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MONTHLY TAX NEWSLETTER

May 2008

WERE YOU SURPRISED ON APRIL 15TH?

by Andrew D. Schwartz, CPA

Boy is the tax code complicated.  Does the complex set of rules cause you to be surprised by the amount of money you end up paying or getting back on your taxes each year?

The biggest culprit is the reconciliation process known as the Form 1040.  Each winter, you tally up all of your various sources of income from the prior year, then claim your allowable deductions against that income to determine your taxable income.  Based on that figure, you calculate your regular tax liability and your alternative minimum tax liability, and pay whichever one is higher.

Here's where many CPA offices take on the feel of a high-stakes casino.  If the amount of taxes paid in during the year through withholdings and estimates exceed your tax liability, you feel like a winner.  When your total tax bill dwarfs the payments you made during the year; sorry, dealer has twenty-one.

Here are some of the common causes of an April 15th surprise:

Misleading Withholding Tables:

Let's start by admitting that the withholding tables do not work so well.  It's not uncommon for highly compensated taxpayers to have only W-2 income and either owe the IRS five figures or get a substantial refund.

The W-4 form appears to be easy enough to complete.  Simply check whether you're single or married, and jot down the number of "allowances" you want to claim.  Presumably, you claim an allowance for you, your spouse, each of your kids, your mortgage, and any other sizeable deduction you can claim.  The problem is that with each additional allowance, less taxes are withheld, even though your tax liability might not change by all that much due to the Alternative Minimum Tax or a variety of other factors.

A second problem is that each employer withholds taxes as if they are your only employer.  Work for multiple employers during the year, and there is a good chance that you'll find yourself underwithheld.  (However, if your total earnings exceed $102k during 2008 and you work for more than one employer, you'll end up with excess FICA taxes withheld which counts as additional federal taxes paid in.)

If you're married, watch out, since the withholding tables assume your spouse doesn't work.  For that reason, a married couple comprised of two working spouses may find themselves to be underwithheld by 6% or more on their total wages.  On $300k of combined income, that translates into a shortfall of $18,000!  I surprised more than a few well compensated couples with the news that they owe more than $10k in taxes, even though their only income was W-2 wages, and they were confident that they completed their W-4 forms correctly.

The IRS is well aware that the W-4 form can be quite misleading.  For help completing the W-4 form correctly, check out the IRS' Online Withholding Calculator.

Not All Breaks Are Equal:

Not all tax breaks are created equal.  Certain changes to your financial or personal situation generally guarantee a big April 15th surprise.  Get married or buy a home during the year, and chances are good that you have no idea how your taxes will end up that year.

Other tax breaks that seem to indicate a substantial savings don't end up impacting your tax situation much at all.  Believe it or not, having a baby or sending a child to college saves you very little in taxes unless your income is relatively modest.

What if you take full advantage of a retirement savings plan offered by your employer?  While money contributed into the plan through salary deferrals saves you taxes, your employer reduces the taxes withheld from your pay by an equivalent amount since the withholding tables are based on your taxable earnings instead of your gross earnings.  So even though maxing out your salary deferrals is one of the best tax shelters available to you during your working years, you will generally not see much of a change to your refund or balance due by doing so.

Delayed Reaction:

Another contributing factor to a big tax surprise is the fact that even though you make the bulk of your tax planning decisions during the year, you don't see the impact of those decisions until you prepare your returns the following winter.  When you finally work through your paperwork and realize there is an issue to address, the next year is already one-quarter done, leaving you just nine months to make any necessary adjustments.  And then, if you forget to make a second set of adjustments the following January, you'll find yourself with another April 15th surprise when you prepare your taxes for that year.

Besides setting the rates for your withholdings and estimates, another common example is paying for a child's dependent care expenses with pre-tax dollars through your employer's flexible spending account.  While this strategy generally makes a lot of sense, it backfires if your spouse has no earned income during the year. 

Lets say you paid for $5,000 of childcare expenses with pre-tax dollars through your employer's FSA, but your spouse didn't earn any income during the year.  When you prepare your taxes, you'll need to add that $5k back to your taxable wages, increasing your federal tax bill by up to 1,750, with no accompanying withholding.  And then, since you most likely sign up for your benefits annually during November, once you realize this pitfall, it's too late to undo the election for the current tax year.

Good Intentions + Complex Rules = April 15th Surprise:

Which of these goals did you set last month?

  • Minimize your tax burden

  • Adjust your withholdings

  • Maximize your contributions to tax-advantaged savings opportunities

With the April 15th deadline still a not-too-distant memory, invest some time now to make those adjustments necessary to avoid a big tax surprise next April.

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ARTICLES POSTED LAST MAY

Last May, we posted the following interesting and informative articles that are still relevant in 2008:

Please note that these articles have not been updated since originally being posted.

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5 REASONS DOCTORS LOSE MONEY ON THEIR FIRST EMPLOYMENT CONTRACT

by Gerry Oginski, Esq.

If you’re like most people, you’re thrilled at being offered a job, and the untold riches that await you if you work really hard. You’ve been given assurances, promises, guarantees, pats on the back, maybe even a few ‘atta-boy’ congratulations. But when all the celebrations quiet down, it’s time to read the fine print. Here are 5 reasons doctors lose money on their first contract: 

1. They don't have an experienced lawyer evaluate their contract.  Do not entrust your physician employment contract to your local general practitioner. While there are some similarities to general contracts and physician contracts, you should have an attorney who has extensive experience reviewing physician contracts. There are more differences than similarities and an experienced lawyer will be able to spot them and correct them before they cause harm. You wouldn't want a family practitioner performing coronary artery bypass surgery on you unless that physician has had years of training and fellowship in that field of medicine. The same holds true for lawyers.

2. A young doctor is money conscious and is afraid to spend money to hire a lawyer.  The common thinking is that if they can save a few dollars by not having to pay a lawyer, then they're ahead of the game. Wrong. That's what you call 'penny-wise and pound foolish'. By spending money for a good lawyer now you will be protecting yourself for years to come knowing that you have fought for everything you can possibly get in your contract. Remember, your contract will guide you for many years. If you make mistakes at the beginning by not knowing and not being an informed consumer, you will regret it for years to come. Believe me, I've seen physicians kick themselves for not having their contracts reviewed by an experienced lawyer before signing it.

3. The young doctor is afraid to make waves with his new group or hospital.  You've just been hired. "You got the job!" But, once you see the contract you realize that all is not rosy. However, with good counsel, you can learn to negotiate, and you can have your lawyer be the bad guy and negotiate for you.  It never hurts to say, "My lawyer felt this was inappropriate...", "My lawyer advised me to have this re-worded...","My lawyer felt this was unfair and needs to be removed." Let your lawyer be the bad guy. Do you think the groups' lawyer is looking out for your interests? Never.

4. The group wants to give you as little as possible.  You have little to compare your contract to. All you know is that when you leave residency you'll be making a tremendous jump in salary as an attending physician. That's good, but that's only part of the equation. You need to know much more. How do you learn more? By reading books written by attorneys who have experience in this area. Learn all you can about your contract and physician employment contracts. Have your attorney give you a crash course on contracts and negotiation. I guarantee you it'll be the best money you ever spend. An experienced lawyer should know what the going rate is for your specialty in your geographic area. He (or she) should know whether the other benefits you're getting are consistent with other competing groups. You must ask lots of questions. 

5. The young doctor fails to do research about the group or hospital he is joining.  This is vital. You must investigate your group. Ask your colleagues about their reputation, their ethics, their surgical or non-surgical abilities. Speak to members who have left the group if possible. The more information you have about the group, the better informed you'll be, and you'll be able to make judgment calls knowing full well what your options are.

CONCLUSION

Be informed, do your research, read your contract, and then hire an experienced contract lawyer who specializes in doctor's contracts.

Gerry Oginski is an experienced New York trial attorney with extensive experience evaluating and negotiating physician employment contracts. Gerry lectures often to residents and physicians in practice about how to evaluate their employment contracts, and realized a few years ago that many doctors were not learning about what to look for in their employment contracts during their training.

Seeing an important need, Gerry wrote a book for doctors called THE DOCTOR'S EMPLOYMENT CONTRACT BIBLE, which helps physicians understand their employment contracts. Learn more about Gerry's book and how it  can help you at www.mdcontract.com.  Don't take Gerry's word for how useful and informative this book is, take a look at his website to see what your colleagues have to say about his book and his valuable services. Gerry can be reached at  516-487-8207.

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TAX AND FINANCIAL PLANNING CALENDAR FOR MAY, 2008

Month

Income Taxes

Saving and Investing

 

 

May

  • Good time to make semi-annual donation of clothing and household items to charitable organizations
  • If you participate in the NIH LRP, contact one of the MDTAXES CPAs to help you get back any additional taxes owed to you by the NIH
  • Before summer kicks in, take a look at your asset allocation of all your retirement and non-retirement accounts, and consider rebalancing your accounts.

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2007 & 2008 TAX FACTS

  • For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $102,000 for 2008, up from $97,500 in 2007.
  • The standard mileage rate is $.485 per business mile for 2007, increasing to $.505 per mile in 2008.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2007 and 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $4,000 for 2007, increasing to $5,000 in 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2008 to make your 2007 IRA contributions. 

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This Month's Topics

Were You Surprised On April 15?

Interesting and Informative Articles Posted Last May

5 Reasons Doctors Lose Money On Their First Employment Contract

The FICA Refund for Medical Residents 

2007 & 2008 Tax Facts

Tax and Financial Planning Calendar for May 2008

 

NEWSLETTER ARCHIVES
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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Copyright 2008 The MDTAXES Network by CPANiche, LLC    Email us at  info@cpaniche.com