The IRS is your major impediment to financial success.
After all, you can’t see 10% more patients this year and increase your take home by 10%, but you can cut your taxes by 10% and take home 10% more.
This is the first of a series of articles that will give you the ammunition you need to cut your taxes by 10% this year, which is a very realistic goal for each doctor.
An understanding of tax laws is the key to saving. Generally, you can’t cut taxes by making tax-sheltered investments. However, there are 11 tax shelters left in the tax code, and investments are required to take advantage of a couple of them.
As income taxes rise in the next few years, numerous schemes will be invented to save taxes. History shows people will grudgingly pay up to about 40% of their income to taxes and when the tax rate rises above that, people will figure out how to avoid taxes. They will follow any scheme, legal or illegal, to get out of paying the taxes.
In the 1970s before Reagan Economics took over, a lot of doctors were in the 70% tax bracket. Three doctors in my neighborhood worked as partners and while two controlled their taxes by making tax-sheltered investments, one used a 2503 trust.
Whenever the kids of the doctor using the 2053 trust would attend a community function that required payment they would bring a check from the trust. The doctor was using the law to shift income to his children, and cut his own taxes.
In the 1980s the IRS attacked the tax shelters that the other two doctors were using. All of their tax savings were disallowed and they paid the back taxes and penalties. They sold their Lincolns, sold the summer homes and really cut back. They lost their retirement.
In the end, the two doctors worked about 10 years longer than the one doctor who used the law to control his taxes.
A lawyer has a limited number of tools to do tax planning, just like a doctor has a limited number of tools to do an operation. The results of the tax planning and the operation depend on how skillful the respective tools are used.
The legal tools include corporations, LLCs, limited partnerships and numerous types of trusts. You may not have to know how to put the tools in place, but you do have to know whether or not the right tool is being used. You also have to know how to get the advantages out of the tool once it is in place.
Each one of the legal tools has an asset protection, income tax planning and estate planning use. Attorneys often focus on one use and never bother to maximize the others, so it’s up to you to learn how to use the tool once you get it. The attorneys and CPAs won’t bother to help you use the tool.
Professionals won’t help a client much, particularly in the area of taxes. They have learned to keep their mouths shut, because they have a liability when they start suggesting things to you: if something goes wrong, it’s their fault. They get sued or, at a minimum, they get yelled at by the client.
The attorney just puts the tool in place, and the accountant just plugs in the numbers you give them at the end of the year. It’s up to you to use the tool and generate the tax numbers. It’s not hard, but nobody ever shows you how to do it.
As a result, lots of doctors pay the big bucks for the tools, but then they never get any asset protection or tax advantage. They end up relying on weird tax-sheltered investments to control their taxes, and they get burnt by the IRS later in life.
Tools give you an edge
You can’t control your taxes as a W2 tax payer. You have to use the legal tools, because they use different tax laws. For example, about the only practical thing you can do as a W2 wage earner to cut your adjusted gross income (AGI) is make a standard IRA contribution. With an LLC, you can easily cut your adjusted gross income by 10%.
Your CPA has never had a heart-to-heart talk with you about your AGI levels. If he has never used the words “adjusted gross income” in your discussions, you are in trouble. That would be like a doctor never having a discussion about cholesterol with an overweight, 55-year-old patient. It’s deadly.
There are lots of ways you can use the tools to cut your AGI. If you cut your AGI, you save taxes. In fact, if you can cut your AGI and drop into a lower tax bracket, you’ll save taxes on every dime you make all year.
You have to start now to use the tools and “generate” your tax numbers. December 15th is too late.
In this series on taxes, I wall talk about the various tools and give you techniques on how to use them. We can cut your taxes by 10% this year by starting now and applying the law. There’s no risk, no more work and no funny investments.
Lee R. Phillips is a United States Supreme Court Counselor who for the past 30 years has helped high income individuals control their taxes and protect their assets. Call (800) 806-1998 or visit LegaLees.com. For a free copy of Lee’s set of practical tax ideas, go here.