Physicians really get screwed on deductions these days. It really is not just docs, but anybody who is an employee making between 150k and 500k. As your income goes up, your deductions get phased out. Once you cross over about 200k, any deduction gets phased out or lowered. Most people think that their mortgage is sacred, but this is not the case. As your income goes up, they steadily decrease the percentage of the mortgage interest you can deduct.
Once you get over your mortgage interest getting phased out, then you have the AMT (Alternative Minimum Tax) to deal with. Basically, the AMT was devised back in 1970 to catch about 20 people with high incomes who paid no taxes. The real kicker is that they did not index it to inflation, so what used to be a crazy high income back in 1970 of say, $275,000, is not so crazy high today. $275,000 a year back in 1970 was gangster type money. So, as the years have gone by, more and more people have, and will be caught by the AMT. Basically, the AMT disallows every deduction. You (or your accountants) have to figure 2 tax forms, one regular and one AMT. You end up paying whichever is higher. There are certain things that will get you into the AMT faster, such as living in a state with high state income tax.
We got bit by the AMT this year. We bought a Prius, it was supposed to get us a $3000 tax credit, not a deduction, but a credit. What happened? We crossed the line for the AMT and it was not allowed. Poof.....$3000 bucks just disappeared. Thanks MR. IRS.
Some doctors think that forming a corporation will help them out significantly on their taxes, don't get fooled. Most docs end up having to form an S-Corporation, which is really just a professional corporation which helps to shield corporate assets from liability. This is business liability, such as sexual harassment, not medical malpractice. The tax savings for a doc with their own business set up as an S-corp are that you can deduct part of your self-employment tax and you can get more business deductions, this is becoming especially important with the AMT, as some of those deductions may not be allowed if you set the practice up as a Sole Proprietor. You will save some money on taxes, but if anybody tries to sell you a plan where you will pay zero tax, save $30 bucks to buy an orange prison jumpsuit. Doctors are suckers for tax scams.
The only way to really save money on taxes with a corporation is to have employees and corporate assets, such as real estate. The basic theme of our tax code is that you have to spend money and generate jobs to get a tax break. It boils down to the fact that you have to spend money to save money on taxes. It really is an incentive type plan to get people to start businesses where you hire people and buy supplies and services which lead to other companies having to hire more people. From the government's perspective, this results in more taxes for the government to spend. This is a great country, isn't it?
As a physician with a decent accountant, expect to pay about 25% of your overall income to the Feds. It is sickening to see the numbers, especially when it is going to fund "bridges to nowhere" in Alaska and line vice president Cheney's pockets.
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