductible contributions to an HSA, and 3) You can deduct your health insurance premium on a pre-tax basis. As an independent contract physician, you’ll have the flexibility and control to design your own benefit plan, including its cost.

Cost of Other Benefits

Finally, many doctors share their fear that other benefits, such as group disability and life insurance, will cost more or be unobtainable. For physicians with certain pre-existing medical conditions, that might be true. However, if you’re relatively healthy, these insurances tend to be more cost-effective over the long run when purchased independently. Since you own and control your insurance choices, you won’t need to worry about losing benefits should you choose to switch your contract to another company.

Business Perks of Independence

Again, one of the main perks of owning your business and contracting with a company is the control you have. You decide what benefits to purchase and when to terminate the ones you do not need, what retirement plans to implement and how much to contribute, what the best business structure is for your operation, plus how and who you should hire in your business. There is a lot of value to control!

There are tax perks, too. You can choose your retirement plan and contribute the maximum contribution if you so choose. This is a big advantage – as an employee, you’re subject to how much your employer wants to contribute. Plus, you can have multiple retirement plans, such as a 401K, and a defined benefit plan allowing for larger annual contributions than if you were an employee. And certain expenses paid for with after-tax dollars are now deductible on a pre-tax basis.

Did you know that if you have a child over the age of 14, you can employ them in your practice?  If you employ your child, you can deduct their wages and related costs from your taxes, too. Depending on your business structure, you may or may not need to pay payroll taxes. In most instances, your children will pay little or no income taxes on their wages. Generally, the benefit works out to saving about 20-30% per year in taxes. For example, if you pay your child $12,000 and your net savings is 30%, you will save about $3,600 in income taxes. 

Additionally, your child is eligible to contribute the earnings to a Roth IRA, which allows them to get a jump on retirement savings. That said, the greatest benefit is the ability to teach your child work ethic and responsibility. 

While this article provides an overview of factors to consider when making the leap from employee to independent contract physician, you’ll need to think through your personal situation and prepare a unique comparison. 

At Rx Wealth Advisors, we specialize in advice and consultation to Physicians exploring independence. We can assist in preparing an analysis that will help you make an educated decision. Feel free to reach out to us for a second opinion. Call us at 412-227-9007 or email croe@rxwealthadvisors.com.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

How Does the Biden Tax Plan Affect a Physician’s Wealth?

June 30, 2021 by eric

Are you worried that Biden’s tax plan will get passed by Congress? If not, you should be, as most physicians will see their take-home earnings decrease significantly. Rx Wealth thinks there is a high likelihood tax legislation will be coming by the end of 2021, effective beginning 2022.

It is no surprise we are facing higher income taxes and increases in other taxes with our government spending like drunken sailors. So, how can physicians reduce or minimize the impact of these tax increases?

This article outlines the proposed tax changes and provides some planning opportunities to consider.

Income and Social Security Tax Rates

Currently, the top income tax rate is 37%. Under Biden’s plan, physicians making over $400,000 will likely be in a new tax bracket of 39.6%.

If you own a practice or outside business, the qualified business income deduction will be phased out, causing an immediate 10% increase in your current tax rate.

Currently, physicians are subject to social security taxes on the first $142,800 of wages or self-employed earnings at a rate of 12.4%, split evenly between employer and employee. If you are self-employed, you pay the full rate and get to deduct a portion from your taxable income.

Biden suggested a change in the social security tax. The maximum taxable wage will stay in place, but if your wages or self-employed earnings exceed $400,000, the amount in excess of $400,000 will be subject to social security payroll tax. This creates what we call a “donut hole” in the payroll taxes, where wages between $142,800 and $400,000 are not subject to social security taxes.

Physicians earning up to $1 million will continue to see their capital gains and qualified dividends taxed between 15% and 20%, with a 3.8% net investment income surtax applying to certain taxpayers. But, if you happen to earn over $1 million, you may see a significant increase.

Planning Opportunities

If you are self-employed making over $400,000 in earnings, you may consider forming an S Corporation and limiting your wages to under $400,000, if it is still reasonable compensation for your specialty. You can take the remaining earnings as distributions. Be aware, these types of arrangements are likely to receive even higher IRS scrutiny going forward. You must structure this properly to comply with the law.

If you are a practice owner, consider employing your children to reduce your income below $400,000. Additionally, certain retirement plans allow you to make large contributions, which may help to reduce your income significantly and lower your tax bracket.

Additionally, as a practice owner, review all current retirement plans to ensure they are appropriate and allowing for maximum deferral advantage.

Finally, reviewing all allowable business deductions to make sure you are not missing anything that will reduce your taxable income.

Income Tax on Over $1,000,000 in Household Income

If you are one of the physicians who still earns in excess of $1 million annually, Biden has placed a target on your back. Not only is he planning to increase the taxes on your wages and business income to a maximum rate of 39.6%, but your capital gains and qualified dividends will also now be taxed at your marginal rate of 39.6%. Also, it will include a current net investment income surtax of 3.8%. This brings the total tax rate on interest, dividends, and capital gains to 43.4%.

Planning Opportunities

You need to make sure your investment portfolio is invested in a tax-efficient manner. Where you own assets will become extremely important. Having some investments, such as taxable bonds, real estate, alternative investments, high dividend stocks, or higher turnover investments held in an IRA or other tax-deferred vehicle will reduce your tax bill and allow the portfolio to potentially grow faster.

Consider using low-cost, investment-only annuities as part of your investment plan to shelter current taxation at high rates. Your heirs will pay tax on any annuity proceeds, albeit at a probable lower income tax rate than you.

Finally, a properly structured life insurance policy, used solely for investment purposes and not death benefit, allows you to place large amounts of cash into it and grow tax-deferred over a long period. Additionally, in certain instances, you may be able to borrow from the policy tax-free in the future. I call this strategy a “Super Roth IRA.” Furthermore, at your death, proceeds are paid to your heirs tax-free.

If you are a physician in private practice or self-employed, you should consider implementing a cash balance plan. This may help to lower your taxable income under $1 million, thus lowering tax rates on capital gains and qualified dividends.

Itemized Deductions

Biden’s proposal limits itemized deduction benefits to a maximum marginal rate of 28% for physicians earning over $400,000. Physicians in marginal brackets below 28% get the full benefit. Also, certain deductions, such as mortgage interest, state and local taxes, and charitable contributions, may be capped for physicians earning more than $400,000.

Planning Opportunities

If this should pass, you want to consider accelerating your charitable contribution over the next five-plus years into 2021. You can do this by contributing appreciated investments into a Donor Advised Fund by December 31, 2021.

Depending on your mortgage rate, consider paying down your mortgage more quickly. The after-tax rate you are paying on your mortgage may be less valuable going forward.

Consider accelerating some itemized deductions, such as paying your mortgage for January 2022 in December 2021 to gain a larger mortgage interest deduction.

Retirement Plan Contribution Deductions

Retirement plan contribution deductions will be limited to a 26% flat income tax credit versus a current deduction at your marginal rate. Thus, all taxpayers get the same benefit.

Planning Opportunities

Depending on where you see your future tax rates, using a Roth 401K and Roth IRA if you are in the top tax bracket looks much more attractive.

Using tax-deferred investment vehicles, such as annuities and life insurance, in lieu of maximizing annual retirement plan contributions may prove to be more beneficial over the long run.

First Time Homebuyers

Are you a new physician looking to purchase your first home? Should the Biden plan pass, you may be eligible for a refundable and advanceable first-time home buyer’s credit of up to $15K.

Estate and Gift Taxes

Currently, each individual has a lifetime estate and gift tax exemption of $11.58 million ($23.16 million per married couple). Furthermore, assets includible in your estate get what we call a “step-up” in cost basis to fair market value. For example, if you own the Vanguard S&P 500 mutual fund with a cost basis of $50,000, and at your death, it is worth $250,000, your heirs will avoid capital gains tax on the $200,000 in gain—a savings of approximately $40,000 in capital gains tax.

Biden’s plan reduces the lifetime exemption to between $3.5 million and $5 million per person. Moreover, it eliminates step up in cost basis.

The step-up elimination affects all taxpayers, not just the “rich,” unless an exemption is provided.

Furthermore, an increase in the federal estate tax rate from 40% to 45% is desired.

You may be thinking, “How does this affect me as my estate is not large?” Bear in mind that if you own any life insurance in your own name, the death benefit will be included in your estate. A reduced exemption also puts many more physicians in the path of federal estate taxes.

For example, let us say you are a divorced, mid-career physician with total assets of $3 million. Additionally, you own a term life insurance policy on yourself for $2 million with your children as beneficiaries of your estate and the life insurance. When you pass, your estate is worth $5 million, and your children will owe a 45% estate tax on $1,500,000 ($5 million less the $3.5 million exemption) or $675,000 in federal estate tax. In 2021, you will owe zero federal estate tax. The law change may cost your heirs $675,000, if you do not plan properly.

Moreover, there is legislative chatter of plans to eliminate some popular estate planning strategies, such as grantor trusts, grantor retained annuity trusts, and the like. This may affect a popular strategy of owning life insurance in a grantor trust to keep it out of your estate.

Planning Opportunities

There is generally a grandfathering of certain strategies implemented before a law passes. You will want to review your estate plan and life insurance under this new lens.

If you own life insurance in your own name, consider owning it in a trust if it is a large death benefit.

If you are happily married for a long time, consider setting up a trust for your spouse to exempt the money from future estate tax. If you have reservations about gifting in trust to your spouse, consider having your spouse create a trust for you and your children and make a gift. Be aware, you can not create identical trusts for you and your spouse.

Purchasing life insurance on you and your spouse that pays when the second spouse passes may be a great way to offset the loss of a step-up in basis and higher estate tax. Remember to consider how the policy is owned to avoid it being included in the estate of the second-to-die spouse.

Consider gifting your IRAs at death to charity or using certain charitable trusts to provide an income stream to your heirs while reducing your taxable estate. This is also a beneficial strategy in light of the Secure Act eliminating the stretch IRA technique.

Finally, if your parents have significant assets and are expecting to leave an inheritance, consider how you should receive the assets so as not to increase your estate size and potential federal estate tax liability any further. Additionally, consider how this inheritance should be structured to avoid potential future creditors, an ex-spouse, and the like. This planning is frequently ignored.

Certain Tax Credits

Under Biden’s plan, the child tax credit may increase to $3,600 for children under 6 and $3,000 for all other children under 17. The child and dependent care credit will allow up to $8,000 for one child and $16,000 for two or more.

Additionally, an informal caregiver credit of up to $5,000 is proposed if you are an informal caregiver of an individual needing long-term care.

Qualified Business Income Tax Deduction for High Earners

Eliminating the qualified business income deduction for physicians making over $400,000 will increase the income tax rate by 10%. Physicians need to consider ways to reduce income below the threshold.

Corporate Tax Rate

Corporate tax rates are proposed to increase from 21% to 28%.

Planning Opportunity

Operating your practice or outside businesses as a self-employed individual or an S corporation generally made the most tax sense; however, high-earning physicians need to reevaluate their business structure. Given a potential increase in tax rates for income over $400,000, the change to taxing investment for earners of $1 million, and the qualified business deduction elimination, operating as a C corporation may become beneficial in certain instances.

There appear to be significant and wide-sweeping tax changes coming down the road. All physicians will be impacted by these changes. As a physician, you should be talking to your professional advisors about the potential impact these tax changes have on growing your wealth. Your financial advisor should be leading this charge.

If you are failing to plan, plan on failing. You will be paying a large portion of your earnings to the federal government, not to mention your state, in the future.

Disclaimer:

Rx Wealth Advisors is a physician-focused financial advisory firm located in the Pittsburgh, Pennsylvania metropolitan area. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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