7 Tax Deductions Doctors Miss Out On

It’s tax season again.  I have found tax literacy among doctors to be particularly low, so much so that many doctors get sucked into questionable investments and “tax shelters” to save minimal amounts on taxes.  I have an entire series coming up on understanding the basics of the tax code, but I thought I’d do a little piece before April 15th about tax deductions.  Let’s take a look at ways you can reduce your tax bill.

1) Tax-deferred Retirement Plans

This is the biggest tax deduction I see doctors routinely missing out on.  I’d guess less than 1/4 of doctors actually max out all the retirement account options available to them.  Some because they simply don’t save enough money (a related, but separate issue), but many simply don’t realize just how much money they can squirrel away into these things with huge tax benefits.

Every dollar put into a tax-deferred retirement account isn’t taxed this year.  If you’re in the highest tax bracket, and have hefty state and local income taxes, you could have a marginal tax rate approaching 50%.  That means for every $2 you put in a retirement account, you save $1 on your tax bill.  That’s pretty darn good.


If you’re a contractor (paid on 1099s) you should be able to contribute 20% of your income to a SEP-IRA, up to a maximum of $50K, with an additional “catch-up” contribution of $5500 if you’re over 50.  If you don’t make $250K, you can contribute even more than 20% to a Solo 401K, so you might want to use that instead of a SEP.

If you’re an employee (paid on W-2s) you may be limited to as little as $17,000 into a 401K, but many 401Ks will match you or at least allow you to self-match up to the $50K limit.  If yours doesn’t I suggest you talk to your employer.

A defined benefit plan can allow you to shelter additional money from taxes, sometimes as much as another $30K, $50K, or even more.

2) The Backdoor Roth IRA

This one doesn’t give you a tax break this year, but it does allow you to shelter retirement investments from any future taxes.  It is a far better option than many insurance related tax shelters salesmen often push on you.  You can put up to $5K into a non-deductible IRA for you and $5K for your spouse.  Then you can instantaneously convert them to an IRA.  There is one catch, you can’t have any other SEP-IRA or traditional IRA due to the pro-rata rule, but there are ways around this for most, such as rolling those IRAs into your 401K

3) Health Care

Health insurance is expensive, no doubt.  But at least you can pay for it with pre-tax money.  Your health insurance premiums are a deductible business expense, as are the contributions to a health savings account (AKA a stealth IRA) that you can use for co-pays and deductibles.  A high-deductible health plan combined with an HSA isn’t the right move for everyone, but for the healthy, you can save a lot of money on premiums and on your taxes.

4) Business Expenses

Many self-employed doctors miss out on all kinds of tax deductions just because they don’t realize what is deductible and what isn’t.  If you are a sole proprietor, partner, or a contractor, it would behoove you to keep careful records of your business expenses.  Travel, meals, accommodations, office equipment and supplies, medical equipment, CME expenses, licensing fees, communication expenses, board exam fees…the list goes on and on and on.  The main benefit of being an owner, rather than an employee, is that you can get all these sweet deductions.  That’s off-set by the requirement to pay the employer portion of your payroll taxes, but at least those are deductible too.

Employees generally miss out on these great deductions.  Unreimbursed work expenses are subject to a 2% floor, which for most doctors is more than they spent.  There are two ways around this.  First, you can get your employer to pay for them.  He gets to pay them pre-tax, just like you would if you were self-employed.  Many employees have a CME fund for instance.  My employer picks up my ACEP dues and similar fees.  The second method, is to become an owner.  Just because 95% of your income comes from your main job, where you are an employee, doesn’t mean you can’t get a moonlighting job on the side and get all the deductions a contractor would have.  If the moonlighting job requires a medical license, DEA license, CME etc, then you can deduct your business expenses from that income.  This one works great for military docs.

Your business doesn’t even have to be medicine related.  The income from this blog last year wasn’t taxed at all since I deducted office supplies, internet-related fees, and phone-related fees from it.  Every little bit helps.

5) Mortgage Interest


Many doctors find themselves with hefty loans, including consumer loans, car loans, credit cards, student loans, home equity loans, investing loans, and mortgages.  While I generally advocate avoiding most of these loans, and paying down those you take out as quickly as possible, the IRS makes carrying mortgage interest tax-friendly.  If you’re going to have the loans, you might as well convert them into loans that have a low rate and are tax deductible.  Let’s say you have $100K in student loans, for instance, at 6.8%.  You also own a house worth $600K with a 5% mortgage for $300K on it.  Refinancing the mortgage into a 4% $400K loan and paying off the student loans would lower the interest rate on the mortgage, lower the interest rate on the student loans, and make the student loan interest deductible.  You can do the same thing with credit cards, car loans etc.  It’s not good to use your house as an ATM, but it also isn’t smart to pay too much in interest, especially when tax-deductible interest is an option.

6) Charity

Doctors tend to be charitable folk.  If they don’t give money, they often give time.  Any donations to a qualified charity are tax-deductible just like mortgage interest (assuming you have enough total deductions to justify itemizing them.)  You can use Turbotax’s It’s deductible to figure the value of things you give to goodwill.  You can also count the miles used to drive to and from your charity of choice and any other expenses associated with donating your time (although you can’t deduct a value for your time itself.)

7) Tax-Loss Harvesting

Investors hate losing money.  But in a taxable account, Uncle Sam will share your pain.  You can even get a break on your taxes without having to “sell low” by doing tax-loss harvesting.  You sell a losing investment, and buy one that is highly correlated to the one you sold.  For example, you might sell the Vanguard Total Stock Market Index Fund and buy the Vanguard 500 Index Fund.  These two funds generally move in lockstep, but they are different investments.  You can deduct up to $3000 a year of investment losses against your ordinary income.

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Comments

7 Tax Deductions Doctors Miss Out On — 50 Comments

  1. Under #1 (Tax-deferred Retirement Plans), don’t forget that the 401(k) and 403(b) limit has increased from $16,500 to $17,000. Additionally, those age 50 or older can deposit an additional $5,500 as a “catch up” contribution.

    Under #6 (Charity) a strategy that has been very popular among physicians is using life insurance to leverage contributions to charities. For example, let’s assume that you donate $1,000 year to a medical association’s educational foundation.

    You can take the same $1,000 and have the medical association apply for a life insurance policy (it can’t be term life as you might live longer than the policy does and then the charity gets nothing) on your life where they are the owner and the beneficiary. You gift the $1,000 to the charity and take the same income tax donation. Now, in the event of your death, the donation is increased substantially due to the insurance policy.

    Now that I mentioned this, if you look at various medical socities or schools, you will notice that this option is usually mentioned and referred to as a “deferred gift”.

    Another large tax deduction falls under IRS Publication 463 (Temporary Job Assignment). The travel, lodging, and 50% of the cost of the meals incurred during a job rotation outside the general vicinity of where you live. The rotation must be for a specific period of less than one year, and you must intend to return to the city that you were living in prior to the rotation. A good example is a Plastic Surgery Resident in New York that goes to do a hand Fellowship in California (one year or less) and then returns to New York. This is often overlooked and can save those in this situation thousands of dollars of their income taxes.

  2. Larry-

    Good catch on # 1. Fixed it.

    The problem with using a permanent life insurance-based strategy to increase a gift is that you have to use the permanent life insurance. It would result in a bigger donation to the charity, but that’s mostly because it is a deferred donation. You get the tax deduction now, but the charity doesn’t get the donation until you die. If that’s your goal, then it works fine. But if your goal is to maximize your eventual donation to the charity, you may be better off skipping the life insurance policy and investing the money yourself, to make a bigger donation later.

    The charity may prefer a smaller donation now rather than a larger one later as well. Or, they may prefer being able to invest it themselves and liquidate it when needed rather than waiting for your death and only getting the lower expected rate of return the insurance policy would provide over a more standard portfolio.

    It really is not much different than using a irrevocable life insurance trust to provide money for heirs. The reason to give it away early aside from hopefully giving more in the end is to take advantage of the $13K/year gift tax exclusion each year, and reduce your estate taxes. I suppose you could do an irrevocable trust without the life insurance, but you don’t hear about it very often. I suppose because without the life insurance the trust would be paying taxes on the earnings at your marginal rate.

    Business travel is a great deduction. The more you travel, the more you can deduct. Temporary Job Assignments are really just business travel. Keep in mind you can only deduct the costs your employer doesn’t pay. For example, when the military sent me somewhere, they paid for everything. No deduction obviously. I do like the idea of using it for a one year fellowship though. I’m curious how the IRS defines the “intend to” clause. If you “intend to” return, but at the end of the year decide not to, do you lose the deduction? How do they determine your intention?

  3. I should clarify the life insurance for charitable giving strategy. Some associations have “benefits” for those that give cash or securities or make deferred gifts now. For example, the American Society of Plastic Surgeons has something called the “Maliniac Circle” in which members that donate to the Plastic Surgery Foundation receive special recognition. Since young members often don’t have the liquidity available or don’t want to take monies away from their family needs, the life insurance works great.

    However, Whole Life insurance should not be used as it is expensvie and will build cash value that the foundation just does not really need now. Therefore, the member applies for a Universal Life policy with a Secondary No Lapse premium and pays for the number of years that they desire (essentially, purchasing permanent term insurance).

    The member gets the recognition now, the charity gets the money later, and the needs of both have been met. The same strategy can work for schools as well.

    The “intent” part is probably tough to prove. I had a client that left his home state to do a Fellowship and signed a contract for a job to return to his home state. He subsequently took another job to go to another state. I would argue that until the new contract was signed, his intent was to retun to his home state. He could then provide the signed contracts to the IRS in the event of an audit.

    A great website is http://www.mdtaxes.com. It is run by Andrew Schwartz, CPA in MA and he and his brother, Richard, specialize in tax planning for physicians and other healthcare professionals. There is a lot of good information there, as well as, an interactive message board.

  4. Does the average MD really need a CPA for tax planning? BTW, I have been impressed with Fairmark.com which looks like a much more active forum for asking tax questions.

  5. Under #5, I do not believe you can deduct the portion of the refinanced mortgage that is used to pay off student loans, credit cards, etc. if you are subject to alternative minimum tax. Under AMT, I think the only interest that is deductible is that which is used to purchase the home.

  6. Mark- I suspect the AVERAGE MD does need a CPA! But average MDs don’t read financial blogs, much less go to forums to ask questions and learn to do things themselves. I agree that Fairmark.com has a great forum for tax questions. I’ve used them many times. You don’t get your answers as quickly as on a busy forum like Bogleheads, but tax-wise, the advice is better.

    Alan-

    You are correct that home equity interest not used to improve, build, or buy a home isn’t deductible under the AMT system. Those who don’t have to pay AMT, however, can deduct the interest on up to $100K of home equity mortgage. Even if the interest isn’t deductible, it wasn’t deductible before anyway. So if you can get a lower rate, it still makes sense to fold it in with your mortgage/home equity loan.

    Larry- Thanks for the link to MDTaxes. Lots of good stuff there.

  7. even if you use gUL, its a bad idea. Since neither you nor the organization needs insurance, one will likely always do better investing seperately. The recognition now part is bogus. dont let any insurance agent con you into this being a good idea. If im not mistaken there have lawsuits about such gifting programs when things dont work out as expected with a large university in the south central region.

  8. White coat, what is this self matching to a 401k you describe. Are you talking about a solo 401k? I have tried to get more matched into our s corp, but i always run into new comparibility rules that requires more money given to employees than i could defer for ourselves as partners.

  9. ill see if i can find it. it doesnt apply to anything id consider so ill have to search. as is typical in these lawsuits, what you read online depends on which site it comes from. The bottom line however is that using gUL or any insurance product to grow a donation is a bad idea. Never use insurance as a way to grow something. The reason its bogus is that there isnt anything special about that type of donation vs another type in regards to how your favorite charity will like you. The charity would much prefer cash or anything else for that matter but of course will take this instead of nothing.

  10. You can find it here: http://chronicle.com/article/Lawsuit-Suggests-Oklahoma/63939/
    This seems much more complex than just, “using gUL or any insurance product to grow a donation is a bad idea. Never use insurance as a way to grow something.”
    By a quick glimpse it seems that there was actual illegal activity involved, not just poor performance of an insurance product.

    Rex – One of the nice things about this blog is that, there is not much “blanket” advice being given. Although your statement may have some validity, there are situations where this strategy could work.

    Suppose you structure this type of strategy, buy a $250K GUL policy for a $1600 annual premium and die in year 10. Can you enlighten me as to where else I can get a guaranteed 55% return? However, if you live for 45 years, it probably wasn’t such a great deal (4-5% return).

    This has nothing to do with my perception or opinion of this strategy. Mainly just to show that there are cases where it may not be so bad.

  11. RabbMD- No, its a profit sharing plan/401K, not a solo 401K, designed by MedAmerica for a group of about 100 docs and a few other employees. The plan allows for “self-matching” by highly-compensated employees (basically docs who haven’t made partner yet.) The non-highly-compensated employees actually get a match from the company. The partners also “self-match” up to $50K.

    I’m no 401K attorney, but my understanding is that it is legal!

  12. Rex and Michael-

    “But, he said, the colleges discovered that if they sank the money into their endowments, they would get the same rate of return — but with less risk. The insurance idea “kind of died on the vine,” he said.”

    There’s the important quote in the cited article. It sounds like Oklahoma State was actually paying for the policies with endowment money and got ripped off by the insurance company. That seems quite different from what we’re talking about here, that the donor buys a policy with an annual gift.

    Michael- Since there’s no guarantee the insured will be dead in 10 years, I don’t think you can call the return “guaranteed”! Heck, the guy could die the next week for a huge return, but on average, the expected return should be less than the University (or the Donor) could get by investing the money themselves. You could guarantee the amount the University eventually gets (which you couldn’t investing it yourself or gifting cash), but you couldn’t guarantee when.

  13. michael that isnt a strategy then its a gamble. How could an insurance company stay in business if they paid a higher return then they can get on their own investments? They cant. The only way to “win” is either extreme luck (which in this case is also bad luck since you are dead) or for the insurance company to accidentally puts you in a category they shouldnt (they think you are excellent health but you are not).

    There are no magical investments in this world. Insurance companies use the same investments that other people do except bc of their guarantees they need to use conservative investments. They also need to pay their people and cover the true insurance risk. Thus as a way to grow money on average it will always be a loser on average. It has to be or the insurance company goes out of business and then those guarantees arent so valuable. That is why that statement will always be true on average. We could tell people play the lottery but we dont bc we know as a strategy it doesnt make sense. The same is true of using insurance to grow money. Its fine if you need insurance but not as a method to grow money. Always keep in mind how they make money and you will realize without the need (or possibly strong desire) for the insurance, it is not for you.

  14. The idea behind the strategy is that (young) physicians might want to make donations to their society’s educational foundation but don’t have the liquidity or desire to make a large initial gift or commit to making gifts of a few thousand dolllars per year on an ongoing basis to meet the requirements for recognition.

    This is typically done because they want the recognition of doing this by the society and/or their peers (Rex – who is to say if this is bogus or not if that is their desire) and like of the benefits that go along with it (typically at the society’s annual meeting) like a VIP suite or reception for donors.

    Since most associations typically require a deferred gift of $50,000-$100,000 so, in most cases, that is the size of the policy being purchased.

    It was mentioned for educational purposes and not something that I recommend that should or should not be done.

  15. WCI – I saw that quote and completely agree with you. However, I believe that “But the complaint alleges that Mr. Lee and the other agents misrepresented details of the deal and even forged signatures on documents that they were required to show to university officials and the donors”, is a fairly critical factor in their filing suit.

    Rex -
    I’m not really interested in arguing this. My intent was not to be pro/against this concept, but rather to share unbiased information – hence why I provided two examples showing the good and the bad.
    Having experience in the financial services industry and working with individual clients, these decisions are not always scientific like you make it seem.

    I think the key factor is for people to understand their options so that they can make the decision that is most appropriate for their situation.

  16. well you shouldnt argue for this bc its a horrible idea except for the agent. The whole reason the concept exists is insurance companies bringing it up to charities. Charities will take something instead of nothing but this is definitely not what they really want and it isnt what you will want either once you understand it and the drawbacks.

    let say a young person does purchase gUL bc they dont have the resources to give a big gift (i didnt pick this as the ideal case by the way which it actually isnt the ideal case for purchasing gUL any way). Well if that person has any hard financial times later on and misses a payment then the policy goes bust. This can be especially true for someone who doesnt have the resources to give a big gift. If you actually live longer than you thought and thus dont save enough for retirement then again the policy goes bust and the charity gets nothing but you will have paid tons over the years. If you become too ill in your last few years of life (which also may have serious financial costs), then maybe a payment will be missed by accident alone and again the policy goes bust. If inflation goes through the rough then those guaranteed dollars become worthless over the next 50 years. Agents and insurance companies love all those situations.

    You completely made up those additional perks and the concept that only by pledging with insurance that one could obtain them. If you just pledge money over time you will get the same reception.

    Again the final factor always will be never use insurance to grow money (i should add under current tax laws). Only use it if you need insurance.

  17. no good reason to use insurance unless you want to gift less money and take on all the disadvantages i mentioned plus more.

  18. No reason to use insurance unless you want to gift less money and give more to the insurance company. There is no good reason to use insurance in this situation.

  19. I’ve never helped manage the investments for a charity, but it sounds like you have some knowledge on the topic based on your level of confidence regarding what charities want and do not want. What are your thoughts on the typical investment portfolio for a charity? One would assume that they cannot be too risky for fear of a negative public perception. So what type of return can a charity who needs to be moderately conservative expect over a 25-45 year time frame?

  20. It seems a single premium insurance policy (which becomes an MEC obviously) would avoid many of those disadvantages Rex. The charity gets a guaranteed amount when you eventually keel over, that amount is more than you can now afford to give, and if the charity is willing to give you some benefit for it that you find valuable, then it is a win-win-win. I agree it isn’t my preferred way to give to charity (I give cash), but I’m not convinced there is NO reason not to use insurance for this. Should the charity prefer a small amount of cash on the barrelhead now? I think so. But that doesn’t mean they do.

  21. michael if you are really in the financial industry then you either dont understand these products are okay with giving poor advice…if one use a gUL as mentioned above then you dont know the return bc it depends on when the person dies. The longer the person lives then the worse the situation. There is also the chance that you set the gUL incorrectly and outlive the guaranteed rate.

    WC,
    Well if you are going to provide a single premium MEC then yes it would eliminate some concerns (except of course the insurance company going under is still a risk and ill add that several companies are cutting back on their gUL bc of the low interest environment and it is also one of the reasons why long term care insurance is in trouble although not the only reason) although still a very poor investment but then it defeats the idea noted above about not being able to afford any significant amount up front so scheduling payments yearly. If you really care then do the smart thing and not the insurance agent thing.

    any charity that has people in the know only wants this instead of nothing and if it helps them get something then fine. They will take it but they dont desire it over the cash for the reasons ive already listed. If you arent a single premium then there is always risk that once the individual realizes how poor an investment is that they stop paying or stop paying for a variety of other reasons i also listed and then again the charity gets nothing. Again there is no insurable interest and thus no need to add the fees of insurance. Agents like to pretend this is smart but it isnt. I like to think here we (physicians) give smart advice and explain why options are poor choices. If one wants to make a poor choice then as long as they understand it fine. Most of us know however that agents coach this conversation in ways so it seems like a smart choice when it is anything but that. Purchasing any permanent policy as an investment no matter how you cook it, is a bad idea. The primary reason must be a need for a permanent death benefit or possibly a strong desire knowing that this will likely result in less money.

  22. Rexxxyy –
    You can’t just turn every comment or conversation on insurance into an agent bashing session. It’s becoming clear that you must have had some poor experience with an insurance agent in the past and I’m sorry that you fell victim to buying something you now regret. While I agree that there are many agents out providing what I would consider to be poor (or perhaps misinformed) advice, there are also financial professionals out there making great recommendations some of which include insurance products.

    If a 40 year old buys a $250k gUL for $1600 a year and dies at age 90 (beyond life expectancy) – that gets him a 4% return. Yes, I agree that one could contribute $1,600 into a personal brokerage account, invest at his/her own risk following the rules of designing a doctor’s investment portfolio, and would likely create more money if they live the same number of years. Trust me, I get it!! BUT, in the real world, not everyone would prefer to do it that way.

    BTW, I’m yet to voice my personal view on this topic and do not appreciate you indicating that I “either dont understand these products or are okay with giving poor advice”. Just because I’m not bashing the insurance idea does not, in any which way, imply that I am in favor of it either.

  23. Michael, just to validate your case, I ran an illustration for a 45 year old male, best class, using John Hancock’s UL-G 12 policy two different ways:

    1. Premiums payable for lifetime with death benefit guaranteed until age 121. The annual premium was $1,038. If the insured lives to age 85, the rate of return on death is 3.89%, if the insured lives to age 90, the rate of retun on death is 3.03%, if the insured lives to age 95, the rate of return on death is 2.38% and if the insured lives to age 100, the rate of return on death is 1.87%.

    2. Premiums payable for 20 years with death benefit guaranteed until age 121. The annual premium was $1,801. If the insured lives to age 85, the rate of return on death is 3.34%, if the insured lives to age 90, the rate of retun on death is 2.88%, if the insured lives to age 95, the rate of return on death is 2.53% and if the insured lives to age 100, the rate of return on death is 2.25%.

    Rex, not everyone has the time, energy or interest to invest their money the way that you describe. All I mentioned was that this was an option that some people choose to use as a way to get the recognition that they want to ultimately benefit a charity.

    You stated “Well if that person has any hard financial times later on and misses a payment then the policy goes bust. This can be especially true for someone who doesnt have the resources to give a big gift. If you actually live longer than you thought and thus dont save enough for retirement then again the policy goes bust and the charity gets nothing but you will have paid tons over the years. If you become too ill in your last few years of life (which also may have serious financial costs), then maybe a payment will be missed by accident alone and again the policy goes bust.

    Based on the premium amount, I can’t imagine things getting so bad for a physician that even if the decided upon the lifetime payment option, they couldn’t make the premium payment. However, if for some strange reason, they could not, the association could make the premium payment as they are the owner and the beneficiary. The charity could also surrender the policy for the cash value if they did not want to carry it any longer or if the insured became very ill, the charity could again make the premium payment or possibly sell the policy to a third party.

    Believe me when I tell you this – it is not worth my time nor Michael’s to run around actively soliciting these types of policies.

    It was just mentioned for educational purposes. You have made your point. Micahel and I have made ours. Let’s just move on to another topic.

  24. I love the garbage just for educational purposes and im not actually voicing my opinion. I think most people see right through that. Neither of you will be able to provide any intelligent reason to use this strategy. Why bring up bad ideas, defend them, and pretend its just for information. In fact there is never an intelligent reason to use permanent insurance to grow money. As noted, this strategy easily could provide returns below inflation. Again the bottom line is only buy permanent insurance for a need for a permanent death benefit. My impression is that this site is for intelligent financial decisions. I could tell people buy loaded managed mutual funds to reduce the work etc but you wont find anyone pushing that here and if they do then they will get the same reception from me. It has to do with bad advice that you are pushing. In regards to your final ideas for the charity in a worse case scenario, what probably would actually happen is the policy would just lapse (since likely the charity wont know of the ill health of their member) and only the agent and company would have benefited. The percentage of permanent policies that dont stay in force until death just says it all. Why dont you just admit that its not an idea appropriate for the crowd coming to this site.

  25. In the thread on disability insurance for retirement contributions, I gave my opinion and stated all the details of how the plan works so visitors of this site would have a better understanding of it.

    I simply mentioned the life insurance idea as it is a strategy that is available and often used as a deferred giving instrument. That is the only reason.

    If you think that I just post to try to have people call me to purchase products, you are sadly mistaken.

    Rex, we (as well as every other reader of this blog) know where you stand on this issue.

  26. Lawrence, a nominal 3% or even 4% return for a 40 year period is likely to be a TERRIBLE return if even a positive real return. Inflation alone will probably
    be roughly in that range if not higher. Insurance salesmen seem to love to use nominal and not real returns. I am with Rex for the most part on this thread.

    Besides the whole concept of trying to get more recognition than you deserve for a gift does seem absurd to me.

  27. I agree that 3-4% for a 40 year investment is pretty poor. But then again, a 30 year treasury is only 3.15% right now. What is an insurance company supposed to invest in to get significantly higher returns?

  28. The underlying point is not what a insurance company should invest in but whether an insurance company should be involved as a middle man at all. If they can not provide a guaranteed positive REAL return, I do not see their value. Remember, they are needing to invest in more risky assets than federal bonds (e.g. corporate bonds and real estate) to provide similar returns to what a risk-free government bond can pay while covering their expenses (employees, commissions, other expenses).

    I personally intend to use a VG or other charitable donor advised fund, take the immediate tax deductions and have that money invested 50-60% in equities. No need for insurance companies, much higher expected returns.

  29. The truth is you are both saying the same thing but from different angles.

    If interest rates remain low for a long period of time, the companies will either need to invest in riskier assets and thus the guarantees arent as solid or they could go completely bust since they arent making enough of a profit and then you now need to hope the state guaranty association can help you out. At the moment, some of these companies are cutting back on gUL products bc they are concerned about that exact issue. One way they can do this is bc making the criteria for excellent health more difficult to obtain. Thus if you are actually excellent but they rate you as less than that, they on average will pay out an even lower return.

    No matter how they spin it, once you understand permanent life insurance, it should never be used to grow money or as an investment. Its primary focus must always be a need or extreme strong desire to have a permanent death benefit. It doesnt matter if its a gift or some other spin, its always a bad idea.

  30. “Its primary focus must always be a need or extreme strong desire to have a permanent death benefit.” BINGO – this is the most important issue. Without the need or desire for permanent death benefit, there are many better options to be considered.

    Regarding the gUL, it isn’t so much that they are cutting back, because there are still plentyyy of companies offering it, but the pricing has definitely continued to increase over the years.

  31. those all lead to the same thing which is poor return. How you coach it doesnt matter. You can increase the price on excellent health or put someone in a lower category or whatever. It does also cut back on sales since pricing matters. Its a subtle but probably necessary way of cutting back.

    ive said that quote probably half a dozen times here. The issue becomes is almost nobody needs a permanent death benefit and once someone really talks through the issues, very few have a desire since it likely means less money for both you and your heirs if the insurance company has appropriately judged your lifespan/risk. There are some situations where you just cant take that chance like having a disabled child who has a long lifespan but for most situations it isnt necessary to have a permanent death benefit.

  32. As a curiousity, how have these permanent life insurance policies fared since 2000 with the stock market nominally returning less than 3%? I would assume a lot of these universal life insurance policies lapsed as the premiums got more and more expensive.

  33. Im not aware of published numbers in that date range and frankly the industry does a good job of keeping the numbers on lapses of permanent policies a secret and you have to search hard to get any reasonable info. In general about 1/3 surrender permanent policies within 5 years, over 50% by a decade and only about 25% at best keep in force until death. Insurance folks like to pretend its a good forced savings plan and the stats show the exact opposite. That is one of the reasons why with UL that you really should purchase gUL if anything at all and id highly recommend not buying any UL for most people. With that secondary guarantee as long as you pay that minimum the policy stays in force. You are purposefully not overfunding the policy bc you want to pay the minimum to get the death benefit. Thus you are not concerned with the actual cash surrender value. As i mentioned there are all kinds of problems still with this and its usually best for an older person who NEEDS permanent insurance and already has all their other stuff paid for and thus can be more confident that they wont ever miss a payment. That person then wouldnt have to worry about the poor return of the market per say although depending on what the insurance company is invested in over the long haul, the guarantee could be less firm.

  34. Hi – thanks so much for this really helpful article! I do have a question, though – under “Business Expenses” you mention board exam fees. I was also under the impression that these could be deducted if one had self-employed/contractor status. Could you point me to some place where the IRS says this? I’m considering including my board exam fees under startup fees or business expenses, but would feel more comfortable if I had some evidence to point to (should the IRS come a-callin’). Any would be much appreciated!

    • Great question. I actually looked it up in Publication 17 where it specifically says this:

      “Professional Accreditation Fees

      You cannot deduct professional accreditation fees such as the following.

      Accounting certificate fees paid for the initial right to practice accounting.

      Bar exam fees and incidental expenses in securing initial admission to the bar.

      Medical and dental license fees paid to get initial licensing.”

      It doesn’t specifically say you can’t deduct medical board exam fees, but given that you can’t deduct bar exam fees, I think you can presume that you can’t deduct medical board exam fees, at least for your initial board certification. However, once initially certified and licensed, you can deduct relicensing fees (and presumably, re-certification fees)

      “Licenses and Regulatory Fees

      You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession.”

      Future board certification exams would qualify for a deduction as “qualifying work-related education” (See pub 970).

      ” If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax. ”

      Again, your initial education (med school) doesn’t count, but ongoing education (i.e. CME) does.

      I hope that clarifies things.

  35. Yes, but ah, here’s the rub. That first part, from pub. 17, appears to assume reference to individuals who are filing as employees and not as self-employed or as sole proprietors. This is where the guidelines get murky for me. It seems to me that the tax treatment depends less on the expense itself and more on the perspective of the taxpayer, i.e. employee vs. self-employed.

    The bar exam example is instructive, I guess. One can’t practice law–either in a larger firm or hanging a shingle–without incurring those fees. However, the self-employment guidelines state that a business expense (for non-employees) is anything that is “ordinary and necessary.” Those fees would count then, as one could not open a business devoted to a particular practice without those initial licensing fees. Just hazy enough.

    At any rate, thanks for your response!

  36. This specific post, “7 Tax Deductions Doctors Miss Out On | The White Coat Investor- Investing And Personal Finance Information For Physicians,
    Dentists, Residents, Students, And Other Highly-Educated Busy Professionals” shows the fact that you
    actually understand exactly what you’re talking about! I personally totally approve. Thanks a lot ,Barrett

  37. Not to beat a dead horse but while agree with most of Rex said, depending on the state, a permanent life insurance policy or annuity is a great way to add more asset protection. If done reasonably, i.e. max funded, plus all other avenues like 401k plus IRA are contributed to at the max level. Of course there are other items MDs can add to increase their asset protection but I see nothing wrong with asset protection plus tax deferral being the most relevant reasons for an MD to purchase such a contract. It is up to the agent to make sure the contract is structured properly and that is usually the problem.

    • As a general rule, buying a permanent life insurance product or an annuity just for asset protection purposes probably isn’t a good idea. Perhaps for a doc going bare in Florida who doesn’t want to buy more home (or car) and has already maxed out wage accounts, retirement accounts etc I could buy it. But for most of us, insurance (malpractice and umbrella) is going to provide all the asset protection we need.

  38. WCI… I think my post was pretty accurate. I did mention that other avenues are funded first, and that is how I do my planning for doctor clients here in Florida. Unfortunately, I don’t feel as though docs in private practice have access to really good, affordable malpractice coverage. I have an OBGYN in CT who had something like 20mill of coverage through her hospital and I have docs in Florida that have 250k-1 mill in FL. CT also doesn’t protect annuities or life insurance like FL does. Lawyers love to hear that their client can sue a doctor, for any reason not just malpractice. Remember, not all docs are really smart with their money and a BK could be the result of many different things, in FL the money in CSV life insurance and annuities would be protected. Before I suggest these products my doc has to be contributing the max to their retirement plan, fund IRA and spousal IRA, higher limit coverage on auto, umbrella of at least 2 million as a carrot for attorneys. When their is money left over then it can be partitioned, mostly to NQ investment account and then a small portion to max funded life or into annuity. That’s my opinion and it I think it is good planning.

  39. Howdy just wanted to give you a quick heads up and let you know a few of
    the images aren’t loading properly. I’m not sure why but I think its a linking issue.
    I’ve tried it in two different internet browsers and both show the same outcome.

  40. Above you wrote, “Just because 95% of your income comes from your main job, where you are an employee, doesn’t mean you can’t get a moonlighting job on the side and get all the deductions a contractor would have. If the moonlighting job requires a medical license, DEA license, CME etc, then you can deduct your business expenses from that income.”
    Let’s say those license fees come to $1000 per year (and I don’t get reimbursed by my employer for them). Let’s say about 10% of my total income is from consulting as a 1099 sole proprietor, 90% is from my main W2 employee job. Can I deduct the whole $1000, or just 10% ie $100 on schedule C? This is my first year doing the consulting so I’m curious what I can deduct.

    • The way I look at it is that you need that entire license in order to moonlight, not just 1/10 of it. So I deduct the whole thing. Here’s a link to the definitive guide. http://www.irs.gov/publications/p535/index.html

      What Can I Deduct?

      To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

  41. Are state income taxes deductible? For a physician making $300,000 with a 6% state income tax, that would be an $18,000 deduction. That would have surely made the Top 7 list above, so I must be missing something.

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