Hugh F. Doherty, DDS, CFP
In 1999, the 6.2 percent Social Security tax will be applied to taxpayers` income up to $72,600 - an increase from a wage base of $68,400 this year. Again, the 1.45 percent Medicare tax will apply to an employee`s entire income.
Bottom line: Doctors will have to kick in an extra $260 more in payroll taxes next year. Self-employeds pay double but, unlike employees, they can deduct half the total.
The latest scam
Above-average incomes and assets and little financial training - that describes most doctors. And that`s why they are such easy targets for financial schemers. The latest scheme is to move your investments offshore as a means of avoiding legal liability. The idea is to put your assets beyond the bounds of creditors and Uncle Sam. Do these trusts work? Maybe. But at best they simply discourage marginal claims. The costs and complexities to set up such a scam far outweigh any potential benefits.
As with most schemes, these unethical promoters use reports, studies, and opinions by so-called financial experts. Doctors, you work too hard for your money. Don`t be taken with this poor advice. In the long run, it could be most costly.
Health-insurance deduction
The recent budget bill passed by Congress included at least one bit of good news for many doctors. The deduction for health insurance will be increased from the current 45 percent level to 60 percent in 1999, to 70 percent in 2002, and to 100 percent for 2003 and after. This change will remove one of the last major tax differences for self-employed doctors as compared to C corporation doctors. The change also affects doctors in partnerships and S corporations.
Hire your spouse
There are many good reasons for putting spouses on the payroll, but a recent tax law change has made it even more advantageous. The reason? More money now can be contributed to your retirement accounts.
Here`s what that means: Most employer-sponsored retirement plans are governed by rules that forbid discrimination in favor of highly compensated employees. Basically, the old rules treated owner-employer doctors and their families as if they were one person. The reason was to exclude family and relatives from retirement plans.
You generally are considered "highly compensated" if you own at least five percent of a business or earn more than $80,000 annually. A spouse also is categorized as highly paid, regardless of compensation. Example: A doctor owns 100 percent of a practice and earns $160,000 - the maximum compensation in 1998 that can be used to determine retirement benefits for qualified plans. Characterizing your spouse as a separate employee may give your practice new flexibility in meeting certain nondiscrimination tests. This can help keep costs down.
Your spouse is on the payroll, but receives a low salary. Besides the two of you, there are four other employees, none of whom is highly compensated. Under the old rules, you and your spouse would have been considered one person. So, a retirement plan that included you had to cover at least 70 percent of the nonhighly paid workers - or three out of the four. Now, you and your spouse are considered two people. If desired, you can design a plan that covers you but not your spouse. Result? The plan covers 50 percent of the highly compensated employees (the doctor), so only 35 percent of the other workers need to be included. That means that two of the other four employees now need to be added. "Carving" staff persons out of the plan can slash the cost of employer contributions.
A strong, serious recommendation
Work only with an actuarial firm whose sole function is to devise and administer qualified retirement plans totally independent of any relationship with a money manager. Retirement planning is a process that needs special attention. Otherwise, it could cause you to lose out on many future retirement dollars.
Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: [email protected]. Web site: www.dr.hughdoherty.com.
