Quieting Financial Stress

Quieting Financial Stress

By Noel Roach, Wealth Management Partner

We live in a stressed society, and financial woes are one of the leading concerns for Americans. Even those who make enough income to be in the top 5% or even 1% can find themselves stressed by daily finances. All the yoga and meditation in the world isn’t going to make your financial woes disappear. What is the most effective way to quiet that stress? Create and follow a solid plan. Why is that so hard for so many of us? Sometimes the unknown of where to start can be daunting. See below for a step-by-step guide on how to get a plan in place so you can quiet the financial stress in your life.

Step 1: Address Your Debt.

If you are still trying to figure out how to tackle a large medical student loan bill, see some tips here. Of course, there can be other debt to address too like credit cards and car loans. A financial adviser should be able to help you determine exactly how much you should be allocating toward debt payoff while balancing savings towards retirement. It’s extremely important to your retirement nest egg that you find this balance. Paying off debt before you save for retirement may NOT be the most financially efficient plan. The 60-year old version of you will thank yourself for taking the time now to working through a plan that maximizes your dollars earned.

Step 2: Determine a Realistic Retirement Savings Goal.

There are several considerations that should go into your decision-making process on how much to save for retirement. Some of these include how much debt you have, if your employer provides a 401(k) match, possible tax savings, the age you hope to retire, the activities you want to do after you are retired, inheritances, how long you will live, etc. Obviously, you won’t have a crystal ball to help you make your savings plan. However, a good financial adviser should have tools that easily allow you to model various hypothetical scenarios. This can guide you to determine how much you should be saving on an annual, monthly or even weekly basis. Again, your 60-year old self will thank you.

Step 3: Build Your Emergency Fund.

Life gets messy at times – you can bet on it. Not having an emergency fund adds a whole additional level of stress when things go wrong. When the refrigerator compressor goes bad, you will thank yourself that you can call the repair man knowing you have funds in your emergency account to cover the cost. And if a bigger issue arises like an unexpected back injury keeping you from working for several weeks… it sure is nice to know your bills will be covered. The common recommendation is to have 3-6 months of income available for emergencies.

Step 4: Protect Your Future Income.

More than 25% of today’s 20-year-olds are projected to become disabled before retirement. This could be due to a serious disease like cancer, or a wrong step that leaves you with a severely damaged leg. Be sure you have the right amount of coverage to protect your future income stream. An emergency fund is a great start, but disability insurance ensures long term protection of your future income stream. For more tips on how to best select a comprehensive plan, go here.

Step 5: Plan for Fun.

Vacations and hobbies are the best, and they can be expensive. However, if you have a “fun fund” that you regularly contribute to, you can eliminate the stress of paying for these activities. Going on a fabulous vacation is waaaayyy more fun when you aren’t stressed about how to pay for the bill. As you watch your “fun fund” grow, you find your mindset shifting from “what can we afford to do” to “how should we spend our fun money this year”.

Although all the above can be done through a DIY approach, it requires you to be a financial expert on top of your day job as a medical professional. To further eliminate financial stress, consider working with an adviser who can guide your decision-making processes, make regular recommendations on how to tweak your plan, and manage the paperwork. Be sure your adviser is a fiduciary (see a short video here), and meet with this person at least 1-2 times a year to confirm your plan is on track.

Have financial questions? You can reach us at 888-898-3627 or make an appointment here: http://www.scheduleyou.in/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

How to Maximize Charitable Giving & Tax Benefits

How to Maximize Charitable Giving & Tax Benefits

How To Maximize Your Charitable Giving Tax Benefits

By Ryan Johnson, Wealth Management Partner

This is a busy few weeks as we all wrap-up 2018. During the holiday season, many are considering making charitable contributions. With the new tax rules established this year, you might want to consider if your giving strategy should be tweaked.

What changed with tax reform that would affect my giving strategy?

The standard deduction was nearly doubled ($12,000 for singles and $24,000 for married filing jointly). You also have a $10,000 limit to deducting the combination of property and state taxes. With these changes, many people who previously itemized will now take the standard deduction. By using the standard deduction, you cannot deduct the funds given to charitable organizations.

Bunching Charitable Contributions for Tax Benefits

Some people are choosing to make a larger than usual contribution in one year. They are doing this by combining several years of “normal” contributions into one year to surpass the threshold of itemized deductions.  In following years, these people are skipping or limiting their charitable donations and taking the standard deduction.

Using a Donor Advised Fund (DAF) in Your Charitable Giving

A donor-advised fund also allows you to make a contribution that surpasses the threshold of itemized deductions ($12,000 for singles and $24,000 for married filing jointly). You can take the deduction in the year you make the contribution (for a cash contribution you can deduct up to 60% of your adjusted gross income). You can then choose when you distribute the funds (and to which charities) over time (it does NOT have to be within that year). You can also choose how the funds are invested and potentially grow the amount of funds you ultimately distribute (without a tax penalty on the growth). And the icing on the cake? Some people choose to invest in companies based on environmentally sustainable policies or social impact. “There’s increasing interest in impact investing, as investors realize that their money can work for good causes, even before they make a grant, says Amy Pirozzolo, vice president of Fidelity Charitable, a donor-advised fund, which has introduced three new impact-investing options.”*

Another added bonus is that you can make contributions to this fund with more complex investments like publicly traded securities, privately held S-Corp shares, real estate, etc. Many times charities are not set-up to be able to receive these kinds of contributions. When you make this kind of contribution to a DAF, you can then avoid paying capital gains tax AND take an additional income tax deduction in the amount of the full fair market value of the asset, rather than the cost (up to 30% of your adjusted gross income). This is a great way to reduce taxable income and maybe even reduce your tax bracket if you have had a big income year.

Donor-advised funds are straightforward to open and usually require a minimum initial contribution (typically $5,000). Work with your financial adviser if you think this strategy might fit your needs.

Looking for someone to help with your finances? You can reach us at 888-898-3627 or make an appointment here: http://www.scheduleyou.in/LhVJJnu85Q

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

* https://www.consumerreports.org/charitable-donations/donor-advised-funds-things-to-know/

Top 5 Year-End Tax Tips for 1099 Medical Professionals

Top 5 Year-End Tax Tips for 1099 Medical Professionals

Tax Tips For Doctors & PhysiciansBy John Golway, CPA and Founder of Financial Designs Tax Services, LLC

It’s that time of year… cheery music, crisp weather, shiny lights… and wrapping up your taxes for 2018. Not only do you have the regular tax “to-dos”, but there are also new tax rules to be aware of thanks to tax reform (don’t panic – there is a good chance the new rules will save you money). See below for our top 5 year-end tax tips for 1099 medical professionals.

1) Reduce Your Taxable Income

To ensure you are maximizing your tax savings, you want to reduce your taxable income as much as possible. Here are some key items you can deduct as a 1099 provider:

  • Health insurance premiums
  • HSA contributions
  • Retirement contributions
  • Deductible business expenses (note: relocation expenses are no longer deductible)
  • Heavy vehicle purchase
  • Qualified Business Income (QBI) – new with tax reform! See a full explanation here.

 2) Pay Attention to Retirement Contribution Maximums and Funding Deadlines

As a self-employed medical professional, you have a few options for retirement savings, and many times this can be one of your biggest deductions. The two most common accounts for 1099 providers are the SEP IRA and Solo (or “Individual”) 401(k). The maximum you can contribute is $55,000 (with a $6k “catch-up” option for the Solo 401(k) if you are 50+ years of age). Each plan has its own advantages. The Solo 401(k) allows you to also fund a Roth IRA if it makes sense to do so. A lesser known fact is that a Defined Benefit Plan can allow you to save well over the typical $55,000 (more than $100k for some of our clients). Work with your financial adviser and CPA to determine the right retirement savings strategy that maximizes your tax deductions.

Additionally, note the deadlines for opening and funding these accounts:

SEP IRA

Solo 401(k)

Defined Benefit Plan

Account Open Deadline

Tax Deadline*

12/31/18

12/31/18

Account Funded Deadline

Tax Deadline*

Tax Deadline*

Tax Deadline*

*Should you file an extension, use the extension deadline to determine your open or fund deadline.

3) Determine If You Can Take Advantage of the New QBI Deduction

The new QBI deduction is a huge deal. Historically, your retirement contribution was likely the largest deduction you were taking as a 1099 physician. It’s possible your QBI deduction might exceed your retirement contribution amount. The key is to lower your taxable income to be between $315,000 and $415,000 for married filing jointly (lower than $315,000 receives the full benefit), and between $157,500 and $207,500 for filing single (lower than $157,500 receives the full benefit). See a full explanation here. If you have an S Corp, you might want to consider if it makes sense to dissolve the entity, so you can take full advantage of the QBI deduction. See more here about entity formations and talk to your CPA.

4) Consider Tax Loss Harvesting

If you have stocks that are in a loss position (outside of retirement accounts), and you don’t expect them to rebound, you might want to sell them before the end of the year. If you have an overall loss, the maximum you can deduct is $3k (any excess carries forward). If you have any gains in the year, any of the loses offset the gains first, then you get a $3k tax deduction. If you do sell stocks at a loss, you cannot buy them back within 30 days.  This is called the “IRS wash-sale rule” and will disallow a tax deduction.

5) Familiarize Yourself with Other Tax Law Changes

The standard deduction was doubled. If your state/local/property taxes (cap at $10k), mortgage interest, and charitable contributions add up to lower than $24,000 for joint filing or $12,000 for single, then you will want to take the standard deduction. Some people are choosing to exceed the $24,000 with charitable funds deposited into a Donor Advised fund. This allows donors to receive an immediate tax deduction and then distribute funds at their discretion over time.  Contact your tax adviser for more details if applicable.

Also, you can now use 529 funds to pay for k-12 private education (up to $10,000 annually). Work with your financial adviser to determine if this is a good strategy for you and your family.

Don’t let the holidays get the best of your tax planning and preparation. For more information about how to find the best tax strategy for your situation, contact your tax professional or our experienced team.

You can reach us at 888-898-3627 or make an appointment here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

 

 

Maximizing the New 20% Pass-Through Deduction

Maximizing the New 20% Pass-Through Deduction

Maximizing QBI Deduction

By Terry Westlund, Co-Founder

Remember the big hub-bub about tax reform almost a year ago? Although the new tax rules were announced at the end of 2017, they don’t take effect until you start working on your 2018 return. Therefore, many are just now starting to think about the changes. The good news? If you are a 1099 provider, you may have an opportunity to save thousands in taxes with the new Quarterly Business Income (QBI) deduction – also known as the “20% pass-through”. Before the new tax rules were finalized, there was question around whether medical professionals would be able to take advantage of this new rule. Just to be clear, this 20% pass through DOES apply to 1099 medical professionals… if you qualify….

So How Do I Qualify?

Before I answer that question, it’s important to be clear on how to calculate TAXABLE INCOME. Taxable income is simply your income minus any deductions or exemptions allowed in the tax year.

For married individuals, the goal is to reduce your taxable income to $315,000 to get the full benefit of this new tax rule. At this point you can apply a 20% deduction… $315,000 x 20% = $63,000. At a 24% tax rate, that saves $15,120 in taxes! Not too shabby. Does $315,000 seem like an impossible number to achieve? Ask your financial advisor about Defined Benefit Plans. If implemented appropriately, these kinds of plans can allow you to save upwards of $100,000 for retirement and therefore further reduce your taxable income.

If your taxable income is between $315,000 and $415,000 (for married filing jointly), you can still save on taxes through the phase-out portion of the new pass through rule (“dollar for dollar”). For single taxpayers, the taxable income limits phase out from $157,500 to $207,500.

Don’t forget as an independent contractor, you have many ways to lower your taxable income including deducting health insurance premiums, HSA contributions, 50% of social security & Medicare tax, retirement contributions (up to $55,000 in 2018 or $61,000 for individuals age 50+… more with a DBP as described above) and deductible business expenses. Historically retirement contributions were typically one of the largest deductions you can make. Now the QBI deduction has the potential to be an even greater deduction.

20% Pass-Through Deduction Example

Sometimes it is easier to explain tax rules with an example. John Doe, MD, an emergency physician, is married and has $440,000 of I.C. income. Here is how he will utilize this deduction:

Business Income

$440,000

Deductible Business Expenses

($16,000)

Net Business Income

$424,000

50% of S.S. & Medicare Tax

($13,500)

Health Insurance and HSA Contributions

($16,500)

Individual 401(k) Contribution

($55,000)

Standard Deduction

($24,000)

Taxable Income

$315,000

QBI Deduction

($63,000)

Net Taxable Income

$252,000

At a 24% tax rate, Dr. Doe will be saving approximately $15,000 in taxes by utilizing the new QBI deduction. Now that’s worth paying attention to!

What if my spouse generates W-2 income?

Technically the deduction is calculated from whichever is lower… your “Net Business Income” or your “Taxable Income”. If you only have 1099 income, your “Taxable Income” is usually the lower amount. If you have W-2 income to also account for, you may find yourself taking 20% of your “Net Business Income” as it may be the lower of the two. Here is an example: Ron has $300,000 of independent contractor income and his spouse makes $135,000 in W-2 wages:

Business Income

$300,000

Deductible Business Expenses

($15,000)

Net Business Income

$285,000

50% of S.S. & Medicare Tax

($10,000)

Health Insurance and HSA Contributions

($15,000)

Individual 401(k) Contribution

($61,000)

Standard Deduction

($24,000)

Spouse W-2 Income

$135,000

Taxable Income

$310,000

QBI Deduction

($57,000)

Net Taxable Income

$253,000

The pass through is calculated from the “Net Business Income” as it is lower than the “Taxable Income”, resulting in a deduction of $57,000 ($285,000*20%). This is still about a $14,000 savings in tax at a 24% tax rate!

Any other considerations I should be aware of?

Historically we recommended medical professionals making over $330,000 should consider forming an S-Corp to save more in taxes. With the new QBI deduction, work with your CPA to determine if the way your S-Corp is set-up truly maximizes your tax savings. You may need to make an adjustment to your flow-through income or consider dissolving the S Corp to take full advantage of the QBI deduction. For more information on entity formation, see one of our blog entries here.

For more details on how this deduction might work within your tax strategy, contact your tax professional or our experienced team. You can reach us at 888-898-3627 or make an appointment here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

LLC? S Corp? Where do I start?

LLC? S Corp? Where do I start?

By Nate Hansen, CPA

As a 1099 medical professional, you may have heard buzz around the need to consider forming an entity. The different types of entities can be confusing and can vary by state. The most important thing to remember is that everyone’s scenario is a little different. There are several factors that need to be considered, including level of income, marital status, location(s), etc.  Seeking professional advice is strongly recommended to ensure you select the right solution for your scenario. In the meantime, here are some basics to prepare yourself for that discussion.

Sole Proprietor

A sole proprietor is an unincorporated entity. This structure allows you the ability to write-off business expenses on the “Schedule C” form of your personal tax return (side note: business expenses incurred by someone employed in a W-2 position are no longer deductible as unreimbursed employee business expenses pursuant to the latest tax reform).  You can also take advantage of some of the new tax rules like the QBI 20% Pass-Thru deduction. Being taxed as a Sole Proprietor is a low maintenance option that doesn’t even require you to set-up an EIN (Employer Identification Number, aka Federal Tax Identification Number). If you are a 1099 physician, you file as a sole proprietor by default unless you set-up one of the entities described below.

Limited Liability Corporation (LLC)

Some employers require their 1099 medical professionals to set-up an entity, such as an LLC. This kind of entity may also provide some liability protection as it separates your personal assets from the business. While an LLC or other entity type may provide some personal liability protection, it typically does not cover any “on-the-job” protection; however, that should be covered by your malpractice insurance normally provided by the facility.  An LLC that is 100% owned by a single individual is disregarded for tax purposes and taxed as a sole proprietor, so all income and deductions are reported on your personal tax return.  It should also be pointed out that some states use a PLLC designation (Professional LLC) as opposed to a regular LLC for medical professionals, but there is no difference from a tax standpoint.

S Corporation

Prior to tax reform, an S Corporation was typically a great option for 1099 physicians who made more than $350,000 (in states that recognize this entity type). An S Corp is more expensive to manage but could provide more tax savings (particularly Medicare tax savings) resulting in more disposable income in your pocket.

Post tax reform, the $350k threshold is a little more complex. A new rule allowing a 20% pass-thru deduction (aka Qualified Business Income Deduction, aka QBI Deduction) is saving many 1099 physicians thousands in taxes, assuming they meet the income thresholds. See here for a short webinar  explaining how the QBI deduction works. With this new rule, only the S Corp “Pass Through” income qualifies for the QBI deduction (vs. your “Wage Income”). Ask a CPA to help you model whether or not a S Corp will maximize your tax savings in combination with the QBI deduction.

Myths

A common misconception is  whether or not you need to have an entity in order to hire your spouse. Or do you have to have an entity to create certain retirement plans or to deduct your business expenses?  The answer to those questions is “no”; you have the ability to do all of those things as a sole proprietor or LLC.  However, in order to pay your spouse a salary and/or open an individual 401(k) account, you would be required to get a separate Federal ID Number from the IRS.

As you determine if you have the right entity structure set-up for your business, work with a CPA to talk through the specifics of your scenario. In most cases, the complexity associated with this decision-making process warrants a phone call or an in person meeting rather than trying to talk through the logistics via email. You don’t have to do this alone!

Want to have a no-risk conversation with our lead CPA? See here to set an appointment with Nate Hansen.

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

 

The Devils is in the Details: Protecting Your Income

The Devils is in the Details: Protecting Your Income

By Gary Eickhorst, ChFC®

Your entire financial plan – your retirement contributions, your savings goals, your debt repayment plan – is likely dependent on your income. What happens if that income goes away? Did you know you are more likely to become disabled during your working years than you are to die?1 More than 25% of today’s 20-year-olds are projected to become disabled before retirement2.

As a physician, you have a lot at risk. Your job is physically demanding. Issues like cancer and heart disease only represent a portion of long-term disability claims. Back injuries, muscle and ligament issues, arthritis and mental health challenges could also prevent you from doing what you love. Those who take the time to address the potential risk are more likely to overcome the unexpected.

Unfortunately, not all plans are created equal and navigating this space to secure adequate coverage (at a competitive price) can be challenging. An independent broker can explain your options, compare rates from multiple companies, secure discounts and simplify the experience. There is no cure for bad insurance, so see tips below on what to look for when shopping for coverage.

When should I secure coverage?

Consider adding disability income insurance coverage to your financial planning strategy early on. Rates are based on your age when you apply so it will never be cheaper than RIGHT NOW. You can select a plan that locks in lower rates for the rest of your career. This savings can add up to tens of thousands of dollars over time. If you’re in residency and have limited cash flow, consider securing a modest policy. You can increase the benefit later on.

What is the difference between group and individual coverage? Do I need both?

w2 employees may have access to an employer-provided group plan. These plans tend to be less liberal (meaning the definition on “disability” may be stricter). Any benefits received are taxable, and depending on the plan, the benefit may only cover a portion of your income. Additionally, if you leave your employer, you can’t take the policy with you. On the other hand, group policies don’t require medical underwriting and are often inexpensive. Even if you have access to a group plan, it’s worth considering supplementing that coverage with an individual policy. In a claim situation, both policies would pay.

Individual policies are customizable, allowing for more liberal and comprehensive coverage. The benefits are received tax-free. Individual policies are portable, meaning you can take them with you from job to job. If you secure an individual policy early in your career, you can lock in a lower rate and reduce the risk of future medical issues disqualifying you from coverage.

It seems like individual policies have a lot of options and add-ons. Do I really need them? How do I pick?

A benefit of securing an individual policy is that it can be tailored to fit your individual needs. Unfortunately, it also makes comparing policies very difficult. An independent broker can explain which “add-ons” (also called “riders”) may be appropriate for you and compare rates from multiple companies. Depending on your situation, some riders won’t make sense for the cost. However, there are a handful of options you should consider:

Residual Disability Benefit: It’s not difficult to imagine going part-time after a back injury or while undergoing treatment for a major illness. If an illness or injury prevents you from working full-time, this rider provides a partial benefit. We ALWAYS recommend this rider.

Pure Own Occupation: If you have an illness or injury that prevents you from performing the duties of YOUR occupation, you will receive a full benefit – even if you are able to earn income in another specialty/occupation. For example, an emergency physician is in an accident and sustains injuries that prevent her from working in the ED. She is able to work in an administrative capacity as the ED Medical Director and also picks up shifts at a clinic. Between these two roles, she makes up most of her lost income. However, with the Own Occupation rider, she will also receive a FULL disability benefit because she can no longer perform the duties of an emergency physician.

Cost of Living Adjustment: Your monthly benefit won’t have the same buying power 10 or 20 years from now. The COLA rider provides inflation protection during a long-term claim by increasing your benefit annually (while on claim) to adjust for inflation.

Guaranteed Increase Option: This rider allows you to increase your benefit in the future without medical underwriting. It’s a good option for individuals that (1) expect their income to increase, (2) don’t currently have the cash flow to pay for a higher benefit, and/or (3) don’t want future medical issues to prevent them from securing additional coverage. This rider is usually inexpensive and simplifies future benefit increases by eliminating the need for blood tests and medical exams.

Level vs. Graded Premium: Rates are based on your age when you apply. If you select a level premium structure (which we recommend), your rates remain level to age 65. Graded premiums will increase annually and become significantly more expensive over time.

What is the difference between short and long-term disability coverage?

Short-term disability policies protect your income during short-term illnesses and injuries. Benefits typically start 14-30 days after a health issue arises and continue for 3 to 6 months. These policies can be very expensive and difficult to justify. Fortunately, if you have adequate emergency savings, you may not need one. We often recommend self-insuring for health issues that would keep you from working for only a few months – This simply means building your emergency savings so you can cover six months of income if necessary.

Long-term disability policies protect against a much greater risk: years or decades of lost income. These policies usually pay benefits after 90-180 days and continue to pay benefits until age 65, 67 or 70. We strongly recommend securing this type of insurance because a long-term health issue can wreak havoc on your financial stability. To cover the waiting periods, we recommend building your emergency fund in a way that you can ride the storm of 90-180 days of no income.

I have sticker shock. Do premiums vary? Should I shop around for individual long-term disability coverage?

Yes! Or even better, work with an independent broker who does the shopping for you. A broker can help you select the type of coverage you need, find the lowest possible price and even secure additional discounts depending on where you work.

Other ways you can reduce your premium:

  • Eliminate the catastrophic rider
  • Eliminate the waiver of premium rider
  • Women should ask about unisex rates. Because disability premiums are higher for women, unisex rates can lead to significant savings.
  • Self-insure to eliminate a short-term disability policy (as described above)
  • Consider a longer waiting period (perhaps 90 days instead of 60) or a shorter benefit period (age 65 instead of age 67 or 70).

When should I re-evaluate my existing coverage?

If you’ve recently changed jobs, review what benefits are offered and how you might need to supplement them. Marriage, child births and other significant life events are another time to re-evaluate your coverage. When others are depending on your income stream, you want to make sure you have the right plan in place.

If you have questions, we’re here to help. Contact us for more information on how disability coverage fits into your plan.

To make an appointment with me or my partner, Terry Westlund, click here: https://www.appointmentcore.com/app/freeslots/KpvdtvV

Do you have a topic you want to hear about? Email us at connect@financialdesignsinc.com to submit suggestions.

1 https://www.forbes.com/sites/peterlazaroff/2018/03/18/how-to-protect-your-most-important-asset-with-disability-insurance/#5d81eacf5eed

2 http://disabilitycanhappen.org/disability-statistic/