Happy Day-after-taxes Day!
Speaking of the 15th, how did it go for you?
One of your colleagues told me last week that he “didn’t owe any taxes this year.”
I couldn’t believe my ears, and I’ll bet you can’t either.
You and I both know you pay way more than your fair share of taxes, so hearing a doctor say he didn’t pay any taxes? That’s simply proposterous! (I love that word.)
So I asked him one more question.
“Are you telling me you had a zero tax liability?” [That’s line 61 of Form 1040, by the way.]
Or do you mean to say you had zero taxes due?” [That’s line 76 of Form 1040.]
Silence. (I could actually hear the crickets chirping.)
Let me be clear: every dollar you earn creates a taxable event and a tax liability. And every unpaid dollar of liability becomes tax you owe and must pay by the 15th.
So what difference does it make? A tax is a tax, right?
Your tax liability accrues throughout the year—up until December 31—and you can MANAGE your tax liability by knowing the rules and being smart about it.
But your tax due? That’s simply the unpaid balance, and once January 1 of the new tax year dawns, you’re pretty much done, and there’s nothing you can do about how much you’ll owe.
So a tax is not just a tax. And the difference can mean thousands and thousands of dollars.
One of the top mistakes I see physician families making is to underestimate the corrosive power of the US tax code.
Your colleagues will skip a latte to save three bucks, and they might even negotiate a few thousand off their new Lexus, but they blithely ignore their tax liability… and pay dearly for it.
What exactly am I talking about?
Here are seven physician tax mistakes I have seen in the past month or so of talking with your colleagues:
- One couple is spending their Health Savings Account on their medical bills, thereby wasting one of the best tax-free growth vehicles they have at their disposal.
- Another got some bad advice and decided not to fund their IRA, which robs them of the opportunity for a Roth conversion while leaving more money on the table for creditors to grab.
- One guy actually did the Roth conversion correctly but almost paid an extra $4000 in taxes because he didn’t tell his tax guru that he even made an IRA contribution in the first place.
- Several docs own junk bonds in taxable accounts instead of municipal bonds, so they pay unnecessary taxes on the interest.
- One couple is using the Utah 529 plan for their college savings while their state’s plan offers decent investment options AND a big fat tax deduction. (Don’t get me wrong, I like the Utah plan but there are slick ways to have your cake and eat it, too.)
- My perennial favorite: the physician who swears she’s maxing out her 401k, only to find out—after we actually check the transaction records—she’s not.
- And the most recent one (it’s a doozy) is a doc who cashed out a six-figure retirement account because he needed money to change jobs, thereby paying taxes at what will probably be the top tax rate he will see in his lifetime while reducing the balance of an account that’s safe from bankruptcy creditors.
I wish I could have told that last guy to just get a signature loan. I know a couple of bankers who would have bent over backwards to give him a low rate and great terms. It would have saved him the agony of a $40,000 tax bill.
So why didn’t I tell him about the loan?
I never had the chance. I wasn’t working for him when he made the mistake.
And that’s the one thing these hard-working, mistake-making, tax-overpaying physicians have in common: none of them had an advisor looking after them THROUGHOUT the tax year, even though all of them had someone who prepared their taxes after the fact (kind of like a post mortem, it seems).
So what can you do about it? Simple:
1. Buy yourself a book about the US tax code for high income individuals (yes, that’s you) and read it cover to cover. You’re smart, and I know you can do it. Become the tax know-it-all in your practice, your breakroom, or your home town.
2. Take your tax dude or dudette out to lunch… on you. And while you’re there, tell them you want to be absolutely sure you are paying only what you must pay in taxes. Work up a plan to make that happen.
3. Find a fee-only financial advisor you can trust—one who is fully aware of the tax issues surrounding your unique financial circumstances—and hire them. Make them work their butt off for you by asking them tons of questions BEFORE you make moves throughout the year, and long before the year-end. Finally, insist that they meet your tax preparer and work as a team to keep you out of hot water. Two heads are better than one.
And no matter what you do, forward this newsletter to one of your colleagues (who can subscribe here) so I don’t have to hear him tell me about the totally avoidable mistakes he made during 2014.
W. Ben Utley CFP® Call: 541-463-0899 Be certain.™