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How the New President and Congress Will Financially Impact YOU in 2009


After an historic turnout for a Barack Obama landslide victory and a stronger democratic majority in both the house and senate, the table is set to allow the democrats to make every attempt to address the issues facing our country.

After an historic turnout for a Barack Obama landslide victory and a stronger democratic majority in both the house and senate, the table is set to allow the democrats to make every attempt to address the issues facing our country.

Before the reins are handed over, there is likely to be another bailout for credit card companies and other financial institutions. There is also going to be no shortage of spending on the military efforts in the Middle East. If the predictions of very poor sales for retailers over the holiday season come to fruition, there will be even greater strain on the economy that require even more bailouts. Taxes are the only way to fund these expenses.

What you must do now is focus on reducing your taxable income so that the tax increases will not have as great an impact on you. There are strategies that can reduce taxes by $5,000 to $500,000 per year. Some work better for small corporations and others work better for larger ones. The key to tax planning is finding strategies that help you reach your financial goals, bring you benefits you need and want, and reduce taxes at the same time. This article explores a few things that you can do to reduce taxes.

Reduce Taxes Now

If you can pay less in taxes in 2008 and 2009, you may be able to recover much of the upcoming tax increase. How can you reduce taxes significantly? Consider the following techniques, which can even be used for small and solo-owned businesses:

A. Utilize the right entity for your practice. Many physicians today are using the wrong ownership form for ideal tax planning. Choosing the right entity among "S" or "C" corporations, or limited liability companies, could turn into tax savings of $10,000-$45,000 annually.

B. Consider non-qualified plans, in addition to pensions/401(k)s. Non-qualified plans are relatively unknown to many doctors, despite the fact that most Fortune 1000 companies make non-qualified plans available to their executives. This type of plan should be very attractive to doctors, however, as employee participation is often limited and inexpensive. Further, nonqualified plans generally allow larger annual contributions for the owners than traditional qualified plans do. Some plans can offer annual contributions as large as $100,000 to $200,000 per participating owner or executive.

C. For larger businesses, consider captive insurance companies. Closely held Captive Insurance Companies (CICs) are great tools for successful medical practices looking for liability protection, risk management, tax and wealth accumulation benefits. The CIC we are discussing here are very small insurance companies that primarily will insure your practice. These companies enjoy beneficial tax treatment (made even better by a 2004 law signed by President Bush), allowing the owners an opportunity to build wealth, as opposed to giving profits up to insurance companies.

Any of the above techniques, as well as numerous others, could help you reduce taxes for 2008 and 2009. By doing so, you might be able to reduce your taxable income enough to offset any tax increase that may come your way. For longer-term wealth recovery, longer-term tax strategies must be employed. We will discuss this next.

Long Term Tax-Efficiency for Retirement & Beyond

We spread our investments across different classes of investment so that, in the event something bad happens that impacts one company or one industry, the total portfolio is not significantly impacted by the event. With tax diversification, a similar theory applies. If you have some investments that may be taxed as ordinary income, some that may be taxed at capital gains or dividend tax rates, and have some assets that may not be taxable at all, you have flexibility.

The concept is quite simple - a properly tax-diversified portfolio minimizes the risk of loss when taxes increase and provides flexibility that can afford savvy taxpayers the opportunity to minimize total taxes paid over a lifetime of investing. For this reason, we advise our clients to have their wealth in multiple tax "buckets" - each with its own tax treatment. This provides flexibility that allows clients to minimize long-term taxes paid. In your case, this strategy may make up for the wealth you may have lost recently - if you apply it properly.

Will Tax Rates Rise or Fall in the Future?

Tax diversification is especially important for the long term because taxes today are extremely LOW. Study the federal income and capital gains charts below. You will see that, given their history, income tax rates are close to the lowest they have EVER been and capital gains taxes are the lowest they have ever been. Given the new president's statements about taxes, it is a foregone conclusion that tax rates will rise in the near future.

Federal Income Tax Rates

Top Marginal Federal Income Tax Rate
73.0 percent
25.0 percent
81.0 percent
91.0 percent
91.0 percent
71.0 percent
70.0 percent
28.0 percent
39.6 percent
35.0 percent
2011 on
39.6 percent

Source: Citizens for Tax Justice, May 2004

Top Federal Capital Gains Tax Rate
30.0 percent
25.0 percent
32.3 percent
39.9 percent
28.0 percent
28.0 percent
20.0 percent
2011 on
20.0 percent

Source: Citizens for Tax Justice, May 2004

Are Most of Your Assets Subject to Future Tax Swings?

Too many doctors only have their wealth in 2 buckets: (1) qualified retirement plans, like pensions, 401(k)s or SEP IRAs; and (2) personally-held taxable assets, like personal securities investments and real estate. The problem with both of these asset classes is that they are both subject to future increases in income tax rates, capital gains tax rates, or both. Whether you are planning on taking funds out of a 401(k) or SEP IRA in retirement or planning on selling stocks or living off bonds, you have no idea now what your tax rates will be on that income in the future. If the charts above are indication, it may be at a much higher tax rate than today.

You Must Use an Investment "Bucket" that is Tax-Immune

Unfortunately, far too few clients have diversified enough into a non-taxable wealth "bucket". By doing so properly, not only can you insulate much of your wealth from future tax increases, but you can also help "make up" much of your recently lost wealth over the long term.

What are such "tax immune" buckets? They may range from Roth IRAs, to non-qualified plans, to private placement life insurance. As an example, one such non-qualified plan is actually treated as a hybrid plan - with both qualified and non-qualified elements. It is a very flexible plan that has numerous benefits for a practice. The contributions are partially deductible and partially taxable at the outset.

From a current tax perspective, this is much more attractive than the "personally held taxable investments" which offer no deduction and less attractive than qualified plans that offer a 100 percent deduction. In the nonqualified plan, the funds grow tax-deferred, which is the same as the qualified plan and better than the "personally held taxable investments" class. When you are ready to access the funds, you can access funds in a nonqualified plan without any tax liability. This is better than the "personally held taxable investments" and far superior to the qualified plan.

In this way, such a plan avoids the risks of future income and capital gains tax rate increases in a substantial way - and can act an ideal long-term recovery for wealth lost in the recent market downturn.

Comparing Different Investment Options - Tax Diversification

Qualified Plan
After Tax Investments
“Hybrid” Non-Qualified Plan
100 percent deduction
No Deduction
40 percent deductible
Taxable (can be Ordinary income or Capital gains)
Ordinary income
Capital gains

In addition to playing the role of a future tax increase hedge and "recovery" wealth tool, the hybrid plan offers the following attributes:

  • The plan can be utilized in addition to a qualified plan like pension, profit-sharing plan/401(k) or SEP IRA.
  • The funds in the plan can grow in the top (+5) asset protection environment in most states and always in a good (+2) environment at minimum.
  • Maximum contribution levels are $100,000 per doctor in practices with 10 employees or less. In larger practices, these levels can be even higher.
  • In a group practice, not every doctor need contribute the same amounts - extremely beneficial for group practices who have doctors who want to "put away" differing amounts.
  • There are no minimum age requirements for withdrawing income (no early withdrawal penalties).
  • The transfer of assets at the doctor's death is income tax-free to heirs.


We have all lost some wealth in the last year. The wealthier Americans have lost more than most. In addition, tax hikes are going to impact the high earners in the future. The key to future financial success is how you react to this lost wealth and the future tax increases. If you would like to explore ways to recover that wealth quickly for the short term, on an ongoing basis for the long term, and mitigate the risks of future tax increases, you should focus on tax planning. By doing so, you can get a jump on all the people who will sit around complaining about what has happened.DT

The authors welcome your questions. You can contact them at (800) 554-7233 or through their Web site www.ojmgroup.com

SPECIAL OFFERS FOR SUBSCRIBERS: For a free audio download and e-newsletter that further discuss this and other personal and practice strategies for Doctors, go to www.ojmgroup.com

For a free (plus $7 shipping and handling) copy of For Doctors Only: A Guide to Working Less and Building More, please call (800) 554-7233.

David B. Mandell and Christopher Jarvis are principals of the financial consulting firm O’Dell Jarvis Mandell LLC where Carole Foos works as a CPA and tax consultant. Mandell and Jarvis have co-authored seven books for doctors. They are speakers for Guardian Publishing (www.guardpub.com) who offer CME seminars and other programs for groups, hospitals and societies.

Visit www.guardpub.com to find out how to get free articles for your publication, speakers for your next meeting or information on non-dues revenue and member benefit programs for your association or society.

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