Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. 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 today's episode. What's up, everyone. Hope you're having a great day. I am excited to talk about some of the big changes. It seems like all kinds of stuff it's changing right now. Tax wise, student loan wise. There's a lot of stuff. It's kind of a wild economy to condoms, really just weird right now. And there's a lot of unique stuff going on. So I wanted to talk about mainly two things today. Number one is the student loan change that has already happened. The PSLF waiver, which we covered more in depth a couple episodes ago, but I wanted to hit on some of the things that we're seeing and kind of remind you guys of the big points there.
Speaker 1 00:01:05 And then number two, I wanted to talk about the proposed changes to the tax laws. Now this one is not set in stone. It's just kind of, what is the proposal at the moment? Uh, it's looking more and more likely that it will happen, but it has, it is not final at all. So I just wanted to talk through what that is looking like at the, at the moment. And ideally, uh, you can kind of come away there knowing what potential strategies are in play and, and come, you know, be able to, to take that into advantage in your situation. So without further ado, we're, we're going to jump into that and then talk through those today. Okay. So number one, the PSLF waiver reason I wanted to bring this up again was it's such it's. It seems like as we're starting to talk to people, this is a pretty big benefit and it's going to affect a lot of people.
Speaker 1 00:01:55 Uh, so I wanted to, uh, just hit the high points, really, if you want to hear, uh, and understand the details, you can check out our episode, a couple shows back where we go over the PSLF waiver in more depth, but today I'm going to hit the high points. So number one, who does it affect? So if you currently work at a nonprofit or if you have in the past, really even worked at a nonprofit for, you know, especially if you've worked at a nonprofit for 10 years, or if it's less than that, maybe you plan to go back at a nonprofit back to a nonprofit in the future. So any of you that have currently work at a nonprofit or that had a good amount of time at a nonprofit, especially 10 years plus, and that have federal student loans, that's the group that's potentially benefiting from this PSLF waiver.
Speaker 1 00:02:48 So what I'm finding is there's a lot of people that, uh, are currently working for nonprofit hospitals that have always been in the nonprofit set up, maybe, you know, most people in training were in non-profit hospitals, and then they, maybe they went out into practice and just started working for a hospital. Most hospitals are nonprofit and, um, they had loan federal loans, but were, they were never qualified, uh, all along, you know, FFL loans, don't qualify for PSLF and it was just not on their radar. And now this is, this PSLF waiver has happened and they're now immediately eligible. So that crowd is adding, you know, the biggest, uh, potential benefits, uh, the crowd that was w was kind of doing everything right, all along, except they didn't have the right type of loans any way, anybody in that nonprofit up that it still has federal student loans.
Speaker 1 00:03:46 I definitely strongly encouraged, like taking a hard look at that. If you want to reach out to us, we can help look at that. As you know, if you work with us, definitely reach out to us about that. We definitely want to take a hard look at that, make sure we understand what it's looking like and make sure you're maximizing this benefit. There are a few action items you have to take. And that brings me to the second point. So second point is if you're in that situation, when in doubt, definitely take these steps. If you're working with us, reach out we'll, we'll let you know if you need to take them, but the steps you need to take, if you potentially qualify for this. So number one, make sure that your loans are direct federal loans. So a lot of loans, federal loans, especially the older ones are F F E L loans.
Speaker 1 00:04:32 You have to make sure they are turned into direct loans and the way you do this as a direct consolidation. So that's the first thing. Second thing is you have to make sure all your prior employment is certified or verified for the entire period, uh, under consideration. So that requires, uh, you know, completing a form or having your prior employer sign off on a form and getting that done. So those are the two things you have to do. I would encourage getting on this fast, like, you know, ASAP, I have a feeling there'll be a little bit of a rush to do this. And I think the servicers are going to be the loan servicers. You're going to have a lot to keep up with on this. So I would definitely encourage getting on this. So as I mentioned, check out the episode from a couple shows back to get more details on this, uh, also feel free to reach out to us.
Speaker 1 00:05:22 So the second big thing, I want to talk about big, lots of big tax changes pending here as I'm recording this it's October 22nd, 2021. And, uh, they've released the details of the proposed plan. The Democrats have control, but they have to get every single vote and it's not going to be like, there's still some negotiating to happen. Uh, and they, you know, it's not going to be as easy to get every single vote, but it is looking likely that something will happen. And there's a, there's a good chance. A lot of things in this proposal will happen. Maybe not everything, maybe some of the things will get tweaked, but you know, it's looking like a lot of this stuff is, uh, you know, potentially going to change, but it's with any of these things, it's not set in stone. So we're going to have to wait and wait and see, hopefully if they're going to change it, hopefully it happens sooner than later, but I wouldn't be surprised if it gets dragged out, you know, towards the end of the year.
Speaker 1 00:06:23 Hopefully it's not like new year's Eve, but you never know. So first big change that is pending is an increase to the tax brackets. So this is for just normal income. Like ordinary income is what they call it, but just like money you make from working in a job. And so we have tax brackets. So the tax practice, basically the more you make the higher percentage of that dollar, you pay on taxes. And so at this point, there's no change for people making below 400,000, if you're single or four 50, if you're married, filing jointly. So if you're below that threshold of a taxable income, it's not affecting, there's no changes at this point. Now, if you're above this, it depends. You're definitely looking at increases, but, um, for people with a, uh, for married filing jointly people with taxable income in that four 50 to six 28,000 range, you're looking at a 4.6% increase on what it was before.
Speaker 1 00:07:27 So you might be wondering like, what was it before? So in the four 50, like the current tax brackets for married filing jointly are 35% tax bracket for four 18 and change to 6 28 and change that bracket still is going to say around, but it just gets cut off at four 50. So really what they're doing is they're just saying starting at four 50, we're increasing taxes. So from four 50 to six, 28,000, it's going to go up 4.6% to 39.6%. And so, whereas it used to be 35%. So what does that, what's, what's an example. How does that affect me? So let's say for example, you make, you're married, filing jointly. Your taxable income is 550,000 a year. So in, you know, 20, 21 tax world, if we're comparing that to this proposed 20, 22 tax world, you're looking at like around a $4,600 increase in taxes, just based on this tax change.
Speaker 1 00:08:32 And that's an annual, you know, tax change, uh, annual increase. Now, if your income is above 6 28 for married filing jointly, you're gonna see, uh, about a 2.6% increase on the income above 6 28. So you're still gonna, it's going to kind of like bump up and then down a little bit. And so, you know, not, not quite as big of a increase, but you're still gonna have to pay, you know, the 4.6% everyone has to pay that makes above four 50. So that's how progressive taxes work, anybody that makes, if you make a million dollars a year, um, you have to pay that higher 4.6% higher rate that 39.6% rate on the income above 450,000, you're going to have to pay that it's going to be 4.6% higher up to 6 28, and then starting at 6 28, it's going to be 2.6% higher. So everybody still has to pay that higher 4.6% rate if you're above four 50, uh, and making a really, really high income.
Speaker 1 00:09:41 But that increase rate just goes down a little bit when you hit that 6 28 threshold. So, uh, in other words, uh, it's going up, it's just going up at a slightly lower rate when you're above that 6 28 level. So at the end of the day, if you're in that high income range, you know, it's like I said, it's looking likely. So you might be thinking about maybe, you know, it really depends on if you have flat, uh, flexibility in this sort of thing. Like if you own a business, you know, or if you can do like, um, retirement plan contributions, or if you have, you know, some expenses that you can take on, uh, you know, like a business business owners have the most flexibility in this type of stuff, those are the things you would be, you could be thinking about, uh, you know, as you know, maybe you want to, so the gist of it is maybe you want to think about accelerating income into 2021 because it's looking more and more likely that it's going to be taxed at a higher rate, uh, in 2022.
Speaker 1 00:10:52 So if you're say for example, you're making 550,000 a year, and you're a business owner. Maybe you want to push some of that income into 2021 while the tax brackets are lower. And then in exchange, that's going to lower your tax. You pay in 2022. So because of these changes, it's kind of like increasing the incentive to accelerate income in 2021. If you have that choice. And then on top of it, it's going to increase the incentive to maximize deductions in 2022. So good example there, if you are, um, you know, if you give charitably and say, you're gonna, you'd like to give at the end of the year and you're in this kind of sweets. Well, it's not very sweet. Isn't, you know, sour spot of potential, big increases. Maybe you want to, instead of doing your big charitable gift in December 15th, you might want to give January 1st, 2022, because you're going to be in a 4.6% higher rate.
Speaker 1 00:12:00 So if you give a hundred thousand just round numbers, that's going to, you know, and, and you were in that sweet spot by giving it in 2022, you're going to save 4.6% or $4,600 on that a hundred thousand dollars gift. So those are the types of things. It'll also increase the appeal of a pre-tax 401k in 2022. So pre-tax, or, you know, things that lower your income will become more appealing, the higher they raise taxes. So those kinds of things will be strategies to be thinking about as this stuff, hopefully shakes out. Well, I mean, you know, maybe they don't even pass anything. I guess that's a possibility as well, but it's, like I said, it's looking more and more likely second thing that's on the docket to potentially change is capital gains tax rates are increasing not as much as they originally proposed, but, um, at this point, uh, the, you know, sticking with those 404 50,000 levels.
Speaker 1 00:12:59 So for a married filing jointly, it's looking at this point like, um, you know, when your income exceeds 450,000, but is below around 500,000, your, uh, capital gains tax rates. And that is the tax you pay on like selling an investment like a stock or, um, even real estate. So the rate, the tax rate that you pay when your income is in that four 50 to 500,000 range is set to increase by 10% in 2022. And then if you're above 500,000, it's set to increase by 5%. So basically it's going to be a little bit more expensive tax wise to sell capital gain assets in 2022 than it was in 2021 or whatever body was talking about in, in, um, in the tax world. Uh, initially when they knew this was potentially coming is, well, maybe we want to, uh, accelerate, uh, capital gains before this happens.
Speaker 1 00:14:10 So let's say you have an investment account that you've had for a long time and it's worth $2 million. And the amount that you have, uh, the total amount you've put in is a hundred thousand. So it's got a hundred thousand, or I'm sorry, a million. So let's say it's worth 2 million. You put in 1 million. So you're in that scenario, your capital gain that has not yet been realized as a million dollars. So if you have a lot of growth in some assets that have not yet been taxed and you see this type of thing coming, maybe you're going to be like, oh, well, shoot. I'll just, as soon as they pass this tax law, I'm going to like sell it, take the, I'll take the lower capital gains tax rate. Now, before it goes up, you know, five to 10%. So also in the proposal, they included this provision that if you sold capital assets, there's a few kind of qualifiers for this.
Speaker 1 00:15:04 But if you basically, if you intentionally sell assets to incur capital gains after I think it was September 13th, 2021, sometime in September, then they would be disqualified and treated under the 20, 22 tax laws. So basically they're like retroactively pulling it back to the date of the PR the formal proposal to avoid having a bunch of people take big capital gains tax hits intentionally to kind of work around this. So that is a, you know, I guess that's a downside, you know, uh, if you have big capital assets, that's a bad, definitely bad news. But on the other hand, if you let's say you're in, um, training, uh, or, uh, early you're you're in your first year in practice, like half year, this year, and your income is expected to go up next year or in the future, but it hasn't yet. And let's say you have investments that have capital gains in them.
Speaker 1 00:16:07 This might be 2021 might be like the, a fantastic year to kind of go ahead and take those capital gains, uh, before the end of the year, um, or before, uh, your income tax bracket goes up, um, because the way these brackets work. So going back to that 404 50,000 threshold, nothing's changing if you're below that threshold. So if your income is below that these capital gains taxes are not going to, uh, increase. And in certain cases, if your income is low enough, you're not paying any capital gains. So many of you in training. So if your income is below 80,000, the capital gains tax rate is, and it is set to continue to be 0%. So if you have these assets now, when your income is low and you expect it to be high in the future, could be a home run opportunity to go ahead and take capital gains.
Speaker 1 00:17:06 And that's more just because income is below that 400 to four 50 threshold. Also, I think so starting in 2022, assuming this all passes, I think it's going to increase, um, you know, the potential benefits of tax loss, harvesting, or deferring gains on capital assets. Like basically everybody's gonna, you know, be wanting to, are trying to defer or avoid taking capital assets when your income is below, above that 400 to four 50 threshold. So if you are in that situation or expect to be above that for 400 to four 50 threshold, you definitely want to pay close attention, you know, to those capital gains assets and, you know, have a plan for minimizing taxation on them, especially. So that's going to become especially important starting in 2022. Okay. So a couple more changes on the docket. If, so this is for, um, business owners. I think a lot of, um, independent contractor physicians, uh, are, are set up as an escort.
Speaker 1 00:18:15 And then a lot of small practices are as well. So escorts, if you're taxed as an S-corp, they're S there's, the proposal includes a tax increase for the profit part. So when you're an S-corp, you pay yourself a salary, a reasonable salary, and then there's profit in the business. And if you're the owner, you're going to get the profit as well at this under the current tax law there, you're not charged, uh, outside of just the normal ordinary income tax rates, uh, but in the new proposed tax law there, um, proposing adding the net investment income tax, which is something that they already a tax on for investment income when your income is high. So if you're in the S-corp setup and your income is in that 400 to 500,000 range, you're potentially going to start having to pay tax this net investment income, or in NY in it tax on that S Corp profit.
Speaker 1 00:19:16 So basically it's decreasing the benefits of having an S-corp or increase increases the taxes on S-corp business owners. So that's, you know, definitely if you're an S Corp, you want to check that out. We have, my business is a, one of my businesses is set up as an S-corp. So it's definitely on the radar. Another change proposed, probably not, uh, you know, a lot of, not a lot of people on this, uh, uh, listening to this, uh, would be affected by this, but I'm sure a handful of people are so for ultra high income right now, they have it at 5 million, but I could see them playing with that number, but right now, ultra high income is going to have an additional 3% tax on top of everything else. So that's going to really make their tax rates high. And the last big thing I wanted to mention it's on the, um, docket here is, uh, the backdoor Roth IRA.
Speaker 1 00:20:10 Uh, so this, I think this is affecting a lot of people we work with, basically they are, uh, proposing that starting in 2022, that there's no more Roth conversions on after tax dollars. So basically what that translates to is you can't do a backdoor Roth IRA or a mega backdoor Roth IRA. So that's kind of where you do it, the back door to raw thing on a 401k. So by disallowing Roth conversions on after-tax dollars, that's effectively killing the backdoor Roth. So that's a pretty big deal. If you're doing that adds, it's a definitely a nice tax way to tax shelter your dollars. So, you know, we'll see what shakes out, but I would, uh, really think about, you know, if you do these and you do it every year, I would really think about trying to get all steps of that process, the backdoor Roth process done before the end of the calendar year 2021, because there's a chance, you know, tax wise, you can fund the IRAs until you do tax return, the following, you know, so in 2021, you're doing, you can do your tax return, April 15th, 2022, but there's a chance that they have passed this and you can't effectively do the backdoor Roth if you're trying to do it at, you know, in the last minute there.
Speaker 1 00:21:38 So I would really think about if you're, if you normally do these, get it done before the end of the calendar year of possible. Um, if you're working with us, definitely reach out to us and, uh, let's make sure you have, you know, even if you plan to fund it, let's make sure there's like a good plan to try to knock that out if possible. The other part about this, uh they're right now, they're talking about getting rid of any Roth conversions for people above a certain income level. So, uh, the first thing I mentioned was the backdoor Roth that's for after tax dollars, but there's also Roth conversions for pre-tax dollars, which can be beneficial when you're in a lower tax bracket. The proposal is saying they're going to get rid of after, of, of, of Roth conversions for people above the 400 to four 50 threshold, which is not quite as big of a deal because the real big benefits of the Roth conversion, uh, occur like the lower your income.
Speaker 1 00:22:37 So when you're in training or income is low, that's where Roth conversions, you know, generally make the most sense, especially when you expect income in the future to be high. So it's not a huge deal, but if you are a really, really high income and you are like a excellent saver, so, you know, say you're in the higher six figures and you save a lot in a lot of cases, that situation, the Roth conversion makes a lot of sense. Uh, but they're gonna, it's looking like they're gonna take it away. There's, there's a little, there's some phase out stuff, uh, that they've proposed. We'll have to see how that shakes out, but, you know, at this point it's not looking good for the Roth conversion for high income. So I think those are the big things. Um, hopefully we get a little bit more, um, information on this, or my opinion, if they're gonna do something, I would prefer them to get it done as fast as possible.
Speaker 1 00:23:32 So we can, like I said, know, what's coming down. Uh, so we'll keep an eye on it. And as we start to see get more information, we'll definitely let you guys know. And as I mentioned, if you have questions on any of these things, if you have questions on the PSLF front, the PSLF waiver, definitely check out the show from a couple shows back on that. And if you have anything on the tax stuff, definitely reach out for questions and we'll, we'll do our best to cover that in a future episode, hope everyone, uh, has a great day today and a hope, hope these tax changes are beneficial to you or not too painful for you. And at worst, we will do our best to kind of strategize and help you kind of make the best of what ultimately ends up happening as always. Thank you so much for joining us today.
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