How to Keep More of What You Earn
“One thing is clear: The Founding Fathers never intended a nation where citizens would pay nearly half of everything they earn to the government.”
- Ron Paul
As physicians, we are generally fairly high income earners. The money you earn is one thing, but the money you get to keep is another. We all know this, and year after year, swallow our bitter medicine and pay the tax man what we “owe”.
Physicians are notoriously bad at personal finances. We mostly don’t have access to the tax attorneys that our business-minded, non-medical professional friends employ to protect their assets.
To avoid overpaying, tax planning must be done proactively throughout the year prospectively. Certified Tax Coaches focus on year-round strategic planning methods so you can save money at tax time.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
- Legendary Judge Learned Hand
The U.S. tax code is an astonishing 67,204 pages with over 1,638 forms and there are changes each year. Because of this complexity, the Government Accountability Office reports that taxpayers overpay one billion dollars per year due to missed tax reduction opportunities. Physicians are huge contributors to overpaying.
“The hardest thing in the world to understand is the income tax.”
- Albert Einstein
The bottom line is that taxes are a complex game that most physicians are losing. We are so focused on our practices, that we default to simply paying taxes in a very normal way. Moreover, we don’t have the professional network to actually find help. Many of us go to the first CPA we can find right out of residency or ask another doctor who they use. It’s the blind leading the blind.
Employing proper strategies with top tax professionals can create asset protection, and the ability to achieve financial freedom much earlier in your life. Then you can focus on the practice of medicine for professional fulfillment instead of for money.
“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”
- Milton Friedman
Key Steps to Paying Less Tax
- Tax laws aren’t fair. They’re written to favor businesses and investments; primarily real estate investments. 1099 income is far superior to W2 wages for tax planning and strategies.
- Do what the government wants you to do. Why try to fight the IRS when it’s actually easy to just follow their rules, keep more money of the money you earn and pay less in taxes.
- It’s not how much you make that determines how much tax you’ll pay - it’s how you make it. Earned income (i.e. W2 wages) is the highest taxed income. Tax strategies work the best for locums tenens doctors and physician groups that allow for 1099 compensation. Discuss with your group changing to 1099. This is usually far easier than people realize and many of our non-medical professional colleagues are set up this way. Most lawyers certainly are.
- Proactive Tax Strategy only works if you develop a custom plan for your own circumstances with the help of trained professionals. Get a team in your corner. It’s worth it. Make sure they are Tax Coach Certified and associated with CPAs and tax attorneys. Tax Coach Certification is a designation that only about 1 percent of tax preparation professionals have.
- Tax laws are constantly changing. To pay the least amount of tax legally possible, have periodic meetings with your team to make sure they are keeping current.
- Proactive Tax Strategy only works if you act. The sooner you and your team put your customized tax plan into action, the sooner you'll put money in your pocket. With a team of professionals on your side, physicians can save up to six figures on their taxes.
- Retirement strategies are a vital part of your financial goals. After you save money on tax day, you can spend it on a Porsche, or you can do the smart thing and put that money to work for you in tax-advantaged ways. Various solutions here include Defined Benefit Plans, High Cash Value Insurance vehicles, Annuities and many other tax-advantaged strategies. Estate planning is also critical to any long-term financial plan.
The income tax was designed with built-in loopholes and strategies such that high earners and entrepreneurs can save an incredible amount if they take the right proactive steps to position themselves appropriately.
There are great tax coaches out there, and it is so important that physicians take advantage of the laws that put them into the best financial situation possible. With burnout at an all-time high, we need to focus as a profession on physician satisfaction and happiness. It is more important than ever to have a sound financial plan—and a team of experts behind it—and focus on freeing physicians from financial stress so that they can enjoy what they do best - taking care of people.
Dr. Kaufman is an ER doctor in Northern Colorado who is the co-founder of Physician Tax Solutions, LLC - a company partnered with tax attorneys, CPAs, and Tax Coaches designed to provide tax strategies and solutions to physicians.
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