Speaker 2 (00:01.9)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money you'll need for retirement and college. I am Ben Utley.
and I'm Nate Rennecke. Today, we are talking about the question of why is physician tax advice so broken? Yes. Ben, we have a problem. And that is that physicians pay a ton of money in taxes, right? When we do, we used to do,
So broken.
Speaker 1 (00:38.54)
budgets where we actually showed them and put it right in their face how much they pay. And I don't know if they really needed that because they kind of already know they pay a ton. Yeah. They got income tax, sales tax, property tax, payroll tax, federal, state, even city and county tax.
Let's not forget a state tax.
Yeah, yeah. As if they hadn't taken enough.
Yeah, when you die, they're still taxing you on the way out.
Right. So this is an issue that physicians have a lot of feelings about and they're negative ones, negative feelings. And we're trying to understand that issue at a deeper level today. Like what is going on? Why can't physicians figure out this tax problem and kind of how do they solve this feeling that they're getting rolled over the coals with the tax code?
Speaker 2 (01:33.486)
Yeah, why is it so painful and so... such a mess, honestly?
Right. And, you know, we talked to several families per week, I would say, that have this feeling that they just pay far too much in taxes. And it's not that they're trying to avoid taxes that they should pay. They just don't want to pay taxes that they don't have to pay. Is that the you have?
Yeah, yeah, it's none of the docs that I talk to want to cheat on their taxes. I'll actually, let me correct that. There are a couple that think they don't want to cheat on their taxes, but what they're talking about is not really legit, but that's a vast minority. But yeah, people that we serve, you know, they do want to pay their taxes, but they just don't want to pay more than they have to.
So Ben, what stands in the way of physicians being more comfortable with their taxes?
first thing I think is that the tax code is super complicated. I heard one time it's, can still see the picture in my head, even though I don't remember the statistic. It was like, if you printed out the whole tax code and you piled it up, it would be like,
Speaker 2 (02:43.79)
Oh gosh, like a mile high or something like that. It's gigantic, right? So it's very complicated and admittedly a big chunk of that does not apply directly to physicians, but you can bet that easily 10 % of it does. And that would still be a whole lot of pages. I think that's kind of the first reason. What do you see as the answer to that question?
Well, the part that is confusing to me, I won't answer it directly, let's say, but the part that's confusing to me is we hire people to deal with this. Physicians have CPAs.
Yeah.
Yeah, even I have a CPA. Yeah. Yeah. I I don't like to deal with it myself. Yeah.
Right, but so if they have a CPA that does their taxes every year and we talk to them, they say, yeah, the CPA is fine, you know, they do their job, then what's all the fuss? Why do they feel like they're missing out on tax breaks?
Speaker 2 (03:35.084)
Yeah, I think there's a feeling that there is some magic secret tax thing out there that, everybody's missing out on. And, you know, it's, it's easy to see what you do have. It's really hard to see what you don't have. It's almost like you need a list of all the stuff that you can do. So can go down the list and check the boxes off. And without that list, you know, you're, always going to wonder if you're missing out on something. And of course, even if you had the list, things change like
to the outtest.
Speaker 2 (04:05.004)
regularly every time Congress meets the tax code gets updated. So they're constantly messing with the system. It's hard to feel confident that you're getting all the tax breaks that you really deserve.
Mm-hmm. Yeah, I get that that I hear the sort of short-changed I feel short-changed or I feel frustrated and Kind of stupid about my taxes that
Just
Speaker 2 (04:29.582)
It's overwhelming. so, you it's like, you're tempted to just like hand it off here, take, take this and, do it. But, you know, we're still hearing from clients and prospective clients about how frustrated they are by that because they're, they're handing it off to a tax preparer and they're still not getting the results that they want. They're still paying too much in taxes and they still have this nagging feeling that I'm missing out on something. And I'm not sure it's a, it's, it's like the tax preparers just, it's almost like they don't care.
I know they're caring people, you know, but it's just like the impression that people are coming to me with is, you know, my CPA is like not doing anything about this. And when I talk to them, nothing's happening.
Yeah. And, know, I hear struggle in physicians' voices when they speak about this because they sort of feel almost guilty for asking for breaks. Like, hey, is there anything I can do? I know I should pay my fair share. They have to give me that whole introduction into why they want breaks. But the reality is that physicians really do not get treated very fair with a tax code.
No, they don't. mean, if we think about it, there are 300 plus million Americans and there are only a million doctors. So Congress knows that only one out of 300 voters is a physician. And the tax code is written for the average person because the average person votes. And so when we get new tax breaks and benefits and deductions and stuff like that, it's typically geared toward the middle class, which is really interesting because the middle class in many cases cannot afford
to do the things that cause those tax breaks like contribute to retirement accounts and in some cases contribute to college accounts. it's kind of a perverse system that unto itself is broken.
Speaker 1 (06:21.546)
Right. Yeah. So, I just want to make it really clear to the listeners that we believe you should get the most out of your tax break. obviously pay your fair share, but we're, you know, we believe around here that you, pay more than your fair share. So the question is how can, how can we make this less complicated and how can physicians feel good about what they're doing? And, and
Absolutely.
Speaker 1 (06:50.156)
The answer is not tax preparation.
It's not.
Yeah, we've kind of been digging into this over the last probably 12 18 months really getting down to what is going on like why do these people have physicians have CPAs but still feel ignorant and about taxes and feel like they're not getting their fair shake. So tell me like how does this go?
Okay, well, I think part of the problem, and I'm going to get to a three-step here in just a second, but part of the problem is that when a physician looks at their taxes, they're typically looking at a big bill and it's in April. So, you know, this year, 2022's bill will be due in April of 2023, but the tax year runs from January 1st to December 31st of 2022.
And so if you're going to do something that's going to impact the bill that you get in April, you're going to have to do it back in the prior year. You're going to have to do it basically between the beginning of the year and the end of the year. So this podcast is going to be released in 2023. So, you know, basically you, your tax clock started on January 1, your tax clock ends on December 31st of this year. And if you want to have a hope of paying less taxes next year,
Speaker 2 (08:07.416)
then you have to have a plan and you have to take action during this calendar year, right? And if you only focus on your taxes during the time when you get your tax bill, then there's nothing you can do. It's kind of like stopping smoking after you've got, you know, some advanced form of cancer. It's like the time to do that is earlier. It's preventative medicine is what I would say. So that brings me to kind of the three, I don't know, I'll just call them the three tax things. Okay.
So the three tax things that people think of when they think about taxes is first is tax preparation. Second is tax planning or projecting and the third is tax strategy. Okay? So tax preparation. That's where you get stuff in the mail that has numbers on it.
and you take that stuff and you turn around and you hand it to TurboTax or you hand it to your tax preparer and they take those numbers and they put them on a form, they give it back to you, you sign it and you pay the bill. So they're basically preparing your invoice to the IRS. That's really all that is. That's tax prep and you know, tax prep can run anywhere between 300 and $700. And the chances are really good that the person that you're talking to about that tax preparation,
did not actually prepare the return. Particularly if you're talking with a partner in an accounting practice or something like that, there's no way they do those things. They might review the returns, but they're not putting the data in.
So this is like a CPA firm you're talking about.
Speaker 2 (09:41.198)
Yeah, it could be a CPA firm. could be an enrolled agent, which is somebody who's licensed to discuss taxes before the IRS. I mean, in our country, anybody can do a tax return, but not anyone can represent a tax preparer before the IRS. So, you know, that requires an enrolled agency where they're enrolled with the IRS, or it requires a CPA designation or some other designation that basically is recognized by the IRS so that can, so that person can represent the taxpayer before them.
Okay, so that's that's tax prep. Basically, they take your numbers off your paper, they put it on their paper, you sign it and you write a big check. Second piece of people want is tax projection. All right. So tax projection is essentially answering the question, how much tax am I going to owe? And how do I minimize the penalty?
All right? Typically we get tax projections in the fourth quarter, particularly for business owners who may have had a wild ride in terms of the amount of income that they're going to have throughout the year. You estimate the amount of money you're going to make for the whole year. And then they estimate the taxes that are due on that. And they, they help you pay the rest of the bills so that you avoid a penalty. Okay. So, so far we've gotten these two things and neither one of those has actually helped us to avoid taxes. Only one of them actually helps us to avoid a penalty.
But none of that is tax reduction, tax abatement. know, there's nothing in there that's going to basically get us the thing that we really want. The thing that we really want is a way to pay our fair share of taxes and not a nickel more. And that's what I call tax strategy. So tax strategy is looking at your finances carefully, looking at it through a tax lens and asking the question, what moves can I make now?
during the calendar year that will cause me to pay less taxes in April and or pay less taxes over the course of the rest of my life. That's tax strategy. So you might think, okay, well, if I've got all three of these, then why is tax advice for physicians so broken? And the answer is you've really only got one of these. Typically, I'd say
Speaker 2 (11:59.702)
Almost every physician has one of these. They have tax preparation, either they're doing it themselves or they have somebody doing it for them. Of those, I would say there's maybe 10 % that have the second piece, the tax projection, and a vanishingly small portion of the population has tax strategy.
Right.
Right, yeah, and the tax projection, people might ask if it doesn't help me, then why? Obviously to avoid penalties. It literally helps physicians just feel better, like prepare a little bit better. Right. And when we speak with physicians, think that those, they think that's all there is because nobody has sort of stripped us down to these sort of sections of tax stuff, like you said.
that is really available to them. And once we break it down for them, they start to ask the question, why doesn't my CPA do this for me? Why don't they do all three for me? And why for it, they say.
Yeah, exactly. Why, why isn't my, my CPA or my tax preparer, why aren't they doing tax strategy? Okay. And I'll tell you why. Uh, I asked this same question to a very close friend of mine who's a certified public accountant. I'm like, Hey, we're thinking about, know, about doing this for our clients. Why is it that you guys don't do this? And he basically explained it this way. He said, look, the tax preparation business is a gravy train. He said, we sent out an organizer.
Speaker 2 (13:29.102)
client show, put their paperwork every year. We do the paperwork, we bill them, they pay it, rinse, repeat. And because we don't actually do the work ourselves, we usually hand that down. It's a, it's a moneymaker for us. And they said, why would we disturb that gravy train? Because when it's time to do tax strategy, we have to gather information that's not easily documented on a W-2, a 1099 or a K-1.
like contributions to retirement plans, contributions to college funds, things that don't have a corresponding document. We have to know a lot more about the client. And even then we don't find a lot of tax breaks, but all that takes a lot of time and our time is valuable and it's partner level time. So we have to bill for it. And if we come up empty handed, we're still providing a bill. And so the end result is that that physician is facing a bill for no value.
And that destroys the gravy train because they're going to leave and move on. Right. That is, that is the big why, that the tax strategy doesn't, doesn't work out. that's part of why physician tax advice is so broken.
Right. Yeah. And it's just more complicated. You know, it's not looking back and looking at a set of rules and applying a set of data to that set of rules. It's like being creative about people's lives that are different and trying to determine if there's any savings. We know there are some savings, but it's this fear potentially from CPAs that they won't be able to find something and yet they still have to send out this expensive bill. So that's right.
You know, even the projections is like, have to ask for it. And so really it's just.
Speaker 2 (15:14.124)
And that's an on top fee. It's not part of regular old tax prep. Do you find somebody that's proactive enough to do these things? It costs a fortune.
Yep.
Speaker 1 (15:23.534)
That's what I was just thinking. mean, when I see these bills for projections, it's as much or more than the prep.
Yep. You have to do the math at some point and ask the question like, you know, if, if, if they find a $5,000 tax benefit, but I pay $5,000 to get it, like what difference does it make? And if I pay $5,000 in tax prep or tax strategy and I don't get $5,000 worth of benefit, then I'm just lost. Right. So there's a, there's a big gap there.
Yeah, and I want to be real clear because you did mention this but just emphasize this point tax strategy It is for the future 12 months. It's also for you know, the rest of your life These the CPA you're speaking with won't be around for the rest of your life
That's right.
Speaker 2 (16:16.51)
Right, it's true.
There's looking backwards and that's fine. But if you want to really get the most out of your tax bill, let's say your lifetime tax bill, then you would look forward beyond just the next 12 months and frantically be filing your taxes and trying to lower your bill by a few thousand dollars every year.
Right. Hey, I have a, I have a perfect example of this. Okay. I'd like to share. Okay. So I'm sure that our listeners are familiar with the backdoor Roth. it's too long to go into on this podcast, but suffice it to say that with the backdoor Roth, you get no immediate tax break. The backdoor Roth will not lower your tax bill this year. Okay. in fact, sometimes when you set up the backdoor Roth, you might actually pay taxes this year. So.
Many CPAs will look at a physician and they'll say, you can't contribute to an IRA. And that's half of the truth. The real truth is you can't contribute to an IRA and get a tax break. And the unspoken part of that is, so why bother? Okay. Gosh, easily half of the physicians that I serve, when they come in the door, they're, they're getting some version of that. The reality of it is that anyone with earned income, including children can contribute to an IRA.
But physicians cannot deduct their contribution and therefore many CPAs are like, bother with it? Okay. But when you contribute to a traditional IRA and you convert that to a backdoor Roth and that money grows tax free forever. And that minimizes your future tax bill and it's worth hundreds of thousands of dollars in taxes that you simply don't pay because you're using the tax code as it is designed to be used. I mean, this is something that we see in the journal of surprisingly
Speaker 2 (18:05.454)
accounting, journal of accounting documents this. So that's a case of having a myopic tax strategy, which only focuses on today's savings, right? And of course the time to do that set up and conversion is during the tax year. So when you find out about it later in the year, you know, it can be too late.
Right. And when you find out about it later in the year and you're staring at a big tax bill and then your CPA says, hey, by the way, while you're having to pay this big bill, can you also put six, $12,000 in these IRAs? Yeah. Not the time.
Yeah, it's not the time. mean, even though you can, you can contribute after you file or up until the time that you file, it's still like who's, who's got an extra 12 or $14,000 to contribute when you're being faced with like a 50, 60, $80,000 tax bill.
Right, right. And so go ahead. This strategy part is a long-term game and you probably aren't getting help from your CPAs, but there is help out there and maybe you could talk about that for a little bit.
Yeah, so when you and I did our kind of our tax savings project where we looked through a lot of our clients and we asked the question, how can they save taxes? The answer that we came up with was the answer that's been staring at us, you know, since you and I both became certified financial planners, the tax breaks that are available to physicians are almost exclusively available through savings programs, savings like retirement and savings like college.
Speaker 2 (19:43.99)
And so, you you remember when we did this, we both said, gosh, you know, we don't need a specific separate tax savings module. What we need is a checklist. And what we need to do is make sure that we wrap this into planning for retirement and planning for college, because that's really where it all is. And it also goes further to explain why tax strategy is not done by CPAs because they're constantly looking backward. You know, they're recording history in its most favorable light, whereas a planner is looking forward.
in terms of ways to save and ways to improve things. So it's a natural part of the forward-looking planning process. And so we just formalized that and wrapped it into retirement and college planning. anybody can do this. mean, you know, there's all kinds of information on the internet about like tax breaks that apply to 401ks and backdoor Ross and cash balance plans. mean, you know, these things exist on the web, but you know, there is some digging that has to happen.
to get those things out.
Right. It seems like that digging is met with a ton of information. Yeah. And it's not really that the information is not available. It's that there's too much information.
Yeah, right. So sometimes it's not worded correctly and it's hard to know like, this for me?
Speaker 1 (21:04.768)
Right. And so we do this every year. We're checklist people. Yes. So we have checklists every year that either grows or shrinks based on the tax code and, and, and when we're preparing for college retirement. But, we actually have a document that is available to people who are not, clients and, where is, where can they get that? It's the overtax doctor's guide to retirement 20, 23.
and
Speaker 2 (21:33.112)
the overtax doctor's guide to retirement 2023. It's freshly updated as of January 1 to reflect all the juicy goodness that's available for people that are preparing for retirement. It's got some things in there that you might expect, but it's also got some things in there that you might not have expected. It has some things in there that you might have overlooked. It also has some things that people kind of yawn at a little bit.
but we've made it obvious how big the tax savings are. And they're bigger than even I had expected before I began to run the numbers, right? So like backdoor Roth IRA is a good idea, but I had no idea how good an idea that is, how big an impact it could make. So I ran out the numbers and actually included that in the guide. I guess the other great thing about the guide is it's a FOMO killer.
You can get that guide and look through the checklist. There's about a dozen different ways in there that a person can reduce their tax bill or avoid tax mistakes while they're saving for retirement. And you can go down that list and check every single one of those boxes and know that that is absolutely everything that you can do to save taxes while you're saving for retirement. so clients who want that can just ask us for it. It's free for clients. Everyone else it's available on the website.
specifically in our, in our store, which we call the programs. So if you go to the website and you click on programs, you'll find it there. The other way to find it really easy is to go to physicianfamily.com slash go physicianfamily.com slash go there. You'll find the overtax doctors guide to retirement, 2023.
and all the other programs that we offer. It's also a place where can sign up for the newsletter, which is free. And occasionally we include coupon codes or gimmies in there that will help you get access to our programs at lower cost or for a waived fee. Yeah. So I guess I'll wrap up by saying that,
Speaker 1 (23:20.982)
Perfect.
Speaker 2 (23:26.69)
that the feeling of FOMO, the suffering that goes with bad tax advice or no tax advice is purely optional. You can pick up our guide, you can sit down with your tax person and have an eyeball to eyeball conversation with them and tell them that you want them to be proactive. Or you can hit the blogs or hit the IRS website and dig in. But again, it is possible for you to legitimately pay.
only the taxes that you're supposed to and sleep well at night, knowing that you've done the best that you can for your family. And, know, every dollar that you save in taxes is a dollar you don't have to earn. And the time that you don't spend earning, you can spend with your family. You can spend taking care of yourself on the treadmill, maybe relaxing a little bit on the beach if you ever get that opportunity, or just feeling better about going to work, knowing that every dollar that you make is going to go to a good place as you save everything you need for college and retirement. So that's the end of our show today.
Thanks to everyone who has reached out to us and asked questions. You can reach to us at podcast at physicianfamily.com. If you have a question and you'd like for us to air your question on the show, please call us at 503-308-8733. That's the answer line. So you call in, you say, Hey, this is Ben from Oregon, and I'm a psychiatrist, and I have a question about whatever it is. Okay. And if we feature your, your
your question on the show, we might send you something really cool. again, that number is 503-308-8733. Thanks for listening to the Physician Family Financial Advisors Podcast.
Thank you for listening to the Physician Family Financial Advisors Podcast. Is there a question you would like answered on our next show? Go to PhysicianFamily.com to record your question. While you're there, sign up for our newsletter and gain access to tools you can use to turn worries about taxes, investing, and extra money into a lifelong feeling of financial security. That's PhysicianFamily.com.
