Speaker 1 00:00:08 What's up everyone. Welcome to the finance for physicians podcast. I'm your host. Daniel RI join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into aids episode. What's up guys. Hope you're having a great day. I, I love talking about some of these quick hitting value ads. What we're gonna talk about today is I think a lot of people love the topic of saving on tax. I don't know. I don't know really anybody that's like, eh, you know, I don't wanna, I don't wanna save on taxes. So it's also, I think one of the most overlooked, or probably one of the biggest, most common mistakes that we see in working with people, one on one is just, uh, a failure to, uh, maximize all these tax breaks that are available.
Speaker 1 00:01:05 Uh, so we're gonna talk about some of the most overlooked ones today. I think a lot of, uh, personal finance, like many things in life is it's more about hitting like doubles and singles and really avoiding errors, not as much about, uh, home runs. I mean, a lot of people home runs are kind of cool to watch and, and see, but they can also put you at bigger risk and, you know, make you more air prone. And so a lot of this is, you know, good sound personal finance is just avoiding those errors and, you know, getting on base you. Um, so tax breaks is, is definitely, you know, a good example of one of those, or at least it shouldn't be, I don't think a home run, uh, it's more of like a single or a double. Uh, I think a lot of people maybe view, uh, especially early on in their career or in life, maybe they have some, some people have a higher expectation for tax breaks than they, they really are.
Speaker 1 00:02:12 It's more of like a single or a double it's like, it's a good thing. Definitely. You want to get on base, but it's not gonna, like, it's not a game changer. It's not a make or break situation. Uh, it's just a, it's much better than striking out and not getting on base. And in fact with tax breaks, I'll point out too. Like sometimes you do see these home run tax breaks, uh, uh, examples of, uh, schemes or whatever. But a lot of times those are, that's kind of more of a warning sign. Like when we hear of a tax break, that's like, it's free money kind of, or it's like, for example, you pay nothing and get, you know, free money back or like you get a tax credit for one of the common ones that's out there today is like a, a conservation easement.
Speaker 1 00:03:08 Like in other words, you invest some money in something, this, this tax vehicle I'm over simplifying it, but you invest money in this thing. And then the tax savings provided by it are greater than the investment in the thing. So in other words, it's like print and money, uh, if it's like free money right away. And so that's not how that's like a home run, but it's also a problem because that's not how the IRS rolls. Like they don't this, these tax breaks to give out money cuz they would just give out money. Otherwise it's designed, they're designing these to be very, I mean, it's very intentional the purpose of these tax breaks. They're really trying to, you know, incentivize behaviors. Uh, they want people to, for example, like invest more in retirement and education and healthcare and of those sorts of things, they want to incentivize those behaviors, uh, and give you a little bit of a carrot to do that.
Speaker 1 00:04:06 It's definitely not designed to be, uh, handing out money. So typically now that example, I just threw out for, for um, the home run free money tax scenario. Um, you know, technically that particular example is maybe legal. Uh, a lot of accountants will argue, uh, it's gray, I guess, really gray. Uh, but the IRS has come out for instance, in this example and said that they're like aggressively pursuing those vehicles. Um, as a, you know, they're auditing them and saying that, you know, it's against, it goes against their rules or whatever. And in other words, it's a, it's a something they're going after and trying to shut down because it goes against the whole idea of the tax code. So home runs, you know, probably should raise a red flag more than anything. Uh, and what we're gonna talk back about talk about today is some of the basic, you know, easy single double tax break type things that are completely worthwhile.
Speaker 1 00:05:16 I don't wanna downplay these. Like they're still completely worthwhile. They're much better than not getting a tax break. Of course, like all things being equal, you definitely want a tax break as opposed to getting taxed. So it's definitely a wise thing to do. And uh, missing out on them is a, an error in, in itself. So I it's, and, and I think it's probably the most common, like I said, one of the most common mistakes we see is not maximizing these. Maybe you're doing some of these, but not all of these. So, uh, and that that's really, like I said, that's a, that's a pretty big error in itself. So we're gonna talk about some of the biggest tax breaks, uh, that can sometimes come, come into play. So, first one, so we're gonna have five, five big, big tax breaks to talk about. So first one is the HSA, assuming you're eligible for that, you have to have a qualified health plan to be able to fund this HSA.
Speaker 1 00:06:17 Um, but the HSA is by far the best of all these tax breaks available. Assuming you're able to fund those, if you wanna understand a lot more detail about, uh, about how the HSA works and why it's such a good vehicle, uh, check out our episode a few back, uh, how to using your H say to build wealth, um, we'll link to that, um, in the notes, but, uh, I'll talk high level today. So it is a fantastic, as I said, tax shelter, like I said, you have to be in the right sort of health plan, but the reason it's such a good tax. So when you put money into an HSA it's before tax money. So in other words, no tax going in. So it's before it avoids it escapes income tax going in, and in some cases it escapes social security tax and Medicare tax.
Speaker 1 00:07:14 So it escapes taxation, income taxation on the way in which is good in itself. That's kind of like a 401k does like a traditional 401k escapes, temporarily income tax on the way in. So the HSA escapes or is not taxed on the way in, so no tax going in and then HSAs are allowed to build. So there's no use it or lose it limitation like a lot of these health plan savings or health savings plans, HSAs, you can completely build wealth in them. Uh, that's no problem. And so as you build wealth and you can invest in them, we talk about that more in the, in the prior episode that I referred to a minute ago, but you can completely build wealth in them. And as that wealth grows, it's tax free. So as long as it's in there, growth is tax free. And then on the back end, when you take it out, that withdraw is tax free, as long as it's used for a qualified healthcare expense.
Speaker 1 00:08:12 So if you're young, it's like you have your entire life ahead of you. Like you're gonna have a lot of healthcare bills and the future, especially when you're older. And so as long as you have future healthcare costs like retirement, healthcare costs, this HSA vehicle is a home run. Um, it's a, it's a way to basically completely avoid taxation on it's really the only vehicle you can avoid taxation in all three of those areas like tax avoid tax, going in avoid tax, as it grows and avoid tax, as it comes out, as long as you're using it for qualified healthcare expenses. Now, if you don't, if you are forced to not use it for healthcare, when as long as you're over 65, then in that scenario, it is tax, but that just functions just like a 401k traditional 401k. So basically a worst case scenario, it's like a 401k.
Speaker 1 00:09:03 Um, and if you're, if you do it right, it's much, much better than a 401k tax wise. So using your HSA to build wealth, not just using your HSA to, you know, write checks for thet visits, but I'm talking about using your HSA to build wealth is definitely one of the most overlooked tax breaks we see. So if you want to learn more about that, like I said, check out our prior episode where we talk more in depth. So on any of these, if you're working with us, we're gonna be like, if you're working one on one with us, we're gonna be making sure you're looking at all these sorts of things and making sure they're optimized. So, but if you have questions on any of these, whether you're working with us or not feel free to throw those out. So second big tax break that I think people miss out on is tax lost harvesting.
Speaker 1 00:09:50 I think this is especially true with like the DIY investors, not DIY is fine. Like, you know, especially if you enjoy something, I think I'm a fan of like DIY in certain areas. Um, I think the enjoyment factor is key, but it's the hard part about DIY. It's just like hard to know all these different things. It's hard to be. It's like impossible to be a Jack of all trades and, and, and, and master <affirmative>. And so with tax loss, harvesting, it's a little bit more complicated and, or intimidating is probably a better word, but what it is is when you have, so let's say you've maximized all your tax breaks or tax vehicles. We're gonna talk about today, a few of them, but let's say you've maxed out all your retirement plans, your HSAs, like all the easy wins on the tax breaks for retirement and education and all those kinds of things.
Speaker 1 00:10:44 A lot of physicians get to a point where they've, you know, quickly maxed all those out. And then they're still wanting to save on top of that. And so then you end up needing to use just a taxable, you know, plane Jane taxable investment vehicle, because once you've maxed all that out, as you invest, it gets taxed as it grows. So with a taxable investment vehicle, the way that that works is it, as I mentioned, as it grows, there's tax implications. So one of the tax, one of the taxes that you'll anchor in those sorts of vehicles is called capital gains tax. So I'm gonna hit the high level of this. If you want to, if you want us to dig into tax loss harvesting, we can cover it in another show, but I'll hit the high points for today. So with taxable investments, capital assets is we're, we're talking about or capital gains is what talking about or capital losses.
Speaker 1 00:11:40 So if you own, let's use a simple example, you buy apple stock for a hundred dollars, and then you sell apple stock for $200 in a week. So that is a hundred dollars capital gain and it gets taxed. And so it depends on how long time period you owned it as to which exact tax treatment it is. But shorter term time periods are taxed. More short term capital gains is what they call 'em long term or taxed a little bit less, but they're still tax. And so, so on the other hand, if you buy apple stock for a hundred, and then you sell it for 50, then that's a capital loss. And so tax lost harvesting, and maybe we could say more broadly like tax efficient, investing on your taxable investments is being more proactive about how all those taxes work in an effort to minimize the taxation or defer the taxation.
Speaker 1 00:12:38 So for example, uh, maybe you have apple stock and you've owned it, uh, you know, 11 months or 11, 364 days. You've owned it just shy of a year and, and you're gonna sell it. So, first of all, I would not suggest buying individual stocks, but, uh, it's a good example if you're buying it and selling it after just shy of a year, that's short term capital gains, which in many cases is, you know, substantially more tax like potentially, you know, 10 plus percent, uh, tax added tax versus just waiting a day or two, you're getting the lower tax rate. So that's one tax efficient strategy is avoiding taking short term capital gains and even further proactively taking capital losses. So that that's, that's where tax loss harvesting comes in. So with tax loss, harvesting, when, so the example of the a hundred dollars apple stock is down to 50.
Speaker 1 00:13:43 In this apple stock example, you could go ahead and sell it, cuz it's at 50 and that triggers a loss of 50. And in that, that loss gets like stockpiled for you. So that in the future you can offset it with gains. Or if you don't have any gains, you can offset up to 3000 a year of income on your tax return. So basically there's incentive tax wise to stock all these losses on your taxable investments so that you can offset a little bit of income a year, the 3000, that's a little, that's a decent carrot, but on top of that, so that you can offset any short term capital gains. You have to take cuz you never want to take short term capital gains, cuz it's a high tax rate. Plus you can offset many, even some long term capital gains or maybe you own the investment for your entire lifetime.
Speaker 1 00:14:42 And when you pass away, it all gets wiped, clean slate. Anyway. So there's a lot of incentive to harvest. They call it tax lost, harvest these losses. Um, you have to watch out for a few things. So this apple example, the question would be like, what do you do with the money? Then you just sold it for 50 and you add it for a hundred. You took the loss. Great. But like what do you do with the $50? Uh, if you buy apple stock right back again, cuz you just wanted it to keep it, um, say you sell it and then buy right back a minute later that wipes it out. You, you can't do that. They call that the wash sale rule. So you have to wait 30 days to buy back the exact same security, but there's some ways to, uh, uh, work around that or not violate that and the way to do it.
Speaker 1 00:15:27 The easy, the most common way to do that is just to buy something similar. Uh, you know, you can buy something that like is very similar to apple stock or if you're using ETFs, that's a much better, you know, I'm a fan of like passive ETX ETFs. So like very diversified ETFs. You can say the same example, it's worth a hundred and you sell it for 50, you take dollar loss and it's the, uh, you know, S and P 500 fund. You can buy the, uh, you know, Vanguard, total stock market as an alternative and swap it out. So it's not the exact same security. Um, it's pretty close. It's like maybe 90% overlap. It's not a hundred percent. So you have to be careful not to buy the exact same security, uh, back when you do that transaction or else you're gonna be forced to wait 30 days to take that loss.
Speaker 1 00:16:26 So, um, there that's, so this gets a little intimidating, um, and a little confusing for people, you know, as you hear this, I'm sure you're thinking lot. It seems like a lot. So, um, and it, it is, um, I would encourage if you're doing this yourself, I would encourage reading a lot more on this. I'm just, like I said, hitting the high points. Um, and you know, for today, the main takeaways are, especially when you're gonna be in higher tax brackets, like tax loss, harvest is a beneficial strategy. It will, you know, translate to lowering taxes, especially when you look at long periods of time, but it does take a little work and you need to read up on it and be understanding what you're doing, cuz otherwise it's gonna be very difficult or you might be prone to take in a wrong turn or whatnot.
Speaker 1 00:17:14 And so that's tax law harvesting. As I mentioned at the very beginning, if you're working with us, we're like already doing these sorts of things like tax law harvesting is just kind of like automatically a part of what we're looking at. Um, so you know, you don't need to it's, it's still like you think good to understand these sorts of things and you can ask questions. It allow, it helps you questions. The more you understand, but just, just so you know, so third big tax break, backdoor, Roth IRAs. So if you're not, hopefully all of you, well, I'd be shocked if all of you were doing this. So for those of you that are not doing this, this is for you. So backdoor Roth IRA is a way to indirectly fund Roth IRAs. Even if your income is above the threshold for funding, a Roth IRA directly.
Speaker 1 00:18:05 So Roth IRAs have this threshold of income where if you exceed it and it changes every year. I don't remember the exact number this year, but it's, you can Google it in five seconds. Uh, but it's, you know, around 200,000 for a couple, for a married couple, or if you're single, it's, it's a lot lower, like a hundred thousand something. But anyway, if you exceed that threshold, you're basically like out for Roth funding directly. And so even if you're over that threshold, you can still fund a traditional IRA. Even if your income is 10 million a year under the current tax laws. So you can, even if you're out on directly funding the Roth, you can still fund a traditional IRA and you can also convert that traditional IRA to Roth. So funding, the traditional IRA really has in, in today dollar or in, uh, to this year's tax return, it doesn't really affect this year tax return.
Speaker 1 00:19:03 If you have that high income example in most cases. So it doesn't really affect, it's not gonna typically effect this year's taxes. So it's kinda like neutral and then come, I didn't get that. Sorry. My phone sometimes thinks I'm talking to it. That was my series saying, hello. Uh, so if you're in, in that situation where you're, you're wanting to fund this, you fund the traditional, I first you then convert it to Roth the conversion. There's no income limitation either. So basically you have taken a couple extra steps to indirectly fund the Roth. Um, and that's they call it the backdoor Roth IRA. The backdoor Roth is a completely non-technical term. The IRS would never come up with the backdoor terminology. Like they don't like they hate backdoor that implies like loophole. And so really it's just a multiple step process of funding or getting funds into a Roth IRA.
Speaker 1 00:20:04 And the IRS has come out. Um, I think in 2018 saying that they are good with these Roth. I, uh, funding Roth this way. It was on the chopping block. Uh, this is 2020, uh, as I'm recording this, but in late 2021, it was about to most people thought it was gonna get Xed from the tax code. But, uh, that for the time being that tax big tax proposal died off. So as of now, there's still fair game and a very, a good tax tax break. You can, but it does take a little bit of work. Um, if you are doing this yourself, um, I would encourage, uh, checking out our podcast where we talk about a little bit more in depth of how it works. I'll link to that in the show notes. If you're working with us, we're gonna bring it up and we will take care of it for you.
Speaker 1 00:20:54 So backdoor Roth, IRA number three, number four would be business expenses. This is, this is for those of you that have a side hustle or you're self-employed maybe you're in emergency medicine to 99 set up, you you're just getting paid cash. And so te you're technically self-employed, or maybe you're working at a hospital and you are, you have a side hustle doing moonlighting and you're getting 10 99 income. The key for this to come into play is you have to be self-employed in some capacity, you know, have a business, uh, or have a side income that's considered self-employment being an employee does not work. So if you're moonlighting, but they consider you an employee, this does not work. You have to be self-employed. And the big, easy way to figure that out is typically if they're not withholding tax on that income and there's no, and they're, you know, they're not considering you an employee in that case, that's a good sign that you're self employed.
Speaker 1 00:21:57 If you're unsure or either way talk to your tax accountant to confirm the status, if there's any uncertainty about this, but this is for all the people potentially have that self-employment income. And so business expenses, when you're self-employed, that's when business expenses come into play, there's all kinds of things. You're totally completely legit in the tax code, able to write off as business expenses, um, which is a good solid, you know, it's not a, so going back to the runs and single doubles, it's not like free money. It's not a home run, but so it's not a reason to spend money. Uh, a lot of people get that kind of sideways. It's like, oh, okay, I should buy this, you know, brand new, fancy Tesla, Porsche, whatever, uh, car. And it'd be my business vehicle because of the tax breaks that doesn't it fly like that doesn't justify spending a ton of money on anything.
Speaker 1 00:22:53 Uh, you should not like buy things because of the tax breaks, but for things you already do, or that are already a part of your business, um, or that you can consider part of your business, that is a, you know, easy single double, you know, you might as well, it's more like not doing it is making, you know, an error that's gonna hurt you. So I'll throw out a few examples of some of these. These are gonna be big time dependent on what the sit, what the setup is for you. Before I go through these, I would, this is a, when you have this kind of income, this is pro probably one of the best times if you're not already working with an accountant to hire one. Um, and one of the first questions for them needs to be like, what are these for me?
Speaker 1 00:23:41 Like, let's talk about all the possible, uh, deductions for my business. Uh, what should I be writing off? Or what could I be writing off? Or, you know, how does this work and that work? And so, you know, that's, that's definitely where you can get a little bit more specific to your circumstances. Talk to your accountant about your specific situation, always for this. So business expenses, some of the common examples, you know, may be you spend time in your home, you know, doing work on it or, you know, setting up appointments or scheduling things or whatever. Uh, so home office, you can deduct a portion of your home expenses and consider them home office expenses, car like travel. So when you travel from one location to another, it has to be business placed to business place, there's mileage deduction, or you can deduct part of your vehicle expenses.
Speaker 1 00:24:30 A lot of people, uh, get confused about the car thing. They're like, okay, I'm gonna buy the car in my business and then I'm gonna use it still, how I was before, like mostly personal, but partly business. And I'm gonna deduct all of it. It doesn't work that away. You can, they, they allow you to deduct based on the percentage of it that you use for your business. So if you're using a car a hundred percent for your business, you know, that's a, you can deduct a hundred percent of the expenses and you can either deduct the expense of the car or you can deduct a flat mileage rate. So, you know, that's something to keep in mind also like any of the education, you know, continuing education and related expenses. So, so all this tax stuff can get a little gray. So this is where it can get gray.
Speaker 1 00:25:14 Like maybe you go to a conference in Hawaii and spend 15 days there and deduct the entire cost of everything as a business expense, because it was a conference for your continuing education. That's pushing it like to the extreme, that's probably, you know, not, that's definitely not, unless you were doing business the entire time and everything related to it was for the purposes of your business. Most cases that's not true. So the key with that example, when you're talking about education and deducting, that is, is whether or not it was, uh, part of business. So if you're, you know, hanging out or you decide to go ski or something, that's not a business expense typically, but like definitely the continuing education aspect and some of the cost around that, you know, at least a portion of it can be a deduction. And then there's all kinds of other little things like basically.
Speaker 1 00:26:11 So, you know, computers, if you use a computer for your business, your cell phone, um, I think the gist of it would be if you have that income source, I would just be thinking about all the possible things that could be a deduction and then talk to your accountant and run the, goes by them and ask then on top of that, what are additional things? And I think that would be a good thing. It's not, it's very, very common that people are missing little things here and there I've missed little things here and there, uh, and over the years have learned. So it's a good exercise to, to go through that. If you're in that situation, last big tax break that, uh, often is overlooked would be the work retirement plan, the tax sheltered work retirement plans. So the most common ones are like the 401k slash 4 0 3 B, making sure those are maxed out.
Speaker 1 00:26:58 That's, that's key on top of that, like the 4 57 B can be a tax shelter. We ha we covered this in a prior episode. Uh, can you max out both your 4 0 3 B and 4 57, um, where we talk about like coordinating the two together. So check that out. If you want to understand that more, but for most physicians it's beneficial to make sure you're maximizing at least the 401k and 4 0 3 B um, and employee max is 20,500 per year. And so that's, that's a typically a minimum trying to max that out is, is a good thing, especially if your income is higher. And then on top of that, typically the 4 57 B, especially if it's a, uh, governmental 4 57 can be, can make, makes sense to max out as well. And that's a separate 20,500. The key is making sure that's a governmental plan. And if it's not, you want to be a little more cautious.
Speaker 1 00:27:53 And then on top of that, there's sometimes extra plans like defined benefit or, you know, old school pension plans that it gets a little more complicated in terms of coordinating all these. But, um, I think it's helpful or the gist of it is if, especially if you're higher income, um, making sure you're like maximizing all those plans, like combined is the idea and you wanna, you know, and that's typically a yearly thing is just kind of, and sometimes they can conflict with one and a other, especially if you have multiple employers. Okay. So that, that's the, uh, that's the list. Those are, I, I think the, the five biggest, uh, most overlooked tax breaks, like I said, if, if you're working with us one on one, we'll definitely be regularly bringing these up. We'll make sure you're maxing these out, you know, unless you're refusing to or whatnot.
Speaker 1 00:28:44 Um, you know, we're gonna be on that. If you're doing this yourself, I would encourage you reading up, you know, especially on some of these that were, are a little bit more complicated. If you want us to dig in deeper, we're happy to, I, I enjoy, uh, talking about this stuff. I just wanna make sure it's helpful for you guys. So definitely let me know if you want to go that direction. All right. Hope, uh, hope this is helpful. And, uh, I look forward to talking again next time as always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
[email protected] for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented is believed to be from reliable sources and no representations are made by finance for physicians as to another parties, informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel prior to implementation. If you don't have an advisor or would like a second opinion, feel free to check out our website for recommended advisors.
