Physicians are under attack! The ever-changing healthcare system and monumental number of tax law changes not only have an impact today, but will have a looming effect at retirement. Justified or not, these concerns need to be addressed as there are solutions to reduce these financial burdens.
As Congress pushed through the American Tax Reconciliation Act in 2012, most physicians did not realize how deeply this would impact them. The potential loss of income may in turn result in lower retirement investing. For those physicians earning above $400,000 ($450,000 jointly), federal taxes increased 4.6 percent. Along with that increase, for those same high-income earners, taxes on long-term capital gains and qualified dividends jumped five percent from 15 to 20 percent. Personal exemptions have also been reduced by two percent for each $2,500 dollars of income above $250,000 ($300,000 for joint filers.) If you think that hurts, for those whose income exceeds $372,501 ($422,501 for joint filers), personal exemptions are fully phased out. This is on the heels of 80 percent of itemized deductions also being phased out.
Another fact to consider is a new surtax on unearned income for Medicare contributions. Most taxpayers don’t realize a new tax of 3.8 percent was assessed on the less of net investment income or modified adjusted gross income (MAGI) above $200,000 ($250,000 for joint filers.) Many physicians are feeling the sting of the possible 13.49 percent tax increase along with the phase-outs of itemized and personal deductions.
The government hasn’t given anything; we still have government restrictions on tax-deferred qualified plans. After-tax dollars invested in stocks, bonds, and mutual funds are subject to higher tax brackets than in years past. This means that the tax-advantaged category/bucket loses some of its appeal because of the new federal tax. This not only takes a toll on your net income today, but also your income at retirement. At retirement your tax-deferred dollars become taxable; taxable investments are subject to higher capital gains; tax-advantaged investments could trigger up to an 85 percent tax on social security benefits; tax-advantaged investments could trigger an increase in Medicare Part B cost from $105 to $336 per month; and there is tax exposure at age 70 ½ on required minimum distribution from tax deferred accounts.
Unless you have a magic wand to wave with the words, “Presto! Make my taxes disappear!” a financial planning solution is needed. Many physicians have found that adding an additional investment tool to their portfolio is not only useful today, but more so tomorrow. By utilizing the benefits of a well-structured life insurance plan to your portfolio you can protect your savings and gain these advantages:
Tax deferred growth opportunities
Tax advantaged source of retirement income
Tax-free benefit for your beneficiaries
No retirement contribution limits
No penalties for cash value taken before the age of 59 ½
No required minimum distributions
No impact on social security benefits
No effect on Medicare Part B
No effect on itemized or personal deductions
Many in the medical community are finding themselves spending longer hours seeing patients, doing procedures, charting, and accessing clinical information. With the ever-changing world of medicine and the tsunami of tax law changes, supplementing one’s current retirement plan with an IRS-approved structured life insurance plan could play a significant role at retirement. Think of your retirement plan as a farm. Would you rather pay tax on the seed or the harvest? Each individual has a specific retirement need, and all retirement plans should be carefully tailored by an experienced team of financial advisors. Remember the words of Winston Churchill, “He who fails to plan is planning to fail.”
Calvin R. Rasey is president of Physicians Financial Services II, LLC and can be reached at 502.893.7001 and firstname.lastname@example.org.
SOURCES: Internal Revenue Procedures 2011-52; American Taxpayer Relief Act; Economic Growth and Tax Relief Reconciliation Act of 2001; IRC Sections 1,86,1411,3101; Medicare.gov, Part B Premiums
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