Power Points
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Some doctors routinely save on taxes. Others miss out. What are those tax-savvy physicians' secrets? They stick to the basics;
essentially, their wisdom comes down to a few easily followed concepts.
Even if you can't apply them all right away, don't worry. As the Zen masters tell us, no one reaches perfection overnight.
More importantly, following through on just one of these ideas may well save you hundreds, even thousands, of dollars.
They go for the big savings. Tape this to your bathroom mirror: Fund your retirement plan to the max. That's the single most important tax strategy for
doctors, because tax-deferred compounding is probably the closest thing to a free lunch you'll ever see. For every $10,000
you put into your retirement plan, that's $3,500 in taxes you don't pay today (if you're in the 35 percent bracket). And you
can defer tax on what that money earns over the years, too.
So contribute all you can, especially early in your career; money stashed away then can grow amazingly over time. Even if
you save only $5,000 a year for five years, then stop, that little pile can mushroom well into six figures over 30 years.
Of course, saving can be tough when you're starting out and during lean years. Then you might consider borrowing to make that
contribution, says financial planner Michael Masiello, of Rochester, NY. "The cost of such a loan—especially a short-term
one—may be small compared with the additional tax-deferred growth your retirement plan will enjoy. You don't want to make
a habit of this, but at times it'll be sensible."
They seek out (and shell out for) advice. Good advice is a great investment, so canny doctors are willing to pay for it. When possible, they use top advisers who deal
with physicians routinely and know their needs. For example, accountants who have a lot of physician clients know the ins
and outs of how to depreciate medical equipment and can provide reasonable guidelines for writing off the costs of CME, travel,
and auto use. Such a person can save you thousands of dollars.
You can also glean tax advice from other experts, such as financial planners and pension specialists. "My successful doctor
clients have one approach in common," says Old Tappan, NJ, financial planner Steven B. Enright. "Each has a good financial
team and confers with those advisers regularly."
Make sure your team is objective and skilled, says attorney and financial planner Gary Schatsky, of Albany, NY, and New York
City. "If you want to know more about how annuities can provide tax breaks, say, ask a fee-only financial planner experienced
in that area. Don't rely on an agent who sells insurance products. Don't depend on your accountant, either; he may not know
the details."
They don't abdicate decision-making. Doctors who save on taxes still pay attention to certain basics themselves.
Investing in a mutual fund at the wrong time of the year, for instance, can be a tax mistake. If you buy into one right before
it declares its capital gains and dividends, your supposed windfall really comes out of what you just invested. You'll then
owe income tax on both the dividends and the gains—in effect, on your own money. (You get to make an adjustment for that when
you sell the holding, but do you want to wait?)
Before buying you should also investigate a fund's tax efficiency—in other words, how much of your return do you get to keep
after taxes are figured in? You can learn this from Morningstar, either at its Web site www.morningstar.com or from its print editions, which many bigger libraries carry. For example, some funds realize a lot more capital gains than
others, creating large tax bills for shareholders.
Sure, your tax advisers can help you with such decisions—but if you learn the ropes yourself, you're much less likely to make
mistakes. The same could be said for important developments regarding limits for pension contributions, business deductions
for medical equipment, and other tax-law changes that could affect your tax returns and retirement planning. Tax issues are
covered frequently in well-regarded and easy-to-read publications like the one you're reading now, as well as Kiplinger's Personal Finance, SmartMoney, and The Wall Street Journal.
They meet with advisers regularly. You send your tax documents to your advisers in plenty of time. You even fill out that year-end summary he or she provides
you with. Fine, but unless you meet face to face, you may miss chances to save.
"Doctors who sit down with their advisers and review tax matters in detail often find it's well worth it," says Sherman Doll,
a CPA and investment adviser in Walnut Creek, CA. "When we review expenditures, we often find business costs—travel, entertainment,
and so on—that they've paid personally and wouldn't have remembered to deduct."
But that may be the least of the benefits. "Such meetings have prompted some doctor clients to set up nondeductible IRAs,
since the earnings are tax deferred," says Doll. "Or sometimes we'll review their mutual fund trading and find that their
taxable gains and transaction costs suggest they'd be better off sticking to a buy-and-hold philosophy."
Never assume, either, that you should meet with your tax adviser only once a year. Opportunities for tax savings can crop
up at any time. "I recommended to a surgeon who had strong cash flow that he not send any bills to his insurance companies
in October or November," says Robert G. Baldassari, a CPA with Matthews, Carter and Boyce in Fairfax, VA. "By delaying the
receipt of tens of thousands of dollars, we were able to save him a bundle on taxes."
The surgeon met with Baldassari in September, well before tax season. "When an accountant is working 70 to 80 hours a week,
as most do during tax season, it can be very difficult for him or her to think creatively," Baldassari says.
Their affairs are in order. "Good clients have their records well-organized," says Philadelphia CPA Jerome R. Glickman. "Besides requiring extra work,
unclear or spotty records can create audit risk. Your adviser may look for ways to drop you."
Not only will careful record-keeping keep your accountant happy, it'll pay off in tax savings. Until May 6, 2003, assets held
longer than a year were taxed at 20 percent—already a big break for many doctors, especially those paying the top rate on
ordinary income. With the 2003 changes in the law, these "long term" gains, as they're known, are now taxed at 15 percent.
(Some assets, including collectibles, are excluded from this rule.) Moreover, dividends, which used to be taxed as ordinary
income, are also taxed at 15 percent—again, with some exceptions. "More than ever, the better your records, the better the
chance that you'll boost your tax savings," says David C. Scroggins, a Cincinnati CPA and practice management consultant.
Does the thought of keeping a paper trail seem daunting? You may find your computer invaluable for organizing numbers, especially
through personal-finance software like Quicken. But check with advisers before investing time and money in any program, Glickman
says. "Your accountant may prefer certain software, or at least a program compatible with his own. I've steered doctors away from certain programs that don't leave a clear enough trail."
They take advantage of technology. Today, technology offers imaginative ways to simplify financial chores, besides massaging numbers in a computer program,
says Denise Milner, a CPA in Nesconset, NY.
For example, some of Milner's tax-wise doctor clients recognize that they'll never keep a written diary of auto use—not even
for two or three months. Instead, they leave a small tape recorder in the car and dictate a brief note about each trip. "As
a result, several physicians increased their write-offs from 60 to 75 percent of their auto expenses," Milner says. On a car
with high costs, such as a Lexus or Mercedes-Benz, that could mean $1,000 or more in additional deductions, she says—a good
return on a $30 tape recorder.
Some tax-savvy physicians also find that technology simplifies keeping in touch, Milner notes. "Years ago, advisers and their
clients often played a lot of phone tag, but today e-mail can avoid that." One cardiologist, contemplating a medical conference
in Russia, e-mailed questions about its deductibility. Another sent detailed queries about leasing vs buying equipment.
They can tell the forest from the trees. It's fine to hunt for deductions in a tax return, but too many doctors worry about items like travel deductions while neglecting
the bigger issues.
Shrewd physicians realize "tax season" is simply a time for reporting what has already happened and checking their compliance
with the tax laws. The real savings usually come at other times, from taking the long-range view—saving, investing, and
managing finances with the goal of minimizing taxes. Sherman Doll explains: "When you sell your practice, for instance, the
way you characterize assets and set up payments can mean thousands in tax savings. But you've got to negotiate with an eye
to that." Before any important financial transaction, do your tax analysis early and thoroughly.
No, there's nothing particularly exotic about the secrets of tax-savvy physicians. It's mostly common sense. But any of these
seven steps can lighten your tax burden—one kind of enlightenment well worth pursuing.
