2011 Tax Changes That Impact Physicians

Guest post by Setu Mazumdar MD

The tax laws are changing in 2011. Here's how that will apply to you as a physician.

Recently I sent the following information to my clients regarding the 2011 tax law changes which are almost a done deal. Hope this helps you

You may have heard that a deal for 2011 tax laws is almost a done deal. I'd like to point out several things which will apply to you.

1. Federal income tax rates

Will remain the same as they are now for 2011 and 2012. However, we don't know what the cutoffs for the tax brackets are yet. It's unclear whether phaseouts for deductions on Schedule A of your income tax return will remain as is or will get worse next year. It looks like they will remain the same as now for the next 2 years. Obviously this is good news for high income taxpayers such as all of you.

2. Dividend and capital gains tax rates

Before this deal dividends in taxable accounts were going to be taxed at your highest rate, which was going to be 39.6% as of next month. However even the current dividend tax rate of 15% will stay on for 2 more year. This is also true for capital gains taxes, which were supposed to go up to 20% and instead will remain at 15% for 2 more years. If you have a taxable investment account, this will make it easier for me to rebalance portfolios since the cap gains rate will remain low.

3. Roth IRA conversions

I've already discussed and converted several of your traditional IRAs to Roth IRAs already this year. If you have not converted your traditional IRA to a Roth yet but are considering it, you may be OK doing it next year in order to defer paying taxes on the conversion. However, realize that by converting this year there is an option to spread out the income over 2011 and 2012 and that option is good ONLY for converting in 2010.

The other issue is that for those of you whom we've converted in 2010 already, it is probably more advantageous for you to spread out the income over 2011 and 2012 since tax rates will remain the same. Please discuss this option with your CPA when tax time comes. In other words instead of reporting the income on the conversion for 2010 only (this would be more advantageous if tax rates are going up next year) you may be better off reporting it in 2011 and 2012 in order to defer taxes to those years.

That brings up another issue—estimated tax payments. If your CPA plans on reporting this all in 2010, then adjust your 2010 Q4 estimated tax payment. However, if the plan is to split the income from the conversion in 2011 and 2012, then there may not be a need to adjust your Q4 estimated tax. Instead, you will have to adjust estimated taxes for 2011 and 2012.

And finally if you have nondeductible IRA contributions, remember that portion is not taxed on the conversion.

4. Estate tax

It looks like the estate tax exemption will be $5 million for 2011 and 2012. This changes things like whether to set up life insurance trusts. However, realize that this is once again a temporary rule and eventually this will change again in 2 years. So it may still be better to proactively address these issues rather than to address them later. But at least this might buy some more time.

5. Medicare investment tax is coming

For taxable investment accounts starting in 2013 there will be an additional Medicare investment tax on investments sold for a gain in addition to capital gains tax. This tax will be 3.8% on "high income" earners and will apply to both capital gains and dividends. This was part of the health care law passed earlier this year. Of course the details on this still have to be worked out.

Hope that helps put some of this in perspective. If you have any questions about this, please ask them as a comment and I'll do my best to answer them.

Setu Muzamdar MD blogs on physician investing and wealth management at Freelance MD

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Financial Planning For Physicians

From the Medical Spa MD Podcast, episode 3 on Financial Planning for Physicians with Dr. Setu Mazumdar

We added a new podcast episode with Dr. Setu Mazumdar recently in which we discussed how physicians tend to underperform the market with their self-directed investments. Here's an excerpt from the podcast that I thought was pretty relevant.

Question: What are the physicians who are more successful with their financial planning? What do they have in common?

Dr. Mazumdar: First of all, I think it’s a very small group. Most of the people I’ve met… Sure they might make high income [inaudible – 00:50:27], but having high income and being successful I think are two separate issues. If you’re spending all the money that you’re making, you’d probably not accumulate enough assets where you can call yourself financially successful. But the common traits that I see are one having a [inaudible – 00:50:47] of plan and place.

The second thing that I’ve noticed are people who basically say: “You know I’ve realized that I can’t pick the winning stocks. I can’t time the stock market. I can’t pick the winning managers. The best I can do and what all the academic research says I should do is, match the market.”

The third, of course, is staying disciplined enough to stay with the good times and bad. As well as kind of taking the approach: “You know, I really don’t know what the future holds. It’s completely uncertain. I don’t know what my income is going to be. I don’t know if I’m going to be disabled. So I’m going to leverage time on my side and, of course, increase my savings to make sure that I have enough to retire on.”

So it all sounds kind of basic, but you’d be surprised that most physicians don’t do those things.

Jeff: So you brought up another interesting point, which is matching the market. Why would I need a financial adviser? And why wouldn’t I just invest the money that I’m willing to put in the market, whatever percentage that is going to be, and have them match the S&P 500 or invest in a matching index fund?

Dr. Mazumdar: That’s a good question. I think if you look at all the data that’s done in this issue… exactly answering this question… OK, here’s a great study. It actually comes about once a year, maybe once every two years. It’s called the [Dalbar Study?]. Here’s what it basically says. It says: If you take the past 20 years and if you just stuck with the market, this includes 2008 & 2009 and all the bad things that happened in the past decade, if you take the past 20 years, you’re just basically stuck with everything. You still will have a pretty decent rate of return, around 8% a year.

It turns out that the average individual investor… their return in the past 20 years, and the way that it’s calculated is based upon mutual fund cash flows across tens of thousands of different accounts and different custodians, the average individual investor got a rate return under 2% a year. The market return of about 8% a year… the average individual investor got a return about 1.8% a year. It turns out that inflation is about 3% a year.

So basically the conclusion there is that investors, when they do it themselves, are getting in and out in the market exactly at the wrong time. They’re essentially buying high and selling low. And so one of the value of an adviser is basically discipline. And people tell me: “Do I really want to pay for discipline?” And my answer is: “Actually that’s the number one thing you should be paying for because your own worst enemy is usually yourself. And all the data show that.”

But then there are always other issues like: Investment is one thing, but how do you integrate that with state planning? How do you know if you have enough life insurance? How do you if you’re saving enough? How do you know this from the other? And it’s kind of like medicine. It’s too vast of a field for somebody who kind of sit down and have the inclination to do so and really figure it out.

Listen to the entire interview on the Medical Spa MD Podcast.

Medical Spa MD {3} Dr. Setu Mazumdar & Physician Wealth Management

Episode 3 of the Medical Spa MD Podast: Dr. Setu Mazumdar of Lotus Wealth Solutions discusses physician wealth management.

The interview in this episode is with Dr. Setu Mazumdar of Lotus Wealth Management. Dr. Mazumdar is an MD who's now changed careers to become a financial and wealth management advisor specifically for physicians who are looking to get their house (and medical practice) in order.

We discuss how physician training does not equip docs with the knowledge and skills that they need to actually accumulate wealth, and how you can make some changes that give you control over your finances. Dr. Mazumdar details common mistakes that docs make and how they can be avoided.

If there's anyone who you'd like to hear interviewed or you think should be a guest on Medical Spa MD, please let us know or just leave a comment.