Here are eight tax planning strategies for orthopedic surgeons post-Bush Tax Cuts. 1. Tax rate and deductions. The expiration of Bush Tax Cuts at the beginning of 2013 and other initiatives going into affect at the beginning of this past year have an impact on the financial situation of many orthopedic and spine surgeons. Most notably:
• Top marginal rate for tax payers who make over $450,000 increased to 39.6 percent — a 4.5 percent increase;
• Individuals who make over $200,000 also saw a 4.5 percent increase in their tax rate;
• A new 3.8 percent surtax on investment income will now take affect for taxpayers with income over $250,000.
"If you combine all the new taxes that take effect in 2013, it amounts to about 10 percent of income over $450,000," says Christopher Wills, CPA, CFA, CFP, Director of Wealth Management for R.W. Roge & Company. "In addition high income taxpayers will see deductions phased out more aggressively further adding to the tax bite."
For surgeons and surgery centers purchasing capital equipment, where they were once able to deduct the first $125,000 they are now only able to deduct the first $25,000.
"I am telling my clients that if they need a new piece of equipment to do a break-even analysis to make sure the equipment is paid for in a reasonable timeframe and that the outlay of money does not hinder operations in other areas," says Sean Weiss, vice president and chief operating officers of DoctorsManagement. "The bottom line is, if you need modern equipment and you call yourselves the pioneers in your area of the country then you need the latest equipment to do that. Medical professionals and physicians have to be smart and that means fighting off the urge to do nothing or to do too much. Right now it is all about balance."
2. Capital gains rates. The capital gains rate will go from 15 percent to 20 percent, which has a big impact on people in the over $450,000 income earner stipulation. Surgeons typically have investments that would be impacted in their portfolios.
"Long Term Capital Gains from the sale of investments held more than a year are often a significant component of a high net worth clients' taxable income," says Mr. Wills.
However, surgeons may be able to take advantage of capital gains rates through obtaining structured notes in a number of asset classes. This allows surgeons to avoid ordinary income and instead receive long-term capital gains for the growth of these positions.
"This is a sophisticated investment strategy that we use to address the tax issue that will face our clients upon the expiration of the Bush Era tax cuts," says Thomas Balcom, CFP®, CAIA, MBA, Founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. "By transferring taxes at the ordinary income level to the more favorable long term capital gains rates, we have essentially provided our clients with a nice tax benefit/savings."
This is a strategy used more commonly in Europe and Asia, and comes with credit risk. Make sure the banks are strong and you are comfortable with the credit risk before implementing this strategy. For example, you would be in trouble if you invested in Lehman Brothers notes because they have gone bankrupt.
3. Estate tax exemption. The estate tax exemption was maintained at $5 million, which is positive for high income individuals. This means the first $5 million associated with the estate is not subject to the estate tax, but everything beyond $5 million will continue to be taxed. The tax rate there grew from 35 percent to 40 percent.
"There was concern that the estate tax exemption might go back to the $1 million dollar level," says Mr. Wills. "So this is one of the few positives that came out of the new legislation."
The strategies for minimizing the impact of future estate taxes don't have to be complex, and surgeons should also think about portability after their death. Married couples who are worth significantly more than $1 million should have a "credit-shelter trust" provision in their wills so each person's $1 million estate tax exemption will be fully preserved, says Benjamin C. Sullivan, a certified financial planner with Palisades Hudson Financial Group.
"Whether the estate and gift tax is a new challenge for you or an ongoing part of your financial planning, it's important to create a plan that works for you no matter what," says Mr. Sullivan. "Build in flexibility to deal with any future changes Congress may throw your way."
4. Payroll tax. Physician practices responsible for their employee payroll will be hit with a 2 percent increase in payroll tax. This impacts every business in the country, as the rate was bumped from 4.2 percent to 6.2 percent.
"Physicians are in the middle of a 'perfect storm' related to our fiscal problems," says Mr. Wills. "They are getting hit on both the tax side and income side from the Affordable Care Act."
Their income from reimbursements is under pressure and their tax burden has increased.
"It doesn't sound like a lot, but that's taking about $120 billion out of the economy, and people will have less to spend," says Brian R. Gantwerker, MD, of The Craniospinal Center of Los Angeles. "Things will get tighter if a debt ceiling deal is not reached and we should prepare for that. We can prepare by coordinating care with patients, and getting needed surgeries before this hits and having a contingency plan in your practice for cost cutting, employee hour cuts and lease renegotiations. The sky isn't falling yet, but we should prepare like it's going to."
5. Tax exempt bonds. Surgeons can minimize the impact of the increased taxes by investing in tax-exempt bonds. However, the increased value of these bonds among high income tax payers has driven yields down.
"There are still opportunities for using tax exempt bonds to avoid all of the new tax increases since they aren't subject to either federal income or the new 3.8 percent investment income surtax," says Mr. Wills. "But this was anticipated last year and we have seen a rally in the municipal bond market. That reduces the effective yield these bonds provide. However, there are still opportunities to identify good bonds that provide better after-tax returns than taxable bonds."
6. Consider growth vs. dividend paying stocks. Stocks that pay dividends are popular today because they are viewed as a safe harbor; a high quality blue chip investment. However, these investments are subject to the investment surtax so surgeons should consider adding more growth orientation to their portfolio.
"Investments with a growth orientation do not trigger a tax liability until sold," says Mr. Wills. "This allows you to control the timing of the income and trigger those gains when you want."
7. Installment sales. Physicians aren't typically involved in installment sales, but some may be able to benefit from them in the future. "If you have an arrangement selling the practice, consider installment sales because that can defer the taxable income over a number of years and potentially lower the marginal rate," says Mr. Wills. "That can be a good tax planning strategy for the future."
More Articles for Orthopedic Surgeons:
10 Steps for Surgeons to Overcome the Fiscal Cliff
5 Healthcare Reform Threats to Spine Surgeons & How to Overcome Them
15 Statistics Comparing Orthopedic Surgeon Compensation to Other Specialties
• Top marginal rate for tax payers who make over $450,000 increased to 39.6 percent — a 4.5 percent increase;
• Individuals who make over $200,000 also saw a 4.5 percent increase in their tax rate;
• A new 3.8 percent surtax on investment income will now take affect for taxpayers with income over $250,000.
"If you combine all the new taxes that take effect in 2013, it amounts to about 10 percent of income over $450,000," says Christopher Wills, CPA, CFA, CFP, Director of Wealth Management for R.W. Roge & Company. "In addition high income taxpayers will see deductions phased out more aggressively further adding to the tax bite."For surgeons and surgery centers purchasing capital equipment, where they were once able to deduct the first $125,000 they are now only able to deduct the first $25,000.
"I am telling my clients that if they need a new piece of equipment to do a break-even analysis to make sure the equipment is paid for in a reasonable timeframe and that the outlay of money does not hinder operations in other areas," says Sean Weiss, vice president and chief operating officers of DoctorsManagement. "The bottom line is, if you need modern equipment and you call yourselves the pioneers in your area of the country then you need the latest equipment to do that. Medical professionals and physicians have to be smart and that means fighting off the urge to do nothing or to do too much. Right now it is all about balance."
2. Capital gains rates. The capital gains rate will go from 15 percent to 20 percent, which has a big impact on people in the over $450,000 income earner stipulation. Surgeons typically have investments that would be impacted in their portfolios.
"Long Term Capital Gains from the sale of investments held more than a year are often a significant component of a high net worth clients' taxable income," says Mr. Wills.
However, surgeons may be able to take advantage of capital gains rates through obtaining structured notes in a number of asset classes. This allows surgeons to avoid ordinary income and instead receive long-term capital gains for the growth of these positions.
"This is a sophisticated investment strategy that we use to address the tax issue that will face our clients upon the expiration of the Bush Era tax cuts," says Thomas Balcom, CFP®, CAIA, MBA, Founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. "By transferring taxes at the ordinary income level to the more favorable long term capital gains rates, we have essentially provided our clients with a nice tax benefit/savings."
This is a strategy used more commonly in Europe and Asia, and comes with credit risk. Make sure the banks are strong and you are comfortable with the credit risk before implementing this strategy. For example, you would be in trouble if you invested in Lehman Brothers notes because they have gone bankrupt.
3. Estate tax exemption. The estate tax exemption was maintained at $5 million, which is positive for high income individuals. This means the first $5 million associated with the estate is not subject to the estate tax, but everything beyond $5 million will continue to be taxed. The tax rate there grew from 35 percent to 40 percent.
"There was concern that the estate tax exemption might go back to the $1 million dollar level," says Mr. Wills. "So this is one of the few positives that came out of the new legislation."
The strategies for minimizing the impact of future estate taxes don't have to be complex, and surgeons should also think about portability after their death. Married couples who are worth significantly more than $1 million should have a "credit-shelter trust" provision in their wills so each person's $1 million estate tax exemption will be fully preserved, says Benjamin C. Sullivan, a certified financial planner with Palisades Hudson Financial Group."Whether the estate and gift tax is a new challenge for you or an ongoing part of your financial planning, it's important to create a plan that works for you no matter what," says Mr. Sullivan. "Build in flexibility to deal with any future changes Congress may throw your way."
4. Payroll tax. Physician practices responsible for their employee payroll will be hit with a 2 percent increase in payroll tax. This impacts every business in the country, as the rate was bumped from 4.2 percent to 6.2 percent.
"Physicians are in the middle of a 'perfect storm' related to our fiscal problems," says Mr. Wills. "They are getting hit on both the tax side and income side from the Affordable Care Act."
Their income from reimbursements is under pressure and their tax burden has increased.
"It doesn't sound like a lot, but that's taking about $120 billion out of the economy, and people will have less to spend," says Brian R. Gantwerker, MD, of The Craniospinal Center of Los Angeles. "Things will get tighter if a debt ceiling deal is not reached and we should prepare for that. We can prepare by coordinating care with patients, and getting needed surgeries before this hits and having a contingency plan in your practice for cost cutting, employee hour cuts and lease renegotiations. The sky isn't falling yet, but we should prepare like it's going to."5. Tax exempt bonds. Surgeons can minimize the impact of the increased taxes by investing in tax-exempt bonds. However, the increased value of these bonds among high income tax payers has driven yields down.
"There are still opportunities for using tax exempt bonds to avoid all of the new tax increases since they aren't subject to either federal income or the new 3.8 percent investment income surtax," says Mr. Wills. "But this was anticipated last year and we have seen a rally in the municipal bond market. That reduces the effective yield these bonds provide. However, there are still opportunities to identify good bonds that provide better after-tax returns than taxable bonds."
6. Consider growth vs. dividend paying stocks. Stocks that pay dividends are popular today because they are viewed as a safe harbor; a high quality blue chip investment. However, these investments are subject to the investment surtax so surgeons should consider adding more growth orientation to their portfolio.
"Investments with a growth orientation do not trigger a tax liability until sold," says Mr. Wills. "This allows you to control the timing of the income and trigger those gains when you want."
7. Installment sales. Physicians aren't typically involved in installment sales, but some may be able to benefit from them in the future. "If you have an arrangement selling the practice, consider installment sales because that can defer the taxable income over a number of years and potentially lower the marginal rate," says Mr. Wills. "That can be a good tax planning strategy for the future."
More Articles for Orthopedic Surgeons:
10 Steps for Surgeons to Overcome the Fiscal Cliff
5 Healthcare Reform Threats to Spine Surgeons & How to Overcome Them
15 Statistics Comparing Orthopedic Surgeon Compensation to Other Specialties