Four money-saving ideas can help you prepare for Tax Day 2010

January 1, 2010
Christopher R. Jarvis, M.B.A.

,
David B. Mandell, JD, MB

,
Jason M. O'Dell, M.S., C.W.M.

As a physician, do you realize that, between income, capital gains, Medicare, self-employment and other taxes, you spend 40 percent to 50 percent of your working hours laboring for the IRS and your state?

Key Points

As a physician, do you realize that, between income, capital gains, Medicare, self-employment and other taxes, you spend 40 percent to 50 percent of your working hours laboring for the IRS and your state?

That's a lot of time spent with patients for someone else's benefit.

Given the significance of this fact, shouldn't your advisers 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 probably get very few tax-planning ideas from your advisers.

1. Use the right practice entity/payment structure/benefit plans. These areas are where doctors make the vast majority of tax mistakes, and where many of you could benefit by tens of thousands of dollars annually with the right analysis and implementations. Issues here include:

2. Don't lose 17 percent to 44 percent of your returns to taxes - explore investment managers who manage with taxes in mind. It is well-known that most investors in mutual funds have no control of the tax hit they take on their funds. What you may 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 percent to 44 percent of their returns to taxes." Obviously, over 20- or 30-plus years of retirement savings, losing one-sixth to about half of your returns to taxes should be unacceptable to you. Nonetheless, too many physician investors settle for this awful taxation.

Even worse is what many of you mutual fund investors experienced last April 15 - when many of you paid significant taxes on the transactions within your mutual fund even though you lost 30 percent or more of your fund values. Is there anything worse than seeing your mutual fund decimated by a 30-plus percent value collapse, and then getting a 1099 tax bill on "gains" inside that fund?

How can you 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. The firm works with you to maximize the leverage of different tax environments and offset tax losses and gains.

3. Asset-protect your practice's most valuable asset and reduce taxes. As a physician, you face malpractice liability as well as general business risks (employee liability, etc.). What you may not realize is that a claim by a patient or employee will likely threaten all of your practice's accounts receivable, including those you earn. Typically, this is a medical practice's most valuable asset.

For this reason, physicians implement strategies for asset-protecting their receivables. While the details of the options go beyond the scope of this article, it should be mentioned that one of these strategies may allow the practice to reduce its income tax burden, as well. Thus, if asset protection is a concern of yours, in addition to tax reduction, we recommend that you investigate your practice's options in this area.

4. Gain tax-deferral, asset protection through cash value life insurance. We've already told you about the 17 percent to 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.

In addition, nearly every state protects the cash values from creditors, although there is tremendous variation among the states on how much is shielded. Contact the authors at (877) 656-4362 to find out how much.

We hope this article has given you a few ideas for how to save taxes. For larger practices with $5 million or more in revenue, there are additional techniques that could offer significantly greater deductions. These are outside the scope of this article, but they are mentioned in the articles on our Web site and are topics of our free e-newsletter.

If you want to save on 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 the next April 15, and the one after that.

This column was authored by David B. Mandell and Jason O'Dell, principals of the financial consulting firm O'Dell Jarvis Mandell LLC, and Carole Foos, who works at the firm as a CPA and tax consultant.

Jason O'Dell is a financial consultant, lecturer and author of two books for physicians. Christopher Jarvis is a financial services professional who specializes in working with business owners, physicians and other professionals. David Mandell is an attorney, lecturer and author of five books for physicians. All are principals of the OJM Group and can be reached at (877) 656-4362, http://www.ojmgroup.com/.

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