In the next two years there will be some significant tax changes you should anticipate. While there are too many to list here, I’ll highlight a few which are pertinent to physicians and some strategies you should consider to take advantage of them.
Income and Social Security Tax
Similarly, Social Security taxes are also indexed for inflation, but for most physicians this hurts since our pay usually does not keep up with inflation. When I finished residency in 2001, the first $80,400 of income was included in calculating the Social Security tax, but in 2009 it’s the first $106,800. Basically I’m paying over $3,000 more dollars this year in Social Security tax than I was in 2001. Want more pain? There is no cap on the Medicare tax and there is preliminary talk about eliminating the cap on the Social Security tax as well. So let’s do some math: if you’re in the highest income tax bracket in 2011 and there is no cap on Medicare taxes and assuming a state income tax rate of 5%, your last dollar of income would be taxed at almost 48%. How do those extra shifts sound now?
The problem, as I see it, is that while EPs incomes may look “high” to outsiders, our income falls in a range where the tax brackets start going up rather quickly so that a significant portion of our income is taxed at the higher rates. Further, we usually don’t have too many large legitimate business tax deductions, and we can’t deduct all of the bad debt we are forced to inherit because of EMTALA. Throw in malpractice insurance premiums, student loans, and some personal expenses, and suddenly you start feeling a little insecure. It would be another story if we made millions, but with most EPs making between $175,000 and $250,000, the tax burden really has a big impact on us.
Let’s take an example of three EPs (one making $300k, another making $400k, and the third making $500k) to estimate the potential additional amount of federal income tax each might pay in two years. Let’s assume each one is married and has two minor children. In addition each one is an independent contractor and pays $30,000 in malpractice insurance premiums and has $10,000 in additional business related expenses (license fees, CME, etc.). Each EP also contributes the current maximum ($46,000) to a tax deferred retirement plan (SEP IRA, Keogh, etc.) and pays health insurance premiums for his family in the amount of $5,000. Each EP also just purchased a new house with a 30 year fixed mortgage loan of $500,000 at 5% interest. The property generates $5,000 in annual property taxes. For simplicity, I’ll assume all other assumptions stay the same (in reality there will probably be an increase in the SEP IRA contribution, an increase in the self employment tax, and other uncertain changes) between now and 2011. As you’ll see in next month’s column, each EP should be prepared to pay about 10% more in federal income tax starting in 2 years.
Capital Gains and Dividend Tax
Read more about how the tax man taketh – and how to keep him at bay – in next month’s issue.
Setu Mazumdar M.D. practices EM in Atlanta, GA and has passed the CFP® Certification Examination
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