You are about to face your largest fiscal challenge ever: reimbursement cuts, tax increases, and lowest common denominator planning. The most obscure of the three is also your biggest liability.
If you think medicine is a difficult business today, “you ain’t seen nothing yet.” You are about to face your largest financial challenge ever. There is an approaching confluence of events that could have a significant financial impact on most doctors...unless you do something to protect yourself.
Medicare reimbursement cutbacks will reduce the income of most doctors. Even if you don’t treat Medicare patients, you are not immune to this cut. If your private insurance contracts offer you some percentage (say 120%) of Medicare, a cut in Medicare reimbursements will lower your insurance reimbursements. In addition, the healthcare overhaul the President is promoting will further reduce physician income. On top of both of these “gross” income reducing events, there are is a significant “net” income reducing threat that shouldn’t be ignored.
The federal government is on the verge of significant tax increases for high wage earners. They are also talking about reducing the value of itemized deductions to 28%. That means that you could pay federal income taxes at rates of up to 39.6%, but only be able to write off your itemized deductions at a rate of 28%. This is almost a 30% reduction in the value of your deductions! If you have a large mortgage, significant health expenses, or other itemized deductions, this change could cost you $5,000 to $50,000 each year! This is on top of the income tax changes.
In addition, most states are facing financial difficulties that may result in a variety of direct and indirect tax increases. Some doctors live in high state income tax environments. Others live in states that are already threatening tax rate hikes — especially in the higher tax brackets.
In addition, even states that are supposed to be “no state income tax” states have hidden taxes. Many counties are delaying adjustments in property tax assessments to reflect the downward turn in the real estate market. For example, one of our partners has had his house assessed at 50% more than what he purchased the house for less than 3 years ago — and denied an appeal to revalue the home for tax purposes.
In addition to declining reimbursements and escalating taxes, the final “triple threat to success” concerns doctors in medical groups. Larger groups often fail to react quickly and plan against challenges. In the vast majority of group practices with more than 3 or 4 physicians, they suffer from what we will call “lowest common denominator’ or “LCD” planning.
LCD planning occurs when the practice will only implement the asset protection, tax-reduction, qualified or non-qualified planning techniques that everyone can agree on. This is not surprising as doctors are notoriously independent and very busy. There are often too many opinions and distractions for a group of doctors to unanimously agree on anything other than the simplest (and least beneficial) strategies.
We have spoken to thousands of doctors who are frustrated with their practice’s LCD planning. The very physicians who want to implement more advanced and beneficial planning ideas are usually the same ones who are doing most of the work and generating most of the revenue for the practice. They are often “caught in the middle” in their practices.
Their younger partners are usually busy paying off student loans or paying for a big new house. They can’t afford to fund retirement tools that may reduce taxes because they need ever dollar they earn. The older doctors have the “if it ain’t broke, don’t fix it” mentality. The problem is that under the new medical economic environment, it is “broke.” The old ways cannot continue to be standard operating procedure.
If you would like your group to consider more proactive planning, the recommendations that follow in Part II are for you. The second half of this article introduces concepts that can be implemented quickly, with the help of a financial planner, to help you avoid LCD planning and address these significant financial threats. We have seen these techniques work for solo practitioners up to very large groups.
Jason O’Dell is a consultant, author of two books for doctors, and principal of the financial consulting firm O’Dell Jarvis Mandell LLC, where Carole Foos works as a CPA and tax consultant. The authors welcome your questions. You can contact them at (877) 656-4362 or www.ojmgroup.com.