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This article is sponsored by Wall Street Alliance Group, specializing in physician financial planning.
Often, physicians only give minimal attention to their financial futures, but potential federal changes could make tax planning even more important. The proposed infrastructure bill would increase taxes, affecting those with an annual income higher than $400,000, which is not uncommon for physicians. These changes make it vital for physicians to sit down with their financial advisors and CPAs now to minimize their own tax burden.
One of the primary ways to do this is by not missing any potential deductions that can still be made before the 2021 tax filing deadline.
1. Standard vs. itemized. While the IRS doubled the standard deduction to nearly $2400 last year, you may qualify for more. Talk to your CPA and review receipts for donations, interest, mortgage payments, and other itemized deductions to see if they will add up to a larger deduction than the standard one.
2. Personal income QBI. Your work-derived income qualifies for a 20 percent deduction as Qualified Business Income for self-employed physicians. This deduction applies to anyone with an income lower than $315,000.
3. Rental income claim QBI. For those who own rental property, collected rent qualifies for a 20 percent deduction on rental income.
4. Maxing contributions. Before the tax filing deadline, self-employed physicians can establish retirement plans such as SEP IRAs or cash balance plans and contribute the maximum amounts to lower taxable income. Contributing to personal IRAs and HSA accounts are also ways to maximize both retirement and tax savings.
5. Student loans. It’s a given that recent graduates will have student loan payments. You can deduct the interest up to $2,500, subject to income restrictions.
6. Real estate depreciation. Improvement costs or depreciation in rental property may potentially be written off as deductions as well.
7. Home offices. During the COVID-19 pandemic, there was a rise in the number of physicians making use of a home office for their practice. A percentage of the amount spent at home for business can be written off.
8. R&D credit. One that often applies to dentists, this credit is for research and development. It can be applied for investing in equipment or processes that enhance the patient experience. The amount of the credit may be up to $250,000.
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9. Food expenses. This write-off was expanded to help local businesses during the pandemic for business-related food expenses. For 2021, 100 percent of food expenses qualify.
After claiming those deductions for 2021, there are strategies to implement now to plan for tax savings in 2022.
1. Employer-sponsored plans. Enrolling in your employer’s retirement plan for physicians working in hospitals is a good strategy. These plan types may include 401(k), 457(b), or 409A plans. Contributing the maximum amount brings the greatest tax savings, but if your hospital plan offers a contribution match, the best practice would be to at least contribute to the level where you’ll receive the full match amount.
2. Cash balance plan. Setting up a cash balance plan for self-employed physicians is a smart move to maximize savings. As this is a defined benefit plan, the contribution amounts depend on age and wage. This works well as a catch-up for those who started retirement saving a little later; for investors over age 60, the maximum contribution is about $260,000 annually.
3. State taxes paid through corporation. Estate and property taxes now have a write-off cap of $10,000. Since last year, many states have adopted legislation that allows state taxes to be paid by pass-through corporations, then allowing a write off the full amount on the corporation owner’s personal taxes. This option must be elected each year and varies by state.
4. Backdoor Roth IRAs. For those whose income level doesn’t allow them to invest in a Roth IRA, those benefits are still available by contributing post-tax money to an IRA and then converting it to a Roth IRA. This conversion has no amount limit.
5. Involve kids. For self-employed physicians, you can hire your own children to your corporation; this teaches them the value of money and, since they’ll have earned income, they will be able to open a Roth IRA. This account will grow tax-free, and after five years, distributions for qualified expenses can be tax-free, such as first-time home buyers, etc.
Besides retirement accounts, you can put other savings options into play for 2022. For some of these, changes in tax law may eliminate them in the future, so implementing them this year is a good plan.
1. Opportunity zones. For real estate investors, opportunity zones, which are state-defined areas marked for improvement, may be a good choice. If held for more than ten years, there are no capital gains on those properties.
2. Vehicle depreciation. If purchasing large vehicles for business, the owner may qualify for accelerated depreciation and be able to write off the full value of the vehicle.
3. 529 contributions. While these plans vary by state, it’s always a good idea to invest in your children’s higher education. Contributions lower taxable income while qualifying for state tax write-offs.
4. Tax loss harvesting. There is always tax owed when selling stocks. For stocks that are dipping in value, selling them at a loss means that loss can be carried forward to offset other stocks’ profit.
5. Cost segregation. Depreciation of property happens as the property gets older, and as it does, the taxes owed lessen. The regular depreciation periods are long, up to 39 years. This period can be reduced to as few as five years through a cost segregation analysis, and the tax benefits on rental income can be gained much earlier.
6. Charitable donations. Rather than donating cash, gifting appreciated stocks will have the dual benefit of the donation to the organization and tax savings/write-offs for the donor.
Physicians can set themselves up for better financial planning and a better financial future by taking advantage of tax savings and preparing for them throughout the year. To decide which combination of these options best suits your needs, speak with a financial advisor and your CPA.
Securities are offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.
Syed Nishat is a partner, Wall Street Alliance Group. He can be reached on LinkedIn and on Twitter @syedmnishat. He holds the FINRA Series 7, FINRA Series 63, and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance.
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Hosted by Kevin Pho, MD, The Podcast by KevinMD shares the stories of the many who intersect with our health care system but are rarely heard from.
Transcript
Kevin Pho: Hi, welcome to the show, where we share the stories of the many who intersect with our health care system but are rarely heard from. My name is Kevin Pho, founder and editor of KevinMD. Today we have a special sponsored episode. We welcome back to the show Syed Nishat. He is a partner at the Wall Street Alliance Group. He is a regular contributor for KevinMD, and his articles and interviews about asset protection and common financial mistakes by physicians are published in MedPage Today and Medical Economics. He has been regularly quoted and interviewed in media outlets like Forbes, U.S. News, and Yahoo Finance, and he can be reached at WallStreetAG.com. That’s WallStreetAG.com.
And today we’re going to talk about a very relevant topic, tax planning tips for physicians. I just did my taxes last week, and I’m certainly interested in hearing more tips around tax time, and I think a lot of my listeners are going to find Syed’s information very, very helpful. Syed, good to see you again. Welcome back to the show.
Syed Nishat: Thank you, Kevin, for inviting me again. It’s an honor to be on your show.
Kevin Pho: So for those who didn’t listen to our first webinar together, just briefly introduce yourself and talk a little bit about the story of the Wall Street Alliance Group.
Syed Nishat: Yes, Kevin. So Wall Street Alliance Group is a fiduciary advisory firm specialized in financial planning for physicians. My background is I came to the U.S. as a foreign student about 22 years ago from Bangladesh, and after graduation, I started my career as a stockbroker in a firm where I had to do cold calls. In the same firm, I met my now business partner, Adil Zaman, who is from Pakistan, and we instantly connected. We started reaching out to affluent first-generation immigrants at the beginning of their careers, because of the cultural affinity, and speaking about the importance of financial planning in the U.S.
But when we were reaching out to them, Kevin, we realized we were getting a lot of physicians. The reason is because, if you take a look at the statistic published by the Journal of the American Medical Association, one out of six physicians in the U.S. is foreign-born, and these physicians have unique financial planning needs, such as tax planning, asset protection, practice valuation, and contract review. And when we sat down and met with them, they didn’t want to just talk about investments. They wanted us to take care of all their financial planning needs.
So what we decided, the best way to serve this physician community, is becoming a fiduciary, fee-based financial advisor, where there’s no product and no conflict of interest. And with this intention, we formed a team of experts, from CPAs, actuaries, and attorneys, and formed Wall Street Alliance Group in the year 2010. So it’s been almost more than 10 years, and now we have grown to almost 400 million in assets under management, and now we are providing wealth management solutions for physicians across the United States.
Kevin Pho: So let’s get right into the meat of this subject, because a lot of physicians, I know, are doing their taxes and thinking about tax planning. So can you explain why tax planning is important for physicians, especially in 2022?
Syed Nishat: Yes. So tax planning is extremely important for physicians, Kevin. If you take a look, recently the Biden administration has just passed a trillion-dollar infrastructure bill. Whenever there’s a big bill like this, always in the economy there’s a budget deficit, and the big question is, who’s going to pay for the bill? And most of the time, the simple answer is by raising the taxes. And like it or not, the taxes overall for the last few years have been down, so the taxes must go up. So there are a lot of bills out there in the Senate, in Congress, and they’re discussing them, but so far, the overall consensus is that people making more than 400,000 will be impacted the most.
Now, to give you some of the provisions in the bill, let’s say the income is more than 400,000 for a joint household. We’re talking about your tax rate going up from 37 to almost close to 40 percent. You might be thinking, “Hey, it’s only a 3 percent jump. What’s the big deal?” But there are some more provisions in the bill as well. Such as, there’s no Social Security tax we pay if the income is up to 140,000, but one of the provisions in the bill, because there’s a big gap in Social Security, is that for any income more than 400,000, you pay an additional 12.4 percent Social Security tax. It’s a big jump.
And also, small business owners, they actually have itemized deductions, so if the income is more than 400,000 dollars, the deductions start to phase out as well. So that’s why, ideally, if it is possible, have the income low, so when the bill becomes effective, most likely this year, you don’t get hammered too much with the taxes overall. Now it’s a good time. That’s why, like you, having just done your taxes, the physician should sit down with their CPA and financial advisor and come up with all the strategies possible, so they understand they are in control of their overall taxes.
Kevin Pho: Now let’s talk about tax deductions. The tax filing deadline, of course, is April 15th. Now, what are some of the deductions physicians commonly overlook?
Syed Nishat: Yeah. So first things first, when you file for your taxes, make sure you don’t miss the deductions, at least for the last year, 2021. And every year, Kevin, pretty much the deductions are the same, for the last few years at least, the foundation. So since 2018, there are two types of deductions when you file for taxes. The Trump administration, when it came in, pretty much doubled the standard deduction. It used to be around close to 12,000. Now it has become almost about 25,000. So that means you can just claim a 25,000-dollar deduction as a standard deduction without showing any deductions. The IRS allows it.
But the problem with this is most CPAs are just taking this easier way out. They’re just going for the standard deduction. But, hey, you know, you may have some other deductions. For example, donations. You may have some mortgage expenses. You may have some real estate that you haven’t shown. Try to lump it together and see if you can go over the 25,000 threshold limit, so you can get more deductions. And that’s more work for the CPA, but definitely we see our physician clients miss a lot of deductions.
Now, what are the deductions we see physicians miss all the time? The first deduction we see, especially for self-employed physicians, is they miss something called QBI, the qualified business income deduction. So QBI means whatever income you collect as a business, you can write off 20 percent of the business as a deduction. For example, if your income is 100,000 dollars, you can write off 20 percent of 100,000, which is around 20,000 dollars, a straight deduction. That was passed a few years ago and still is applicable. There’s a QBI similarly for rental income as well. So for example, if you have a rental income of 50,000 per year, after even depreciation and everything, whatever income is left, you can write off 20 percent of the rent as a deduction as well. So again, we see physicians miss rental income deductions as well.
Now, before April 15, and again, these are for self-employed physicians, you can open a SEP IRA. In a SEP IRA, you still have time for it if you haven’t filed for your taxes. You can write off 20 percent of your adjusted gross income or 58,000, whichever is less, as a SEP IRA, and this money is pre-tax. You can also open up a cash balance plan. In a cash balance plan, for last year, you can contribute, let’s say over the age of 60, almost close to 260,000, and again, all the money is pre-tax. But again, you have to sit down with the actuary and CPA and come up with the calculation.
And a straightforward IRA, husband and wife over the age of 50 can contribute 7,000 dollars each. And lastly, HSA, we see physicians miss all the time. If the employer allows you to contribute into the high-deductible savings account, you can contribute 8,200 dollars for the family. And again, hey, all the money is pre-tax, and the beauty is, if you leave the money until the age of 65, after 65, you can take it out for non-health-related reasons as well. But again, you still have time before April 15 to open all these IRA accounts. Speak to your CPA about it.
The next item is the student loan payment deduction. A lot of physicians think they don’t qualify, but if your income is below about close to 140, you can write off about close to 2,500 of the interest you pay. A lot of students do qualify for it, so speak to your CPA about it.
And then the real estate. If you have income, make sure that you write down all the expenses, all the renovation, all the depreciation. We see depreciation missed all the time. Against the rental income, it becomes an expense. And last year, Kevin, as you know, due to the pandemic, a lot of physicians transformed their business, working from home. If that’s the case, a certain percentage of the square footage of the house you can write off as a home expense deduction. So make sure you speak to your CPA about that, if the business has transformed.
And I want to talk about two more items. One is called the research and experimental credit, which is known as the R&D tax credit. With my dentist clients, we usually see it all the time. If you have bought equipment that overall improves the service or overall improves the process, up to 250,000, you can get the R&D tax credit from your payroll. Again, you have time by April 15 to speak to your CPA about whether you have done any of the process or not.
And lastly, last year and up to this year, the food expense for business is 100 percent. It used to be 50 percent of the amount you could write off, but right now you can write off dollar per dollar, up to 100 percent. So again, speak to your CPA. I know that it’s a long list for the small question you asked, but this could be a good foundation to sit down and speak to your CPA about whether you have missed any deductions or not.
Kevin Pho: Now, I understand that better planning can be done if some of these steps are implemented at the beginning of the year. So for 2022, how can we plan to be better prepared from a tax planning perspective?
Syed Nishat: Yeah, for 2022, the good thing is that we’re talking at the beginning of the year. A lot of things can be implemented that people missed out on last year. For example, a 401(k). In a 401(k), if you have an employer-sponsored plan, make sure you max out. For 2022, the amount went up. Husband and wife can contribute, over the age of 50, almost 27,000 each in an employer-sponsored 401(k). Again, all this money is pre-tax, and a lot of times there’s a match as well from the hospital. So for example, if you contribute, only then is there a match, so at least contribute the amount for the match, or else you miss out.
Also, a 457 plan is for not-for-profits. This is where you can contribute, but there is no match. But again, you can defer the money. You can take this money out before the age of 59, and there’s no penalty in it. The 409A plan, a lot of physicians miss out on it. A 409A plan is similar to a 457 plan, but the contribution amount goes almost as high as 90 percent of your salary. So the problem with the 409A plan compared to the 457 is the money is not 100 percent principal-guaranteed if the hospital files for bankruptcy. So we’re not saying to put a lot of money into it, but again, if your income is very high, speak to your CPA about whether a 409A or 457 plan makes sense for you.
And as I mentioned in the previous conversation, with the cash balance plan, a self-employed physician can contribute almost 260,000, but it depends on your wage. So this year, you have the full year to adjust your wage, your salary. So if the salary goes down, the contribution goes down, and if it goes up, the contribution goes up. So again, just now, it’s a good time to do it.
And there’s a new law I want to talk about next, which is called the SALT cap workaround. A lot of states have started to implement it. So far, about 20 states have started to implement it. When Trump became president, for the property tax you pay and the state tax you pay, the maximum you can write off is 10,000 dollars, which is called SALT. Now, states like New York, New Jersey, and Maryland enacted last year that if you have an S corporation or C corporation, you can pay the same state taxes from the corporation and get the write-off of the full amount at the federal level. But it’s not automatic, though. You have to elect to do it. For example, in New York, by March, you have to elect for 2022 that you want to pay the state tax from the corporation. But again, it’s a big deduction if you have a lot of income from New York, so make sure you speak to your CPA about whether paying the state tax from the corporation to get the deduction makes sense or not.
And then the last two items. Roth IRA, the reason I put it there is because we all know the market is down right now because of this Russia issue going on. So if the portfolio is down, it’s a good time to maybe do some Roth conversion, because the beauty of a Roth conversion from pre-tax IRA accounts is, once you convert it into a Roth IRA, the money goes tax-free, and the withdrawal is also tax-free, and you pay less taxes now because the overall portfolio might be down. And one of the provisions in Biden’s tax law is that Roth conversion may go away if the income is more than 400,000. So again, the Roth conversion is still there, you know, and it may be a good idea to do it, depending on your tax situation.
And lastly, you know, if you are self-employed, this is for your children. If you think there’s a use for them, hire your children and put them on the payroll. It is not just about the money point of view, but you are educating them about the importance of money. They’re working for you. Have them work for you during the summertime and pay them 5,000 dollars, for example, and this 5,000 dollars they can contribute into a Roth IRA for the child. And the beauty of the Roth IRA is, after five years, the children can use it for buying a first-time house, education, and emergency expenses. They can take it out, there’s no penalty in it, and the money grows tax-free. So these are, from the retirement point of view, some of the strategies available for physicians. Speak to your CPA if it makes sense for you.
Kevin Pho: You’re listening to a special sponsored episode of The Podcast by KevinMD, tax planning tips for physicians, and we have Syed Nishat. He is a partner at the Wall Street Alliance Group. He can be reached at WallStreetAG.com. That’s WallStreetAG.com. Syed, are there any other tax deduction vehicles besides retirement accounts?
Syed Nishat: Yeah. So besides retirement accounts, these are some. Physicians are saying, “OK, I’m not self-employed. What are the options out there? I have some outside investments.” Yes, a lot of physicians invest in real estate. One suggestion: We’re saying to physician clients that if you’re into real estate, try to invest in an opportunity zone. What is an opportunity zone? It is an area where there’s a 20 percent poverty rate, and the government is encouraging investors to invest the money. The beauty of an opportunity zone is, once you invest the money into real estate in that area and leave it there for 10 years, there’s no capital gains tax. Again, very powerful.
Then, if you need a car for the business, again, if you need it, if you buy a car weighing more than 6,000 pounds for the business, you get to write off the full purchase price of the car, the full purchase. So usually, the 6,000-pound cars are expensive, 80,000 dollars at least, and you get to write off all of it. It’s still there; most likely it will go away. So again, the physician can use it, you know, this year.
Again, the 529 contribution: If you do it, you can get a state tax deduction. For example, in New York, for my two kids, I can contribute 10,000 each. Again, I get some write-off for state taxes. And I put out this information on tax harvesting because the market is down right now. If you have a significant profit, and some stock might be down right now, book some losses to offset the profit you may have.
And then cost segregation. I think it’s one of the most underutilized strategies for physicians. Most real estate you own, Kevin, for commercial, the depreciation schedule is about 39 years. What is depreciation? It means every year the depreciation happens, you get to write it off from the rental income you collected. So it’s a wash. A cost segregation study, all it does is bring the depreciation down from 39 years to five years. So that means you get a bigger depreciation, and you get to write off a huge amount of losses against the rental income you collected.
You know, I was talking to a physician client of mine in Texas. He has an urgent care. We bought it, and it’s for a million dollars, and we did a cost segregation. We immediately got 250,000 of advanced depreciation. In the 35 percent tax bracket, that is almost 87,000 of tax savings right there. So again, if you’re into real estate, speak to your CPA about a cost segregation study.
And lastly, I want to mention charitable contributions. There’s no way in this podcast I can cover it, because charitable contributions could be a podcast of their own, but just to give an idea: We see physicians give cash all the time. It’s a mistake, though. Don’t give cash, because if you have appreciated stock, give the stock as a donation into a donor fund. Let’s say you bought Apple for 100, and the stock is 200 dollars. When you sell that, you have to pay taxes regardless. So the best thing would be, if you’re charity-minded, give this Apple stock as a donation. The beauty is that on the appreciation from 100 to 200, you pay no taxes, plus you get the deduction as well. So up to 30 percent of your adjusted gross income, in stock, you can contribute. Before December, you can open a donor fund and do it. So if it is of interest to you, speak to your financial advisor about whether a charitable contribution makes sense for you or not.
Kevin Pho: Now, there are a lot of financial services companies that advertise to health care professionals like physicians and dentists. Now tell us what separates the Wall Street Alliance Group from your competitors, and why should physicians consider you?
Syed Nishat: Yeah. So 90 percent, Kevin, of our clients are physicians. And to answer your question, I’ll share a personal story with you. I’ve shared it on a lot of podcasts as well. You know, a few years ago, my wife was diagnosed with uterine fibroids, and as you know, fibroids are very common in women, especially South Asian women. But unfortunately, my wife had over 17 of them. So we went to a lot of general OB/GYNs, and the overall opinion was just to remove the uterus, because there was a lot of bleeding she was going through. So we were overall hopeless, and I didn’t know what to do, till we met a physician who specialized in fibroids.
So this guy was all the way over in Alabama, and when we met with him, he assured us that he had the team of experts we needed in-house, so we didn’t have to go to 10 different places. He does the surgery day in, day out. He knows what the problem is, and he made us feel very comfortable. And he was a miracle doctor for us, because he was able to do the surgery very seamlessly. And because of this miracle doctor, it’s been five years now, and we have two kids, Ayan and Noah.
And the reason I share the story with you is because if we hadn’t found this specialist, we probably still would be going through the process, you know. And so the moral of the story is that whenever a physician goes to a financial advisor, make sure the financial advisor is an expert in something, like my physician was an expert in fibroid removal, so we didn’t have to really worry about this. Make sure that the financial advisor has a team of experts, like my physician’s clinic did, so the physician doesn’t have to go to the CPA and the attorney, to 10 different places. And make sure the financial advisor the physician chooses is a fiduciary, like this physician was a fiduciary for us and saved our lives. And we believe that we have the team of experts for physicians in-house, and we can take care of all their financial planning needs under one umbrella very efficiently.
Kevin Pho: Syed, what are some of your take-home messages that you want to leave with the KevinMD audience?
Syed Nishat: Yeah. So one particular message, Kevin, I will have: Obviously, we’re talking about tax planning, and this is one of the important topics of financial planning, but it’s not all of it. One of the concerns we have is that physicians have a lot of blind spots, and they’re not focusing on them. Like, we’re seeing a lot of young physicians coming to us with a very hot topic: “Give us the best hot topic possible. How can you beat the market?” That’s the question they’re asking, and that’s why they want to use a financial advisor. But it’s the wrong question to ask.
I think, logically, Kevin, if I knew how to beat the market, I wouldn’t need any physician’s money. I’d probably be investing more money and become a billionaire right now. But that’s not the case. The reason why you’re using a financial advisor is because, as a physician, most likely one thing you don’t have is time. You don’t have time to do estate planning and go to an attorney. You don’t have time to do complex tax planning and go to a CPA. You don’t have time to collaborate with the asset planning attorney.
So what we do is, we’re the fiduciary who talks to all these experts, and at the end, we create a foundation for you, which is a financial plan. Without a financial plan, it’s like, you know, driving a car without any direction. You’ll be driving aimlessly. So that’s what a fiduciary financial advisor is supposed to do for you, create a roadmap for you, so your overall financial plan is intact. And this is what we do, and this is what physicians should focus on, which is creating a foundation, which is a financial plan. That is very important.
Kevin Pho: And how can people reach you?
Syed Nishat: Yeah. So Wall Street Alliance Group is not just one person. We have a team of experts. You can go to our website, www.WallStreetAG.com. You can see all our team’s bios. You can complete the questionnaire, and we’ll be more than happy to get back to you with a complimentary financial plan.
Kevin Pho: Syed, thank you so much for coming back on the show and sharing your time and insight.
Syed Nishat: Thank you, Kevin, for inviting me again.
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