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October 2010


by Andrew D. Schwartz, CPA

Ninety days and counting until the 2001 Tax Act sunsets.  Expect tax rates across the board to increase on January 1st unless new tax rules are enacted.  Congress recently warned us, however, that they will not even take up extending the current tax rules into 2011 until after the November mid-term elections.  Here is what you can expect for 2011 tax rates assuming Congress isn't able to provide President Obama with a Tax Act by the end of the year:

  • The 10% tax bracket disappears reinstating the 15% rate as the lowest tax rate.

  • The 25% tax rate jumps to 28%.

  • The 28% tax rate jumps to 31%.

  • The 33% tax rate jumps to 36%.

  • And the 35% tax rate jumps to 39.6%.

As you can see, while the lowest rate increases by 5% and the top rate increases by 4.6%, the three other brackets increase by 3% each.  Since the 10% bracket is quite small, and the top bracket only affects taxpayers earning more than $400k, most people should see their federal income tax burden increase by about 3% of their taxable income assuming Congress lets the current tax rules expire.  For each $100k of taxable income, therefore, expect to pay $3k more in federal income taxes.

 The Pre-2011 AMT

Ever since the 2001 Tax Act was enacted, the Alternative Minimum Tax (AMT) increased the federal tax burden for many middle-income and high-income taxpayers.  Remember, each year, you need to calculate your taxes two different ways - the regular way, and then again under the AMT rules. Whichever tax is higher is the tax you pay.  

Based on our database of clients, more than half of our married couples who filed joint returns ended up paying the AMT last year.  Plus, married couples who paid the AMT paid an amount equal to 2.2% of their taxable income for this secondary tax.  For single individuals hit by the AMT, they ended up paying a federal tax premium equal to 1.8% of their taxable income.

The Raw Data

To prepare for this article, I researched the AMT paid by my firm's individual tax clients per their 2009 federal income tax returns.  Here is what I learned:

Married Couples:

Due to a variety of factors, the AMT affects the majority of tax returns prepared for my firm's married clients.

  • Out of the 1,489 tax returns my office prepared for married couples filing jointly, 847 of those clients, or 57%, were hit by the AMT.

  • All but a few of our married clients whose Adjusted Gross Income (AGI) fell between $210k and $615k paid the AMT.

  • If a couple paid the AMT, the AMT exceeded their regular tax calculation by an average of 2.2% of their taxable income.

  • Not one married couple with AGI in excess of $1 million paid the AMT.

Check out the scatter graph below showing the AMT paid by all 1,489 of our "Married Filing Joint" clients as compared to their AGI.  Notice that there are very few data points showing zero dollars of AMT between $200k and $600k of AGI.

Scatter Chart Comparing AMT with AGI for Married Couples

Single Individuals:

Based on the tax returns prepared by my office, the AMT does not seem to affect Single Taxpayers nearly as much as Married Couples.

  • Out of the 719 tax returns my office prepared for Single individuals, 133 of these clients, or 18.5%, were hit by the AMT.

  • All but a handful of these clients whose AGI fell between $210k and $360k paid the AMT.

  • If a single person paid the AMT, the AMT exceeded his or her regular tax by 1.8%.

Other Filers

For our other clients, 100% of our Head of Household clients with AGI in excess of $135k and 100% of our Married Filing Separately clients with AGI in excess of $100k paid the AMT.

The Silver Lining

The very unpopular AMT might actually absorb the impact of much of the impending tax hike for many taxpayers.   Remember, anyone paying the AMT will not see any increase in their federal tax liability due to the 3% rate increase until their AMT liability is fully erased.  Since our database of clients showed that married couples hit by the AMT are already paying on average a tax premium of 2.2% of their taxable income, they should see their tax burden increase by less than 1% of their taxable income.  Single individuals, due to the fact that affected taxpayers paid an average of 1.8% of their taxable income in additional AMT, should still only feel a 1.2% tax increase on the 3% rate increase.

Plus, reaching the point where middle income taxpayers are no longer hit by the AMT means taxpayers can once again benefit by some good old-fashioned tax planning.  We'll keep an eye on changes that Congress makes to the regular tax rules and to the AMT later this fall to help you figure out how to best plan for the remainder of 2010 as well as for 2011 and beyond.

Or A Dark Cloud

Before crowning the AMT as the savior to middle-income taxpayers, the AMT is currently a dark cloud over everyone's 2010 taxes.  Just as in prior years, Congress has not yet passed an extension to the AMT rules that minimize its impact for millions of middle-income taxpayers.  The last time this was a potentially huge issue was back in 2007, and Congress wasn't able to pass their annual AMT relief until December 19th of that year.  Had Congress not acted, the number of taxpayers paying this tax was expected to jump six-fold - from 4 million in 2006 to 23 million in 2007.

Check out these two articles from a few years back to learn about this potential tax mess that could affect millions of taxpayers if Congress isn't able to once again extend AMT relief through the end of this year.



by Andrew D. Schwartz, CPA

Most states are dealing with high unemployment, decreasing tax revenues, and substantial budget shortfall.  How better to address these three challenges than by hiring more revenue agents?  Just be careful that you're not the one who gets stuck single-handedly paying a chunk of the salaries for these new agents. 

In addition to staffing up their revenue departments, states have also increased their "data mining" capabilities.  By having sophisticated computer programs comb through driver license info, voter registrations, employment rolls, real estate transfers, and a variety of other databases, state governments are systematically trying to locate every person who might be subject to their state's income taxes.  A few years back, a state tax expert in Massachusetts warned me and the other attendees of a state tax seminar to expect to see a significant rise in the number of notices and inquiries sent to taxpayers due specifically to expanded data mining efforts.

Check out these real life examples that demonstrate what our clients have been dealing with so far this year:

  • California withdrew more than $40k from a client's business account to pay for what California deemed as reasonable withholding and unemployment taxes, even though this client had a loss on his business for the past few years and has not been able to take any salary. 
  • New York sent notices to two of my clients assessing more than $80k in taxes, interest, and penalties due to non-filing of a state income tax return, even though both clients moved out of New York prior to the year in question, and properly filed a tax return with their resident state for that year. 
  • New York sent another business client a bill assessing a $10k penalty because his corporation recently started to pay an employee who worked abroad but had a New York residence.  Evidently, this client's insurance carrier did not report to New York State that my client had purchased Workers' Compensation insurance that covered employees within New York (even though this employee would not be working within New York).
  • Massachusetts is auditing one of my clients over an issue for which the IRS had previously audited, and would not accept the "No Change Letter" that the IRS had provided me from this audit. 
  • Massachusetts is forcing another client to pay Massachusetts taxes on a portion of their income since this retired couple maintained a bank account with the address of a vacation home within Massachusetts that they still own, even though they live outside of Mass for more than six months a year and each have a driver licenses from their home state. 

While we are in the process of getting each of these items resolved on behalf of our clients, all this activity clearly shows that the states are increasing their tax compliance, assessing, and collection efforts.  By doing so, not only do they raise more money for their state, but they also put more people to work.  While I'm not opposed to seeing unemployment rates decrease, I find reducing unemployment by each state staffing up with new revenue agents to be quite disconcerting.



by Lawrence B. Keller, CLU, ChFC, CFP

Not long ago, if you did not purchase your disability insurance as a Resident or Fellow, you could potentially be “penalized” by having your benefits limited when purchasing an individual policy.  Now, due to enhanced special limits, within certain insurance companies, for “New In Practice Physicians” this is no longer the case. 

Enhanced Special Limits for “New In Practice” Physicians

You were probably told that you should purchase your disability policy prior to the completion of your residency or fellowship training for a variety of different reasons.  While some insurance agents may tell potential clients that if they wait, their policies will cost more after graduation, this is simply not true (the exception being if there is a discount program available at your teaching hospital that will not be available to you after graduation).

Rates increasing based on your age or potential adverse changes in your health not being taken into consideration, the most compelling reason to purchase a policy prior to graduation is related to what is known in the insurance industry as “Issue & Participation” (I&P) limits.  These limits simply relate to the total amount of disability insurance coverage that the insurance company will allow you to have in relation to your earned income.  After all, if they allowed you to purchase an amount of coverage in excess of your earnings, they may in fact be providing you with an incentive to claim benefits on your policy.

While insurance companies, generally, do not take the amount of disability insurance provided to you while you are in residency or fellowship, if you graduate and your new employer provides you with coverage, it will be taken into consideration in determining the amount of individual coverage available to you.  This essentially meant that by deferring the purchase of a policy until after graduation, you might find that you are eligible to purchase less coverage as an Attending (earning 4-5 times the income) than you could have purchased under the special limits available to Residents and Fellows.

A Case Study

Dr. Smith will be completing his General Surgery Residency and entering private practice.  His starting salary will be $200,000 and his employer will be providing him with disability insurance that covers 60% of his salary with a maximum monthly benefit of $10,000.  Therefore, Dr. Smith would collect $10,000 per month in the event of his disability. 

Unfortunately, the group Long-Term Disability (LTD) insurance is mandatory and Dr. Smith cannot “waive” or “opt out” of the coverage being provided – even if he desired.  Dr. Smith then decides to look into purchasing an individual policy to supplement his employer’s plan.  Using the Issue & Participation Chart from a well-know insurance company, Dr. Smith’s agent tells him that he can purchase a policy with a monthly benefit of only $2,670, just more than half the amount he could have purchased as a Resident or Fellow (in most cases, $5,000 per month is available regardless of actual income). 

Additionally, as the Future Increase Option (FIO) Rider is typically a multiple of the base policy’s benefit, he can no longer reach this specific insurance company’s issue limit of $16,000 month, regardless of his health, as his income rises.  Instead, he is limited to a maximum of $8,010 month ($2,670 base plus a $5,340 FIO Rider); again about half the amount he could have had the ability to reach had he purchased his policy as a Resident or Fellow.  Obviously, this can cause a major problem if he leaves his current employer or if his employer’s Long-Term Disability policy is canceled and he is no longer healthy.

Too Good to be True?

As of this writing, two companies will allow “New in Practice” physicians (up to 12 or 24 months after graduation, depending upon the specific carrier)  to purchase coverage based on the limits made available to their medical specialty (up to $7,500 month), regardless of their earned incomes or other employer provided coverage. 

What this means, is that although Dr. Smith, under normal circumstances, would be limited to purchasing a policy with a monthly benefit of $2,670, he could now purchase as much as $6,500 month, as a General Surgeon, with a Future Increase Option Rider of $9,500.  Thus, the availability of these enhanced special limits have essentially negated the “penalty” that would have normally been imposed for deferring the purchase of his disability insurance policy until he completed his medical training.


While I am not suggesting that any physician defer the purchase of disability insurance until the completion of their medical training, in the event that they did, the enhanced special limits provide “New In Practice Physicians” with an exceptional window of opportunity to purchase a proper amount of individual disability insurance coverage.  It is best to consult with an insurance agent or financial planner that specializes in working with physicians as they will be familiar with which companies are best suited to your individual situation and those that make enhanced special limits available to beginning professionals.

Lawrence B. Keller, CLU, ChFC, CFP is the founder of Physician Financial Services, a New York- based firm specializing in income protection and wealth accumulation strategies for physicians.  He can be reached for questions or comments at (516) 677-6211 or by email to



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2009 & 2010 TAX FACTS

  • For 2009 and 2010, the standard deduction for a single individual is $5,700 and for a married couple is $11,400. 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 2009 and 2010, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2009 and 2010.
  • The standard mileage rate is $.50 per business mile as of January 1, 2010, down from $.55 per mile for 2009.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2010.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2011 to make your 2010 IRA contributions. 


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This Month's Topics

The "AMT" Could Cushion Blow Of Pending Tax Hikes

Watch Out! The States Have Stepped Up Their Auditing And Collecting Efforts

Special Disability Insurance Limits For “New In Practice” Physicians: Let The Good Times Roll

The FICA Refund for Medical Residents 

2009 & 2010 Tax Facts

Tax and Financial Planning Calendar for October 2010


Browse our index of previous months' newsletter topics

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In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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