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Navigating opportunities & landmines
Proactive tax planning is crucial for medical practices and their owners as compensation changes and compliance and overhead costs cut deeper into profits. A large number of tax plans ranging from illegal to fully compliant are aggressively marketed to doctors, requiring physicians to tread carefully and work only with experienced, licensed advisers.
Remember two basic guidelines about all tax plans:
Almost any plan that allows depositing money into the plan tax-free, grow it tax-free and take withdrawals tax-free is illegal. You can often get two out of three, but in most cases, any plan that offers all three is, in fact, too good to be true.
No matter who a physician pays, relies on or consults, the legal liability for any tax plan is ultimately on the physician. Sure, a physician may be able to sue someone who intentionally or ignorantly steered him or her wrong, but the physician will be busy spending time and money fighting another, much more dangerous battle with the IRS.
Here are two options for physicians to consider:
For those who qualify, this is an effective strategy. You can move some of the money you probably already keep in regular cash savings for an emergency into a segregated medical savings account.
Health Savings Accounts (HSAs) are a tax-exempt trust or custodial account you set up with a qualified trustee (such as a bank or insurance company) to pay or reimburse certain medical expenses you actually incur. Qualifying physicians can get a tax deduction, tax-free growth and take tax-free distributions to cover a wide variety of medical expenses and offset their own rising deductibles and insurance costs.
While the rules are detailed, some of the basics are simple. Check with a professional, because there are 20% penalties for spending it on the wrong things, but the list of permissible expenses is extensive and includes deductibles, copayments and other costs (but not insurance premiums.) You can contribute to an HSA every year and defer taking distributions indefinitely.
To qualify, the taxpayer must have a high-deductible health plan, which means your deductibles are at least $1,300 for individual coverage or $2,600 for family coverage. HSA contribution limits are $3,350 for individuals and $6,750 for families. This is the maximum amount that can be put away and deducted from income taxes. The guidelines state no income limits or requirements and no authorization from the IRS is necessary to establish an HSA.
Many doctors seeking to include a wider variety of investments in their retirement savings and tax planning use self-directed IRAs (SDIs). These can hold assets such as real estate, private placements, precious metals, and active businesses, including the medical practices, labs and surgical centers and the income streams they produce, but that may not be needed today.
While these vehicles are flexible, they have very specific rules. I recommend that all physicians seek the help of an SDI administrator, who can provide advice, help identify and establish any legally required plan structures and complete the mandatory reporting documents for compliance.