Physicians' high annual salaries (averagingover $200,000) and tax positions(in the highest tax bracket), combinedwith today's anemic stock marketand high real estate prices, make taxcredit programs an attractive portfoliotool. Tax credit programs offer high incomewage earners a useful stockoption that maximizes tax benefits.
How can a physician-investor take advantageof tax credit programs? In short,tax credits generate tax savings. Anddepending on an individual's situation,these savings can be used to open retirementplans and college savings plans, paymortgages, or invest in stocks and bonds.
Dollar-cost averaging is one exampleof how savings from tax credit programscan be invested, benefitting your portfolio.Let's say that after meeting with yourfinancial advisor and discussing ways toinvest your tax credit savings over a 10-to 12-year period, you decide to usethese generated tax savings to participatein dollar-cost averaging. Whatcould you expect to see in terms ofreturn at the end of 10 to 12 years?
In this case, if your $50,000 investmentyielded a $5000 tax credit per year,and you reinvested the $5000 (includinggrowth returns) at 8% per year, youwould see a return of $78,227. Potential returns can be madejust by reinvesting the tax savings generatedby the tax credits.
Of course, dollar-cost averaging doesnot assure a profit or protect against lossin declining markets. Such a plan involvescontinuous investments in securities,regardless of their fluctuating pricelevels. Therefore, a physician-investorshould always consider whether theycan continue purchasing stock throughlow-level periods.
Tax credit programs can offer certainphysician-investors a substantial benefit. Ifthey utilize the tax credit, they can generatepassive losses. Both the credit and theexpenses generated by tax credit programscan be used to offset passiveincome, thus increasing overall yield. Whoqualifies for this benefit? Physician investorswho have real estate investmentsthat generate passive income qualify.
Tax credit programs are outlined in acompany's prospectus only. Prospectusescontain more financial information,including fees and expenses, and adescription of a company's business history,officers, operations, etc. The prospectusshould be read carefully before investingor sending money.
Maximizing tax benefits can be anexciting alternative that some physiciansmay want to consider. If you're interested,consult with your financial advisor tolearn more about this option and to findout if a tax credit program is right for you.What works for your colleaguesmay not work for you.
Brett Ellenis president of American Financial Network, a
registered principal, NPC. He welcomes questions or comments
at 800-585-3326, or visit www.afn-net.com.