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August 29th, 2016
Many doctors are so busy managing the patient side of their practice, they end up neglecting the financial elements of their business. Others are distrustful of financial advisors, while some are just complacent about their finances.
Regardless of the reason, not being on top of your practice’s finances can lead to costly errors that damage your long-term financial situation and create a much higher tax bill than you would have otherwise.
So, what are the biggest tax mistakes doctors commonly make – and how can you ensure you don’t make them?
Being high-income earners, doctors can easily fall into the trap of living beyond their means. Whether it’s credit card debt or paying back your student loan, poor debt management habits can quickly become a significant problem.
Repayments take away from both your day to day income and savings, as does any extra interest acquired. This can constrain your investment strategy and affect your retirement nest egg, ultimately reducing your ability to build wealth. Most of all, you’ll suffer from a poor tax outcome because you’re unable to make the most of tax-effective investments that grow your wealth and reduce your tax bill over the long term. There are strategies which assist you in converting non-deductible (bad) debt into tax deductible (good) debt.
If you’re suffering from poor debt management, you need to act – now! Sit down and devise a realistic plan that will see you from making monthly repayments to making monthly savings instead. If you’re unsure how to do this, enlist the services of a financial advisor who will be sure to help you get back on track.
Earning a high income can lure some doctors into a false sense of security. While most people have four decades to save for retirement, physicians – due to the time it takes to complete medical school – have around three decades. An ideal saving ratio might be 20% to 25% of your total income if you intend to retire at 65, and this ideally should be combined with a smart superannuation and tax strategy that involves maximising super contributions for the best possible tax outcome.
Doctors often neglect superannuation because they’re commonly self-employed and therefore aren’t mandated to make contributions. This means some doctors start making large contributions to their super much too late. When done right, your super strategy helps you realise your retirement goals and saves you a considerable amount at tax time each year.
All doctors can benefit from working with the right financial advisor – even young doctors with fewer investments and assets. One common mistake doctors make is retaining a financial advisor when the doctor’s financial situation and practice – and therefore tax planning requirements – have outgrown their financial advisor’s experience.
Financial and accounting generalists may lack the knowledge and skills to deal with concepts such as Medicare fees and out-of-pocket gaps, along with the many complexities associated with running a medical practice. This can potentially mean you get stuck with a larger tax bill.
On the other hand, medical financial specialists are very knowledgeable about the nuances of allowable deductions for doctors and medical specialists. They will also know more about tax-effective structures for doctors such as service and investment trusts.
Tax is one of the most complex areas for individuals with investments and retirement strategies, yet many doctors lack a defined tax strategy. Some doctors, for example, are content when see their net pre-tax income, and fail to realise that their after-tax position can be dramatically improved with smart tax planning.
Lowering your tax bill can involve implementing a smarter investment strategy and maximising your superannuation contributions. A smart tax strategy takes into account every facet of your finances; given the complexity involved, it’s best set out with the help of an accountant or financial advisor.
Having plenty of disposable income means some doctors are drawn to high-risk schemes which promise high returns and high tax savings. What all medical professionals should do is identify their risk tolerance levels – a financial professional can assist with this – and manage their investments accordingly, preferably focusing on lower-risk investments. By investing in alignment with your risk-tolerance level, you’ll be able to generate stable income and minimise your tax deductions.
Tax regulations are changing all the time, and for doctors with their own practices or with many income-generating assets, tax returns can be a minefield. Despite this, some doctors are still tempted to prepare their own tax return. Yet without specialist knowledge you can miss out on opportunities for large tax savings! Your tax return should ideally be completed by a financial advisor or tax specialist with niche knowledge about the medical industry.
Some doctors – especially those who prepare their own returns – will neglect to claim small deductions. However these can add up to large tax savings over the course of the financial year. Remember, you can claim a deduction on everything from hiring an accountant to professional membership fees.
Other smaller deductions not to forget about include work-related car expenses and even home-office expenses. Often it’s just a matter of the implementing the right record-keeping processes to generate accurate deduction amounts for these items; work with your accountant or financial advisor to ensure you’re getting the most out of your tax deductions.