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White Coat Investor Podcast
WCI #459: Financial Strategies Every Physician Needs: Taxes, Retirement, and Real Estate
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This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. This is White Coat Investor podcast number 459, brought to you by Laurel Road for Doctors. Laurel Road is committed to serving the financial needs of doctors, including helping you get the home of your dreams. Lower Road's Physician Mortgage is a home loan exclusively for physicians and dentists, featuring up to 100% financing on loans of $1 million or less. These loans have fewer restrictions than conventional mortgages and recognize the lender's trust in medical professionals, creditworthiness and earning potential. For terms and conditions, please visit www.l Laurelroad.com WCI that's www.l Laurelroad.com wci. Lower Road is a brand of KeyBank NA and an equal housing lender, NMLS number 399797. All right, welcome back to the podcast. We're excited to have you. The White Coat Investor community wants you to be successful, wants you to be successful in your career, in your finances, with your family, in your relationships, et cetera. Burnout is a problem in medicine. We want to help you crush it. And one of the best ways to crush it is to have your financial ducks in a row. If you're, if you can have your finances taken care of, you'd be surprised just how much you can do to crush burnout in your career. It might be changing jobs, it might be cutting back, it might be less call, it might be just being able to tell an administrator to shove it because you don't need the money. And you have the ability to make changes in your workplace that not only impact your life, but impact those of your coworkers and your patients. So while we are trying to become your source for all things financial, we're trying to help you become financially literate and financially disciplined and connect you with those resources you might need. Let's not forget that we're really focused on something far more important than just your money. That said, we still gotta teach you about money. So for you students out there, it's time to do our Live Money masterclass aimed at students. What medical students need to know about money. You can sign up for this@whitecoatinvestor.com MoneyMasterclass I'm going to be here with Andrew Paulson. The reason I'm bringing Andrew is because he knows more than anybody else on the planet on how to manage medical school loans. And so we're going to be presenting on everything you need to know as a medical or dental student, et cetera, financially speaking. Okay. And we're also going to be giving away five fire your financial advisor student version courses for those who attend this webinar. Live this webinar. If you're listening to this, the day the podcast drops is today. It's at 6pm tonight. So if you're listening to this and it's 6:15, switch over to the webinar. You can listen to this podcast later, but again, you can sign up for that whitecodinvestor.com moneymasterclass okay, if you're listening to this, after today, maybe we can get you a recording of that if you still sign up or something like that. I want to make sure those out there interested in coming to the Physician Wellness and Financial Literacy Conference know that you've only got one more day to get the $200 off that. Okay? So tomorrow, if you're listening to this, the day the podcast dropped is the last day to get $200 off your in person registration. So this drops on the 19th. The 20th of February is the last day to get that $200 discount. Use Vegas200 when registering@Whitecoatinvestor.com WCICON to register for that. You don't want to miss this year's conference. It runs March 25th through 28th and it's going to be awesome. Yes, the JW Marriott Hotel is sold out because so many of you are coming, but we've got one just down the street that's a very nice place to stay and it's still going to be a wonderful conference for you, even if you're not sleeping in the same building in which you're doing all the activities. It's literally a 10 minute walk from the venue and the exercise is probably good for you. It'll be good for your wellness. And come on, this is Vegas in March. It's not like it's going to be steaming hot or freezing cold or anything. It's going to be a nice walk. So book your hotel now before it sells out too. Of course, if you can't come in person, that's okay. We'd still like to have you participate. You can come virtually virtual is obviously cheaper. It's much cheaper for us to put it on when we don't have to feed you and, and all those sorts of stuff during it as well. But you get all the content and the content is awesome. We've got dozens of great speakers and we're going to have a good time, even virtually. And of course you get the lifetime access to all the content later, just like you would if you were coming in person. You can sign up for all of that@whitecoatinvestor.com WCICON that code again is Vegas200. Okay, I got to do some corrections and clarifications. Whatever you want to call them, let's make sure this show is accurate. So when I screw something up, send us an email to editorwhitecoatinvestor.com, we'll get it fixed. I do screw things up from time to time, mostly because we're not afraid to get into the weeds on this podcast, and the more detail you get into, the more likely you are to get something wrong. But I got an email saying I just listened to podcast number 451. You discussed the new option in the TSP to perform in plan Roth conversions. Unfortunately, the TSP has decided that any traditional TSP money that's converted to Roth in the plan will be converted pro rata. And this is what I get for talking about this on the podcast before I wrote a post about it. I've since written a blog post all about the new TSP Roth conversions that'll be out soon. You'll be able to see that. But the bottom line is the TSP is not doing this the way I would have liked them to do it. Which is to have three sub accounts, right? Your tax deferred sub account, your Roth sub account, and your after tax sub account with the tsp. This is the Federal Thrift Savings Plan for those of you who are military members or otherwise federal employees. They only have two of those sub accounts. All your tax exempt money from when you're deployed in the military goes into the tax deferred sub account. And the problem with that is when you do a Roth conversion, you can't just convert the tax exempt money, which is a real bummer. It basically means you can't really do the mega backdoor Roth IRA process with the federal tsp, unless you have wisely chosen not to have any tax deferred money in the tsp, which is probably the right thing for lots of people who have access to the tsp. Military members are either going to get a pension that's going to fill the lower brackets later, or they're going to get out and make a whole bunch more money. And so it can make sense for them to only do Roth money while they're in the military. But if you've got a bunch of tax deferred money in there. Any Roth conversion you do is going to be prorated, so you should be aware of that. They also don't let you convert the entire thing. You got to leave. I think it's. Don't quote me on this. I think it's 500 bucks you got to leave behind in each sub account. So keep that in mind as you go and do Roth conversions. It's nice of the TSP to actually allow them. I mean, the IRS has allowed this for like the last 15 years, and the TSP is just barely getting on board a decade and a half later. It's good that you can do some Roth conversions and maybe these Roth conversions work for you and your situation in the tsp, but don't expect to be able to do the classic mega backdoor Roth IRA process in your tsp. You can still separate the basis when you separate from the military like I did, and convert your tax exempt money to Roth at that point. But you do have to wait until you separate from the military. Okay, second correction. And this is great. This is somebody who left a note. It's an attorney who left a note on the show Notes for a recent podcast, which we talked about cash balance plans and Trusts and the $1 million debate. He says, I'm an Ohio attorney. You erred in describing the Ohio homestead exemption. Ohio added an inflation adjustment, so one cannot simply look at the statute to know the current amount of the homestead exemption. The inflation adjustment is done once every three years and lasts for three years. This period is good for April 1, 2025, through April 1, 2028. The current exemption amount is $182,625 per person. This means that married couples who jointly own a property can protect from creditors double that amount. So I appreciate those corrections. Not necessarily because there's a lot of you that live in Ohio and are really worried about the exact amount of the homestead deduction, but because I'm also going to correct it in the White Coat Investors Asset Protection Book. So that White Coat Investors Guide to Asset Protection, we have all the state laws that have to do with asset protection, and we try to keep that as up to date as we can. We don't call them second editions, we just update it. And so we try to keep that as up to date as we can. And obviously, when you're talking about 15 laws times 50 states, it's a lot of laws to keep up to date. It's never completely up to date, of course, but we're doing the best we can by helping people make wise asset protection decisions. So thank you, attorney Ben Rodriguez, for writing in and correcting that particular mistake. Okay, let's listen to some of your questions and see if we can get them answered.
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B
Hi, Jim, this is Stan Gertler. I was wondering if you could comment about direct indexing using long and short extensions to maximize tax loss harvesting. When is this appropriate and is it ever worth the extra cost? Thanks.
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A
Okay, I guess we're going to start out right on the weeds today. Not only are we going to talk about direct indexing, which is in the weeds to start with, but we're going to talk about long, short strategies while doing direct indexing. So let's step back for a minute and talk about direct indexing. What is direct index indexing? Direct indexing is a process where you're trying to overcome a problem with mutual funds. This is a problem that has always existed with mutual funds since the 1940 Investment Company act that basically established the mutual fund industry. Mutual funds are required by law to pass through any gains that they realize when they're buying and selling the various stocks in the fund. They have to pass through those gains to you as the owner of the mutual fund shares, but they cannot pass through losses to you. It's very unfortunate, but this is the way mutual funds work. They cannot pass through the losses to you. So even if your mutual fund has all kinds of losses from selling shares that have fallen in value, it can't pass those losses through to you to use on your own taxes. So a fund cannot tax loss harvest for you. You must tax loss harvest on your own. Now, you can do that with fund shares or ETF shares. And this is what I've done for the last 20 plus years is when there's a big bear market, you take all the shares you bought with new contributions in the last year or two or three, and you tax loss harvest them, you swap them for another ETF that's very similar, but not, in the words of the irs, substantially identical, and you get a big fat tax loss. And I've been able to acquire all kinds of tax losses over the years by doing this. So, you know, pandemic rolls around in 2020 and I do a bunch of tax loss harvesting and the interest rates go up 4% in 2022. So I do a bunch of tax loss harvesting. And by doing that, I've accumulated seven figures of tax losses over the years. And they're useful, right? You can use $3,000 a year against your ordinary income and you can use an unlimited amount against any, you know, capital gains that you have. So I haven't paid capital gains taxes in a long, long time because I offset them with these capital losses. And they're very useful that way. And when it's easy and cheap to grab some more capital losses, you might as well do so, you know, it's just a little bit of effort and not much expense. And if those losses are useful to you, you might as well grab them. Direct indexing is a method to get more tax losses than you would get by just tax loss harvesting at the fund level. Because what you are doing is not buying an index fund, you are building an index fund. And if you got enough money, you can do this. Instead of buying an s and P500 index fund, you'll literally buy all 500 stocks and you can hire people to do this for you. And it used to be that they would charge you some money to do this, 1% or 2% or whatever. And then it got down to about 0.7%. And more recently with one of our partners, it's down to about 10 basis points. which point maybe it makes sense for you right now that you've gotten it down that cheaply. And so the idea is there's stocks going up and down all the time. There's just a lot more opportunities to tax loss harvest when you own 500 investments than when you own one investment. That's the idea. So you get more tax losses? Yeah, they're still heavily front loaded. Right. You can really only tax loss harvest for the most part, for the first few years after you buy an investment. And after that, the tax losses kind of peter out because everything's appreciated from what it cost when you bought it. Okay, so that's the idea behind direct indexing, is to get more tax losses than you could otherwise get. And who might that be useful for? Well, somebody that expects to realize a lot of capital gains. Maybe you're selling a practice or maybe you're selling a small business. And millions and millions and millions of dollars of capital losses would actually be useful to you. But if you're one of those people, you're like, I'm never going to realize any gains anyway, and I can only use $3,000 a year against my ordinary income. You don't need more tax losses, you don't need to do direct indexing. Okay, so that brings us to the next iteration of this. Oh, and by the way, there are critics of direct indexing as well. Right. They say it's not as Easy as you think to track the index. And that error, that tracking error on the index maybe eats up a lot of the value that a lot of people are getting from those additional losses. So, you know, there are some people that don't think this is a no brainer, even if you need those additional losses, because then you're locked into that investment long term, right? And if they're having trouble tracking the index long term, even if it's only by 10 or 20 basis points a year, that really adds up over 20 or 30 years that you might be holding these investments. Direct indexing, kind of like whole life insurance. If you're going to do it, you probably need to do it the rest of your life, right? Okay, so long, short version of this is you're buying some stocks long and some stocks short, right? You're shorting some of the stocks, you're betting they're going to go down. And by doing this in kind of an equal way, all you're doing is mostly getting that index performance, maybe paying a little more in cost, but getting that index performance and just getting a whole lot more losses. Okay? Because you're getting these stocks long and you're getting them short, you can just get more losses. That's the idea, is you're supercharging the ability to get tax losses. And the downside of doing this is at this point, you're kind of letting the tax tail wag the investment dog. There's just a lot more that can go wrong. More difficulty in tracking the index return you want. I mean, at the end of the day, you don't actually want to lose money. You want good returns. And as you make this more and more complicated, you gotta really ask yourself, do I really need all those losses? Are those really gonna be that beneficial to me to have all these tax losses? And as you move from direct indexing to long, short, direct indexing, I get pretty skeptical. Maybe if you've got a really good use for tax losses, you can convince yourself that it's worth investing this way for the rest of your life. But I'm not entirely convinced. Hope that helps. And hope that trip off into the weeds did not lose everybody else listening to the podcast today. Our quote of the day today comes from John Hope Bryant who said, you can make money two ways, make more or spend less. And I love that quote. One thing you may not realize is spending less is even more powerful than making more. Right? Because when you spend less, you don't have to pay any more in taxes. But when you make more. You do have to pay more in taxes. And for a lot of you out there, your marginal tax rate on an additional dollar of earnings is 35, 45, even 50% plus depending on what state you live in. And so it's not insignificant. You might have to earn $2 in order to have one, whereas if you just spend $1 less, you get that dollar. All right, thanks everybody out there for what you do. Your job is hard. And if no one said thanks today, let me be the first. I appreciate what you're doing. Whether you are an attorney, whether you are a tech worker. Most of you, of course, are doctors. And doctors tend to be people pleasers. We do this because we want to help people. And it's nice to get a thank you every now and then. And it doesn't happen maybe nearly as often as it should. Okay, here's a question from a doc who's interested in buying properties and seeing how that's going to interact with their 1099 income.
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B
Hi, I'm a 1099 physician, and I've heard this from a few other physicians in the same situation. The concept of buying a property every year, essentially, you know, a certain amount of money is either going to go to the IRS or to a property. So they figure that by buying a property, you have the investment opportunity of money that would be leaving your account anyways. This is a relatively historic time in the sense that mortgages have outpaced rents, and many times you're going to be in the red on a monthly basis if you rent it out. Is this still a generally advisable thing to do? Thanks for everything that you do. I've really learned a lot.
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A
Okay. There is so much in that question that we're going to be talking about this one for a while. First of all, the fact that you're paid on a 1099 is essentially irrelevant to the whole rest of the conversation. There is nothing about this that has anything to do with being a 1099 doc, or being a W2 doc, or being a K1 doc, or whatever you want to describe yourself as if you want to be a direct real estate investor, you want to own properties yourself, then you have to buy the properties at some point. And unless you've gotten a big inheritance or won the lottery, you're going to have to buy the properties with money you earn. And you only earn so much money every month, every year. So what that means for most people who are trying to build a portfolio of direct real estate property is you're buying One at a time. And maybe that works out that the amount of money you have to put into real estate each year is enough to buy one property. Maybe you make enough that you can buy two properties or three properties. Or maybe you can only buy a property every couple of years. Okay. The truth is, as you go along, those properties should all have positive cash flow. You need to be buying properties wisely and putting enough down that they all have positive cash flow, but they start contributing to the process over time. So maybe you start out buying a property every three years, and then every two years, and then every one year, and then all of a sudden you're buying a property every few months because not only are you working and earning money, but all those properties you already bought are working and earning money that you can use to buy the next property. Or after you've had them for a while and they've appreciated, maybe you refinance them. So I do a cash out refinance, take some money out, still cash flow positive, but now you've got some additional cash you can use to buy the next property. So it typically accelerates. Right? One property a year would be pathetic. If you've been doing this for 30 years. I'm like, really? You buy one property a year, you've done this 25 times, and you gotta wait another year to buy another property? That doesn't make any sense at all. So the one property a year idea, somebody's clever. I don't know, maybe there's a book titled that or something. Buy one property a year. I don't know. But it doesn't really make sense. I mean, the bottom line is if you want to be a direct real estate investor, you got to get started. And if telling you to buy one property a year gives you the motivation to get started, great. Buy one property a year. Right? But there's nothing magic about one property a year. And I suspect the rate at which people buy properties typically accelerates as they build that little real estate empire. Okay, let's move on to the next part of this question, which is the idea that you can either buy a property a year or you can pay the IRS what you owe them. That's not exactly how it works. Okay, you really need to understand the details of this. All right? That can work for some people, and it works for people who can use depreciation from the property to offset their earned income, whether that earned income was paid on a W2 or a 1099 or a K1 or whatever. There are some very specific rules that Dictate who can do that, who can use a passive loss from depreciating a property against active earned income. Okay. And there's basically two groups of people. The first group are real estate professionals. This is reps status, reps real estate professional status. And typically it's not the 1099 doctor, it's their spouse. Because the requirement to be a real estate professional is twofold. You have to work at least 750 hours in a year in real estate. And I'm not just talking browsing the MLS for properties to buy or reading real estate investing books. I'm talking actually working in real estate. You're a realtor, you're a property manager, you're renovating your own properties, whatever, right? That's like 16 hours a week. It's a part time job. So that's requirement number one. Requirement number two is you have to do that more than all your other professional stuff. Right. So if you're also doctoring, you can't doctor any more than 749 hours. If you're only going to work 750 hours in real estate. This is why it's usually your spouse. Now if you're filing a married filing jointly tax return, it's okay, Your spouse can be the real estate professional, you can be the ENT. Getting paid $800,000 a year and using that extra earnings to buy properties works out very well. It's a nice combination, you know, it's a nice combination to be married to an interventional radiologist as well. Right. But if you're going to be married to somebody in real estate, you might as well take advantage of it. Okay? So if you are a real estate professional or your spouse is, you can use those depreciation losses, those paper losses from your real estate investment that you just bought this year against your earned income. And it's not a one year thing. Right. You can do it the next year as well and then a year after that and year after that. But you tend to not have losses after a while, Right. Because you've depreciated the property and the cash flow has gone up and it, it's now more than the losses you get from depreciation. And so you don't have losses after a while. It tends to be early on in the life of an investment property that you bought that you get these losses and you can actually accelerate them. Right. You can do a cost segregation study and you can, you know, take depreciation a little bit faster on some of the contents of the home. You know, furniture and you know, some of the furnishings and those sorts of things than you can on the home itself. And of course, you can't depreciate the ground it's sitting on. It's only the dwelling that you're depreciating. But the bottom line is it is possible to get a whole bunch of depreciation very quickly, right, in the year you buy a property. And if you have real estate professional status, you can use that to offset your earned income. So it is possible, right, to send them, use the money instead of sending it to the IRS to use to buy a property. Now you're technically deferring those taxes, but if you never sell the property, you're deferring them indefinitely. And so it does work out okay. So the other category besides real estate professional status is what is usually called the short term rental loophole. And so if you are renting out the property for short time periods, I.e. an average occupancy of a week or less, you don't have to do 750 hours. You can get away with as few as a hundred hours of management on properties during the year. And trust me, if you're managing a bunch of short term rentals, you're going to get your hundred hours in and it doesn't have to be more than you do doctoring. And so you could have that property be a short term rental for a year or two or three, and then convert it to a long term rental if you want, and have this actually work where you're using money you would have paid in taxes to buy rental properties. But your life's going to revolve a little bit around this rental property empire that you're building, right? This isn't something that you can just do passively and have no involvement with whatsoever. But it can work this way. Real estate investing can be very tax efficient when you do it properly, but it's going to require some work from you. So I think I've explained the situation in which this can work, but it's not nearly as simple as you might have been led to believe when you listen to the speak pipe question that was left. And I hope I answered your question. Yes, it can work, but read the fine print, right? There's a lot of fine print involved in doing this. And of course you got to be careful not to let the tax tail wag the investment dog. Never buy an investment mostly or primarily for the tax benefits, right? I get it that it's shocking when you become an attending physician and you're now paying more in taxes than you ever even made as a resident or as a fellow. It's shocking and it doesn't feel fair. You just realize that we have a progressive tax system. We. Well, guess what? We have a progressive tax system. The more you earn, the more you pay in taxes. Get used to it. It's a good problem to have. It's not necessarily bad to pay a bunch of money in taxes. I much prefer my life now that I pay a bunch of money in taxes than my life back when I hardly paid any taxes and got deployed to the Middle east every year. Right. I'd much rather pay the taxes. You can have zero taxes if you just don't make any money. Right? Your end all and be all is not to have a low tax bill. The goal is to have the most leftover after you pay the taxes. So don't get caught in that tax trap that so many people do. But yes, real estate investing can be done very tax efficiently, especially if you're willing to be a direct real estate investor. Especially if you or your spouse is a real estate professional or you're willing to build a short term rental empire. I still to this day believe that this is the fastest route out of medicine. If you're 35 years old and you realized you made a mistake going into medicine, this is probably your fastest route out is to start carving out a huge chunk of your medical income and use it to build an empire of short term rental properties. And it's probably the fastest way out, quite honestly. That's reasonably reproducible. But most people that go to medical school actually want to be doctors and don't actually want to be Airbnb hosts. And that's okay too. You're going to be able to build wealth just fine never being a real estate investor, but it's nice to understand exactly how the process works. Okay, speaking of taxes, we've got one of our partners that works with White Coat investors to help reduce their tax bills. A tax strategist. And we're gonna spend a few minutes chatting with them today on the White Coat Investor podcast. We have one of our sponsors, Brian Martin. Brian is the founder and managing partner of Taxtra. Okay. Taxtra stands for tax strategist. And you can find them at taxtra.com or go onto whitecoatinvestor.com Taxtra Brian, welcome to the podcast.
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B
Glad to be here.
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A
Tell us a little bit about why you decided to start this firm and what you do.
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B
So we started taxdra three years ago. We're a firm that specializes in high income earners such as physicians, we do a lot of real estate investors and we do small business owners. So we want to get out there and help them achieve all the tax savings they could get. And obviously one thing that we see is like a lot of tax grabs, just they look at the big tax picture, but they don't always look at just what your ROI is going to be overall. So we look at trying to get you the most income in your pocket and not necessarily always looking for the deductions on everything.
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A
And you're married to a doc, correct?
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B
That's correct. So he's ob gives you a little.
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A
Bit of insight into the unique lives of financial lives, of positions. Anyway.
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B
Yeah, yeah. So I, I've lived it. So we had, we had the financial constraints in the early in life. So you do medical school and residency, so you're delaying your higher income and then you go in and you get hit with this big tax bill all of a sudden. And it's not always as much money take home as what a lot of people think from the outside, what positions take. I mean, your readers and listeners are probably very familiar with this. We have a lot of clients that come over from white coat investors. So they're all very familiar with the challenges that we face in this situation.
- [30:07]
A
Yeah, I'm in the middle of a day recording here where I'm spending about five hours in front of a camera. And my last presentation was to my residency program down in Arizona actually. And one of the things I was pointing out to them was that most of you will have a higher tax bill than your current salary. And that's appalling to new physicians to realize that we have a very progressive tax system and they've hardly been paying anything for the last 30 years of their life and now they're going to make up for it. So it's appalling. And a lot of people just hate paying taxes and even those who don't mind it, you know, don't feel like leaving a tip to the IRS anyway.
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B
Exactly.
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A
We mentioned before we started recording, you know, that there are some typical client profiles and maybe how you might think about each of these as we go through them. So let's go through these one by one. The first one is a single doc that's getting paid on a W2 or a married, you know, dual W2, high income earners where both spouses want to continue working. What kind of, you know, tax strategizing should those folks be thinking about?
- [31:13]
B
Yeah, so one Thing that we really point them to is one of the one assets that you created was that white coat investor waterfall. So we're kind of looking at, first we want to get the free money that you get with your match. And then we look at the different retirement accounts. Like when you're that W2 earner, you're just kind of limited on what you can do. So we really try to focus on retirement accounts. And then if some of our clients are in interested in real estate, we start looking at short term rentals. I know that's something you, you're familiar with and that you, you like as a potential, but there's just a lot of work that goes with them too. So you don't always necessarily have to do short term rentals, but there are a lot of tax benefits with bonus depreciation. And then if you start doing the cost segregation studies on that, that can be some substantial tax savings.
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A
Yeah, being able to use that short term rental loophole to use that depreciation that normally would only shelter, you know, passive income, being able to use that against your active income is awfully powerful when it comes to building wealth. You're absolutely right about that. What about the new. You know, there's SALT changes this year with the obba and I suspect that's affecting a lot of your clients.
- [32:20]
B
It is, and that's one of the big things we're planning about. So for those who don't know, SALT stands for state and local tax. So that's your income tax by state of California or state of Illinois or. And it's your property taxes too. Those are the two primary ones that clients are paying. So before that was capped at $10,000, but recently in the one big beautiful bill, it went up to 40,000. So that's great for most of our clients, but once you start hitting that $500,000 income limit, it starts to phase out at 30% for every dollar you make over 500,000 until it reaches 600,000 when it goes back down to the original cap of 10,000. So we really want to focus on trying to alleviate that for our clients because not only are you getting taxed at a high tax bracket, usually if you're at the 35% bracket there already, and then if you're paying 9% to California or whatever your state income rate is at that point, you also get hit with losing that deduction. So that deduction when it phases out, you lose another 30,000 on that 100,000 income on deductions. And if it's a 35% tax. Like you're paying almost additional 55,000 in tax just on that 100,000 income. So it gets really hairy for a lot of our clients. So we're really trying to like any client that's making between 500 and 600, we're really trying to get them down to under 500 at that point, hopefully.
- [33:41]
A
By things like tax deferred contributions and HSA contributions, those sorts of things, right?
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B
Yep, exactly.
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A
Not necessarily just quit earning money.
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B
No, no. It's a problem to have.
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A
But you know. Okay, so let's move on to kind of the second hypothetical group of clients who married one spouse is earning way more than the other on a W2. Let's talk about some strategies they might be able to use.
- [34:06]
B
Yeah, and that's where we start to look at getting a little more creative. Like obviously we still look at the retirement accounts and everything, but at that point we look at the short term rental loophole, which you can do with the dual income, but maybe not always have the time available. Like my spouse and I, we both work full time and we got nine long term rentals, but we don't do short term rentals because of the time constraints. So you can do the short term rental loophole. We also look at real estate, professional status with guarantee, a lot of same benefits as short term rentals, but you don't have to manage the short term rental. And then the last one we look at is possibly setting up some side businesses for the spouse that's not working or the spouse that is working.
- [34:42]
A
Okay. And then of course, I suspect the biggest category of clients you work with, business owners. These are people that tend to be making enough money that they can see a return on their investment of hiring a tax strategist, but also have lots more options available to them when they're on a 1099. Considering doing an S election and being taxed as an S corp or they're already an S corp. What do you do for those folks?
- [35:10]
B
Yeah, so first we evaluate whether the S Corp election's worth it for them. So we want to see at least 50 to 75,000 in net income. And part of it depends on like if you have another W2 and things like that. So we look at the whole picture to make sure it's worth it for you. You're going to be doing that 1099 gig for longer than a year usually. So if we do the S Corp, there's some things we can do there. Set up the retirement accounts. There's a lot More deductions. We can look at having either your vehicle or accountable plan set up for you, just any expenses that we can put towards the business. But we really want to focus on, like, the deductions that are saving you taxes that aren't, you aren't having to spend extra money on. Because if you're having to spend $100 to save 35 bucks, that's usually not a wise investment, unless you need that. Otherwise.
- [35:55]
A
Yeah. Now, when we start talking about tax strategizing, there are some people out there that are more aggressive than others and get into strategies, or sometimes referred to as audit lottery kind of strategies. You know, we're starting to talk about things like charitable conservation easements, the way people are claiming home offices or their business vehicle use. You know, they're trying to have their business a really heavy vehicle, for instance. Or some of the more outrageous ones I've seen are buying tax credits from native tribes, actually. And I've seen an entire company that revolves everything around hiring your kids and paying your kids and getting money into their Roth accounts. How do you think about some of those more aggressive, controversial tax strategies when it comes to your clients?
- [36:46]
B
Yeah, I mean, it really depends on the strategy. But let's take having your kids in the business, for instance. So that's one that we get a lot of questions on the kids. I always like to ask the client, would you hire someone else's kid to do this job for this amount of pay? So that's kind of, that's kind of the question I like to ask with some of those. And typically, like, if they have an Airbnb and they want to pay their kid $5,000amodel for their B and B, usually the answer is no. So we throw that out. But if they have like a 16 year old that goes over and cleans Airbnb all the time, like that's, that's usually a typical investment that will allow. So as long as they're being paid a reasonable wage, Some of the others, like the vehicle, we want to make sure the business use percentage is there. You're tracking your mileage. Same with home office. We want to make sure it's actually home office and not just your basement that has no business use. So we're just looking at things like that just to make sure in the case you are audited, because sometimes they are random and sometimes they are targeted. And you just want to make sure that you have your ducks in a row. And we make sure that we're comfortable with what we're filing as well.
- [37:46]
A
So if somebody wanted to hire Taxtro, what should they expect to pay?
- [37:50]
B
Yeah, so individual returns, we started 850, so that's kind of our base rate. And then if you want to include some planning, usually somewhere between 1500 to 2000 for an individual return, business returns start at 1200. So usually that's for like a rental partnership with two partners and it goes up from there. And then monthly accounting, we go about $400 a month and then go up from there depending on complexity and number of transactions, things like that.
- [38:13]
A
So if somebody comes to you with 30 K1s and 12 rental properties and wants to start not only strategizing with it, but having you prepare returns, are they going to be up there pushing the five figure amount to do all that?
- [38:27]
B
Yeah, we probably. I mean if your 30k wants 12 rental properties, yeah, you're going to be close to that five figure mark. So obviously everybody's different. So it depends on how many states are involved and things like that. So maybe 8k to 12k somewhere in there.
- [38:40]
A
Okay, if somebody's interested in working with you, what's the best way? Other than going to whitecoatinvestor.com taxtra that's T A X S T R A or going to taxtra.com what are the next steps?
- [38:53]
B
Yeah, so we'll have a landing page for whitecoat investors. Come Visit. So it's taxtra.comwci that'll give us a 30 minute exploratory call with some of our staff to discuss what you have going on. If we can help you, if we don't think we can help you, or if we're too high priced for what you need, we'll tell you. I mean, we'll be honest with you and just say we're probably not a good fit, but I think we're a good fit for a lot of white coat investor community. So go to taxtrade.com wci and then we can put our socials in the show notes.
- [39:22]
A
All right, thank you so much, Brian, and thanks for what you're doing for white coat investors.
- [39:25]
B
Thank you, Jim.
- [39:27]
A
Okay, I hope those interviews are helpful for you. Obviously we get paid by these people, they advertise with us. And I hope that's very obvious when we bring on partners like this onto the podcast. It provides some publicity and some marketing for them, but, but hopefully it's also useful content for you to learn a little bit more about how taxes work, about how tax strategizing works, and maybe decide if this is the sort of professional you're interested in hiring. Okay, let's take another question off the speak pipe.
- [39:58]
B
Hi Dr. Dale. I had a quick question for you. So I'm currently employed by a nonprofit health system and we have a 403B and a 456 which I've been maxing out. I'm also looking into potential part time 1099 job. One of the things that I noticed with 1099 jobs was that the tax burden was pretty high. And one of the thoughts that I had was to open up a solo 401k to at least get the employer match portion into the solo 401k in order to kind of save money on the taxes. I just kind of wanted to hear your thoughts on it. From what I understand, it's legal, but I didn't know if you had any other advice, anything else that I could consider. Thank you so much.
- [40:45]
A
Okay, great question. I get this question all the time. I'm sure we've addressed it on the podcast at some point in the last 458 episodes, but I can't tell you exactly where or when. But it's so common we got to hit it every now and then. I have a blog post on the White Coat Investor blog called multiple 401k. You know, rules with multiple 401ks or something like that. If you search multiple 401k on the blog, this post will pop up. It's got a gazillion comments below it and I keep it up to date because it gets used so often. I send it out by email every week and it goes over all the rules that are involved when you have multiple 401 s. And this is super important because accountants don't understand these rules because they don't have any clients that have more than 1 401. So while this situation is super common among doctors and among White Coat investors and people who want to save a lot of money for retirement, et cetera, et cetera, it is not common for your accountant. And there's a very good chance that your accountant doesn't know these rules and HR doesn't know these rules and your 401 provider doesn't know these rules. So you have to know those rules. I promise you they're true rules. This is really the way it is. I've dived into this as deeply as it can be dived into. But this is the way the rules work. When you have more than one retirement account like a 401k and your situation is a little bit unique as well because you don't have a 401 at your nonprofit, you have a 403. But I'll get to that in a second. Okay? You are allowed to have more than one 401. Newsflash for those of you who didn't know that. So that means for most doctors, the situation is they've got one provided by their employer and they've got one for their moonlighting work, their 1099 work. Sometimes it's for another employer. But bottom line, as long as those employers are not related, and there's a definition of what related means, as long as they're not related, you get a maximum contribution to each of those. The 415C limit. Okay? So for 2026, that's $72,000 for those under 15. Okay? So $72,000 can go into each of those 401ks. Pretty cool, right? Because the employers are unrelated. Now, there's a good chance you're not going to be able to get $72,000 into each of those because maybe your employer doesn't let you put that much in there or you don't earn enough in your 1099 gig to put a full $72,000 in there. But that's the total contribution from employee contributions, you know, your 23,500 contribution or whatever it is this year. I probably just botched that and someone's going to call in with a correction. But you know what I mean, right? You put in that tax deferred or Roth contribution, and maybe you get an employer match in there, and maybe it lets you make after tax employee contributions, AKA a mega backdoor Roth contribution in there. But the total of those has to add up to $72,000. And same with the Solo 401. The total of all contributions can't be more than $72,000. Okay. There's another limit, though. It's called the 409 limit, and that is the employee contribution. So no matter how many 401s you qualify for with unrelated employers, whether it's 2 or 3 or 4 or 12, you only get one employee contribution amount, that $23,500amount. You get one of those across all the plans. So what often happens is you put your employee contribution into the one at work, work into your employed job, and you get a match. Maybe they give you $8,000 too in there. And then when you go to your Solo 401 for your 1099 job, you can only make employer contributions, which is essentially 20% of your net income at that job. Net of everything, all the expenses, as well as the employer half of your payroll taxes at 20%. So you make 100 grand there and you put $20,000 into your Solo 401. Now, if you will go get a customized Solo 401K from some of the people on our recommended retirement account provider list@whitecoatinvestor.com they will build you a customized Solo 401. And it's super cheap. It's maybe $500 upfront and $150 a year or something like that. You will be able to Design a solo 401 that allows you to make mega backdoor Roth contributions in there. And if you do that and make $100,000 at this side gig, you could actually put all $72,000 in there. Right. Some of it might be employer contribution or maybe all of it is after tax employee AKA make a backdoor Roth contributions. Now you're not going to be able to do that in the cookie cutter plan at Schwab or Fidelity or whatever. But if you get a customized Solo 401, you can really do that. You could get $30,000 into your employer's 401 and you could get $72,000 into your Solo 401. Which is pretty cool. Okay. All right. Now the 403 caveat that applies to this particular question. Unfortunately, due to the way 403s are looked at by the IRS, your 403 and your solo 401 share the same 415c limit. That's that $72,000 limit. So if you got $30,000 into your 403 at work, you could only put $42,000 into that solo 401. It's not the case if your work offered you a 401, but it is the case if what your work is offering you is a 403. Very unfortunate. I'm very sorry. The 457, not 456. But the 457 limit is totally separate from these 401 and 403 limits. And what most people are able to put in there, they do have some catch up contributions. It's actually even more complicated than the 401 catch up contribution laws. But usually what people are allowed to put in there is the exact same amount as their employee or their 409 contribution into the retirement account. But it's nice to be able to put a little bit more into another tax protected retirement account like a 457. All right, super complicated. Sorry we had to get way out into the weeds on that today as well as some other things today. But that's the way it works. Okay, separate limit for every 401 at an unrelated employer. But you share one employee contribution limit across all employers and you got the special little caveat with 403s. Hope that's helpful. All right, Our podcast today was brought to you by Laurel Road for Doctors. Laurel Road is committed to serving the financial needs of doctors, including helping you get the home of your dreams. Laurel Road's Physician Mortgage is a home loan exclusively for physicians and dentists, featuring up to 100% financing on loans of a million dollars or less. These loans have fewer restrictions than conventional mortgages and recognize the lender's trust in medical professionals, creditworthiness and earning potential. For terms and conditions, please visit www.l LaurelRoad.com WCI that's www.l LaurelRoad.com wci. LaurelRoad is a brand of KeyBank NA and an equal housing lender. NMLS number 399797. All right, don't forget tonight's the Money Masterclass aimed at medical students. 6:00pm Mountain Sign up at WhiteCoatinVestor.com MoneyMasterclass and tomorrow is the last day for $200 off in person. WC icon. You can sign up for that at WhiteCoatinVestor dot com WCicon thanks for those of you leaving us five star reviews, we actually got a one star review recently and I wonder if it was an error. If this was yours, you might even want to go fix it. But here's how it read. I was so angry. But then I found White Coat Investor. For the first 10 years of my career, after finishing internal medicine residency, I was working for another doctor as a W2 employee. Then in 2015, I started working for myself as an owner of my small primary care practice. When I had to pay my first tax bill, I was in disbelief. Then it turned into anger and frustration. I was in my early 40s and I had never learned or been exposed to basic investing and personal finance topics. I immediately started searching on how to lower my tax bill, what we talked about today, right? And to begin saving for my personal goals and even retirement. This is when I found White Coat Investors. Now I can easily say that my personal and financial life has improved immensely because of the simple but powerful principles discussed on the podcast and the forum. Thank you WCI for helping us become better doctors by securing our financial futures. One star all right, so Mr. Or Mrs. Kalong, if you don't mind changing that to five stars. That'll actually help more people find the podcast, but we do appreciate your kind words. All right, we've come to the end of our podcast. Keep your head up, keep your shoulders back. You've got this. We're all here to help you. You're going to accomplish your goals. All you got to do is become financially literate, develop a little bit of financial discipline, stick with it for a while, and you'll be amazed what you can accomplish. And then it's going to make your life way better. Thanks for listening to the White Coat Investor Podcast. We'll see you next time. The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.