By: Michael Scott
Life as a traveling physician can be taxing. So can the accumulation of taxable earnings from a steady diet of locums assignments.
While at three hospitals and a community health center, I had the occasion to welcome and onboard a number of locums physicians. One frequent topic of conversation was the ongoing nightmare that many doctors faced compliments of the continuously changing tax landscape.
I recently had the pleasure of interviewing tax authority and Rich Dad Tax Advisor Tom Wheelwright in order to capture some insights for keeping these issues in check. Tom is the author of Tax Free Wealth, a book that offers an ocean of ideas for creating business and personal tax favorability. He is also the CEO of Provision Wealth, a firm which assists small businesses and entrepreneurs in creating a strategy for long-term, sustainable wealth.
Check out our discussion below for his thoughts on how to keep more of your earnings:
Tom, what type of tax breaks should traveling physicians be keeping top-of-mind as they move from assignment to assignment?
Tax breaks associated with travel away from home would be number one. If the assignment is out of town (from the physician's home) then it may be possible to deduct all of the travel and living expenses while away. In addition automobile expense should be deductible for in-town assignments so long as the physician has a qualified home office.
What do physicians who receive both W-2 and 1009 pay need to know in terms of tax ramifications?
Generally, tax reduction opportunities are much greater with 1099 income than with W-2 income. However, if you're not careful, the 1099 income can be taxed even higher than the W-2 income. A good tax strategy for 1099 income developed in collaboration with an expert tax advisor is essential to long-term, permanent tax reduction.
There's been a lot of talk in the media about the status of contractors in terms of how they are being classified (1099 vs W-2). Where is all of this headed?
There's been a big effort recently by the states and Federal government (IRS) to push more people into the W-2 classification. Traveling physicians should do all they can to make sure they are independent contractors (1099) due to the much greater tax benefits of owning a business (1099) versus being an employee (W-2). This is especially true under the ACA since contractors can now readily get affordable insurance through the Exchange.
Are there any particular wealth-building strategies that physicians tend to generally overlook?
Physicians tend to defer their income through profit-sharing and 401(k) or SEP plans. This limits their investments to the stock market (generally) and ensures that you will pay high-income taxes when they retire. Instead, a wealth and tax strategy where you invest in better assets (e.g., private offerings of real estate or private equity) and take advantage of the many opportunities for permanent tax savings would enable higher returns and lower taxes both now and at retirement.
What about real estate tax strategies for physicians who may have homes in other states?
The biggest opportunity will be for travel away from home. This requires some very good tax planning and can result in homes other than their primary home being fully deductible along with your meals and other living expenses.
Can you give us your perspectives on all of the chatter around comprehensive tax reform and how this might impact physicians?
Simplification of the tax law is unlikely in our lifetime and is not particularly beneficial. The tax law is a series of incentives for active investors and business owners. A traveling physician who is an independent contractor effectively owns their own business. Use of the many incentives in the tax law for business owners could be very beneficial for the traveling physician.
In the end, a tremendous amount of political will would need to be present in order to overhaul the tax law. This is why I think it's very unlikely to happen. Simplification would mean that a lot of incentives would disappear in favor of lower tax rates. Not necessarily a bad idea - there would just be a lot of winners and an equal number of losers. Like all of us, physicians hate to lose tax benefits.
Tom Wheelwright is the CEO of Provision Wealth. His website is http://taxfreewealthadvisor.com
About the author: Michael Scott is a Denver-based journalist and former healthcare leader focusing on the intersection between free markets and economic freedom. His active discussion forum on Twitter can be found @biz_michael.