In Part 1 of this article, published in Dermatology Times last month, we explained that physician families have substantially greater liability risk and retirement challenges than do so-called "average American" families. This segment will focus on tax, investment and insurance issues that affect physicians; mistakes that doctors make; and suggestions for avoiding pitfalls.
EDITOR'S NOTE: THIS IS THE SECOND OF A TWO-PART SERIES.
In Part 1 of this article, published in Dermatology Times last month, we explained that physician families have substantially greater liability risk and retirement challenges than do so-called "average American" families.
This segment will focus on tax, investment and insurance issues that affect physicians; mistakes that doctors make; and suggestions for avoiding pitfalls.
Paying full price when the government offers to pay half.
Technically, the government (Internal Revenue Service) is not paying half of anything. However, if they offer you a tax deduction and your combined state, federal and local marginal tax rate is close to 50 percent, you can think of your purchasing something that is deductible as being half as expensive, because the government will allow you to deduct this purchase.
Suggestion No. 4
Buy long-term care insurance (LTCi) through your practice and let the government pay half.
More than 60 percent of American households will require some sort of long-term care assistance. This can be a short, relatively inexpensive proposition, or it can result in years of assistance that may cost hundreds of dollars per day.
In either case, without long-term care insurance you will have to pay for this assistance from your savings.
If you purchase long-term care insurance through your medical practice, you do not have to offer this for your employees.
Furthermore, you can cover yourself and your spouse through the practice, even if you are not both physicians.
Lastly, you get a tax deduction for 100 percent of the premiums if they are paid by your practice.
We understand that you will not practice medicine forever. This is not a problem. You can pay your entire life's premiums over a 10- or 20-year period, so that all premiums come from your operating practice - and are 100 percent tax deductible. This way, when you retire, your premiums are paid in full, and the government has subsidized all of your payments.
This is one of the many tips that we offer to our clients to help reduce unnecessary tax burdens.
There are also non-traditional, non-qualified retirement plans that allow physicians to make contributions of $100,000 to $1 million per year, discriminate as to only include the doctors or key employees, and allow access to the funds before age 59.5, if that is their interest.
Furthermore, these plans can be set up to be very important pieces of a family's estate plan without sacrificing tax deductions or control of the assets.
Mistake No. 5
Wasting money on taxes and term insurance premiums. A famous female financial adviser with her own TV show is one of many advisers to suggest "Buy term insurance and invest the difference."
This is excellent advice for the "average American" family that earns $42,000 per year, pays 12 percent in federal income taxes, and has no liability or estate tax risk whatsoever. The average family pays very little tax on investment income. It is possible that their tax on investment gains ranges from 10 percent to 15 percent.
The average family is not worried about having its assets taken through a lawsuit. Furthermore, the average family buys insurance solely for temporary income protection against the premature death of the breadwinner. The average family also has no interest in long-term liquidity for estate planning purposes, because members will never have an estate large enough to warrant any estate tax.
Does this sound like you? Of course, it doesn't sound like you.
Suggestion No. 5
Buy cash-value life insurance as a supplemental investment tool that will offer permanent life insurance protection as well.
If you are skeptical of this advice, ask yourself whether you are skeptical because you did the calculations yourself (or reviewed a careful analysis by an expert) or because you've heard this axiom enough times to have accepted it as fact.