Proactive tax planning can save doctors a lot of money on taxes by using legal means.
Experience shows that most doctors overpay in taxes and sometimes pay in excess of $125 for every $100 they were required to pay according to the law. While analyzing the tax returns of doctors, it becomes obvious that the reason they overpay to Uncle Sam, their state, and their local jurisdictions, is lack of proactive tax planning on their part.
By not taking advantage of all the loopholes in the tax law and missing the tax-saving opportunities, these doctors are basically jeopardizing their financial future. A vast majority of them appears to be unaware of the existence of proactive tax planning. They take higher taxes as a fait accompli, simply complain among themselves and just keep paying more and more.
Proactive tax planning is the process of creating a personalized tax strategy with the ultimate goal of minimizing the tax burden and then implementing it throughout the year. Tax planning is aimed at tax aversion by using legally permitted techniques and loopholes in the tax code. The United States Supreme Court has held that tax planning to reduce one's taxes is perfectly legal.
“There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that,” former Chief Justice, William H. Rehnquist wrote.
This tax aversion is in complete contrast with tax evasion, which is illegal and can lead to the one involved in tax evasion being sent to live free of all expenses in a government sponsored residence for many many years.
The key here to understand is that proactive tax planning and its implementation needs to be done during the year. Once a tax year is over, there is basically not much that can be done to reduce the taxes. At that point, it becomes a matter of recording history and paying the piper. Most of the accountants used by the doctors are very good at the "recording history" part of the process. They collect the raw data from the doctor of all the income and expenses of the practice after the year has ended. These accountants then clean up this data and put the right numbers in the right boxes on the right forms and hence complete the preparation of the tax return and timely file it. They are very efficient and knowledgeable at this and do a good job of what is called compliance work.
However, the accountants most doctors use are not focused on planning the affairs of the practice to structure them in such a way that significant amount of tax is saved. Both the doctors and their accountants share the blame for this situation. The accountants for not getting trained in tax planning and the doctor for not seeking out the experts who are involved in the business of tax planning. The result is a huge benefit for Uncle Sam at the cost of the poor doctors.
Nearly 75% of all doctors own small practices. The process of losing money to the government unnecessarily starts even before they buy their practice from a retiring doctor, or when they become associates or partners in a practice with the intention of ultimately buying it. The brokers and attorneys involved in these transactions are very good at what they do. The brokers find practices which need to be sold or partnered with and market them quite effectively to find suitable buyers. The lawyers draft the legal documentation quite well to ensure that the interests of their clients are well protected in these transactions. Neither the brokers, nor the lawyers are experts in tax law and hence they simply don’t know the tax implications of practice transitions. The purchase agreements are full of fatal tax mistakes. Both the buyer doctor and the seller doctor end up paying taxes which they did not have to if they had used proper tax planning techniques.
Interestingly, owning and managing one's business is arguably the best tax shelter plan left for an average American. Since a vast majority of all doctors own and manage their practices they have a great opportunity to smartly use this “tax shelter” which they call their practice, to legally save money on taxes by using proper tax planning techniques like using multiple entities, structuring fringe benefits programs and taking advantage of hidden business deductions.
Albert Einstein had once said “the hardest thing in the world to understand is the income tax.” His statement is as true today as it was in Einstein’s time. But it is also true that those who make it their business to understand the tax system and use it to their advantage reap huge dividends.
For more information, visit www.JayMalik.com.