In the fourth of our six-part series specifically for Healthcare Professionals, Amy Walls of Thimbleberry Financial gets into the tax complexities facing those in this field. These factors can include higher income, sometimes from multiple sources (and across borders), capital gains, and even taxes on tuition benefits for those at teaching hospitals.
Amy walks us through the hurdles of having separate business entities, sometimes earning income in different countries with different rules. Regardless, its critical to keep good records and often advantageous to work with a Certified Public Accountant, or CPA. This can be helpful with understanding deductions and what you are eligible for.
Amy's specialty is retirement planning. Because traditional retirement plans have dollar limits, those limits can often represent a smaller percentage of income for higher wage earners. These individuals may want to look into other retirement vehicles, such as 457 plans and saving into nonqualified, taxable investmets. We dive into the latter.
Amy and Jag wrap up, we cover a few other tax strategies, including tuition benefits, student loan forgiveness, and chartiable giving.
For more information contact Amy Walls and her staff at 503-610-6510 or click here Thimbleberry Financial.
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Jag: Welcome back to ThimbleberryU. I am Jon JAG Gay.. I'm joined as always by Amy Walls from Thimbleberry Financial. Amy, how are you doing?
Amy: I'm doing great, Jag. How about yourself?
Jag: Good. We're both fighting a little bit of a cold, so that's the disclaimer as we go forward. I think we're going to survive this. Ironically, we're going to get it to part four of six on our series for healthcare professionals. We're subtitling this the Tax Prescription. We're not talking Mucinex or Sudafed or anything like that. We're talking about a different type of prescription. We're talking about taxes today. Give us a rundown of the various factors that contribute to the tax complexity for the healthcare professionals that I know you work with so many of.
Amy: First of all, let's just talk about income. The government likes to limit things as income goes up. Right there, that higher income creates complexity in relation to taxes. Also, related to that is income from multiple sources. Many of our healthcare professionals maybe do some consulting, and they have a business on the side.
Jag: Sure.
Amy: There can be some complexities related to that. Some of that income could come from across borders. That creates some complexity.
Jag: You mean by across borders, you don't just mean states, you mean countries as well, right?
Amy: I do, yes.
Jag: There may be an organization called Doctors Without Borders, but for our purposes and taxes, the borders are important.
Amy: They are, and we'll get into that. Healthcare professionals with their income likely cannot save as high of a percentage of income into an employer-sponsored retirement plan. Because of their income, if they're going to reach other goals, are likely going to need to save in taxable investments, and that can create tax consequences. Then for those people maybe working at teaching hospitals, there might be some tuition benefits for dependent that can also create tax issues depending on how it's set up.
Jag: Sure. You mentioned the higher income. That obviously makes sense. Healthcare professionals generally make more than the average Jane or Joe or Jag. You hinted at this before, Amy. Can you speak to having multiple sources of income and perhaps some of that income coming from other countries? What do we do about that?
Amy: Many of the healthcare professionals we work with, as I mentioned, and especially those that are professors or researchers, who work in teaching hospitals for example, also have consulting income. They're employed through their employer, but they basically have a side gig related to their specialty. Sometimes that's speaking or presenting that they're getting paid for. They may be doing that at a conference that's in Germany or Italy or somewhere else. This creates basically opportunity as well as some issues that need to be addressed for those folks.
The first thing is they really need to know, and we need to know what each source of income is and what that's likely to be going forward. There's both the forward-looking for planning purposes, but then what actually happened. Who is actually paying? In many cases, they may want to have a separate business entity. Really, I'm looking at the CPAs here. We're not CPAs and I'm not giving tax advice today. That's where for us, for example, we're going to talk a lot with the CPA around what's happening if we need to, if there's those complexities.
Also important to note, we're talking about, across-country borders, that the US has different tax treaties with different countries. What we do with England isn't going to be the same as what we do with South Africa. Where that income was earned could really dictate the tax consequences. In some places, it's really simple, but in others, it could be more complex and perhaps those earnings are actually taxed twice, both by the US and the other government.
Jag: Very true. You mentioned CPAs. This has come up in the podcast before that financial planners often help you look forward at your money and the CPAs help you look backward at what's already happened. That's why they can often make such a great team because you're looking at both sides of the coin in that way.
Amy: Absolutely. I love our relationships with great CPAs.
Jag: In fact, funny story, our CPA actually recommended our financial advisor to us and they work hand in hand all the time on our stuff. It's certainly a good point. Amy, how can healthcare professionals with various forms of income make the most of job-related tax deductions?
Amy: Well, since we were just talking about great CPAs, having a good one and having a great one. That's what I'm going to put number one on the list. However, they can only do that if someone has kept good records. They only know what they know same as us. If everything's not disclosed, it's going to be a lot harder. When I talk about those records, I'm really talking about keeping track of conference fees and travel expenses, supplies, and just knowing that, and again, knowing where those other sources of income are.
CPA can definitely give direction on if someone who's self-employed or self-employed part of the time may want to be taking a deduction for their home office. The IRS has some pretty stringent rules around that. I do think it's important to talk with the CPA because there are pros and cons to doing that.
Jag: Having those records is so vitally important. Oh, by the way, a lot of CPAs, or most of them billed by the hours, so the more detailed your records are, the less hours it's going to take as opposed to you having a thousand receipts in a shoebox.
Amy: Absolutely.
Jag: All right.
Amy: I think the key there is having your records organized.
Jag: Number one, having them, and then number two, having them organized. All right, let's move back over to your specialty Amy, and that is retirement planning. You said that their ability to save into retirement might be smaller. How can they save for our healthcare professionals we're talking about today?
Amy: Let me clarify what I said because there is nuance that I think is really important there. The amount they can save isn't necessarily smaller if they're employed, but the percentage they can save. The IRS allows everyone who's earning an income to save the same dollar amount into an employer-sponsored retirement plan. This is 401(k), 403(b), 457. Assuming the investor has more earnings than they are contributing, the only difference in that dollar amount for anybody is if they are under or over the age of 50.
They allow people over the age of 50 to contribute more. If we're trying to replace future income through our savings today, it's usually easiest for people to think about saving as a percentage of income. Getting to the exact dollar amount, that's going to take calculation. There's oftentimes, ballparks out there, "oh, save 15% of your income." For a higher income earner, the percentage of income that they can save into one of these employer-sponsored retirement plans is lower.
Jag: Give me some numbers to illustrate that, Amy, if you would please.
Amy: Totally. The limits in 2023 for someone under 50 is $22,500. For someone who makes $75,000 a year, maximum funding their retirement plan at $22,500 would mean they're saving 30% of their income.
Jag: Good number.
Amy: It's a great number. For someone making $250,000 maximum funding, that same retirement plan at $22,500 is only 9% of their income. Obviously, a 30% savings rate is better than a 9% savings rate. If we're talking about likelihood of success, 30% is more likely to get someone to a successful retirement than 9%.
Jag: That's something we've also talked about in previous episodes as well, Amy, is when you get into your retirement, you want to be able to have that same, if not more in your budget to spend every month because you're not working all day or all night as the case may be. That's why having that percentage is so important. If you are making a lot of money and all of a sudden you've only got 9% of it that you're drawing off of in your retirement, that's going to be a major, major lifestyle adjustment.
Amy: Absolutely. The good news is these healthcare professionals may have some other options. In addition to a 403(b) or a 401(k), they may have what's called a 457 plan. If that's the case, that's great news because they can actually save that 22,500 assuming they've got the income in this case. I think we can go with that into both plans, but not everybody has both of those. If our listeners are not in healthcare and saying, "Well, that's not fair, they get two retirement plans." It's a pretty rare situation that somebody has both available to them.
Jag: What else can they do?
Amy: The other thing they can do is increase their taxable investments. Basically, they can save into investments that are not inside any retirement plan. There aren't tax benefits for doing that, but it can at least get the percentage of savings up high enough. Now they have a good chance of having a successful retirement or reaching whatever goal it is they're working towards.
Jag: You said taxable investments, and we've talked about taxable investments in other episodes. For our listeners, can you address the tax repercussions of these taxable investments?
Amy: Yes, before I do that, let me talk about what this actually looks like. The physical action of saving into a taxable investment is like saving into your savings account. You're taking money, you're putting it into an account. The difference between saving into a taxable account or a brokerage account and a savings account is that when you're saving into a brokerage account, you're doing it with the intention of investing that money. Any investment has risks and opportunities associated with it, depending on what the investment is. Whereas your savings account, hey, you know that, sitting in cash, and hopefully, you've made sure it's FDIC insured. To your question of what are the tax repercussions, just like when you earn money in a savings account, and this year, we'll probably see it with interest rates being high enough, you're going to get tax forms at the end of the year that say, "Hey, you owe some taxes on what you earned."
That's on realized earnings, real earnings that you see. Same thing when you sell a taxable investment; you realize earnings, and those are taxed at the capital gains and dividend rate. That's a preferential tax rate to income as long as you've held the investments for more than a year. Some types of investments, in this way, also pass earnings back to the investors. I tend to think of things in terms of buckets and umbrellas. Let's pretend we have a bucket of fish.
Jag: Okay.
Amy: Okay.
Jag: It's breakfast time out there in Portland, but it's lunchtime here in Detroit. Now you're making me hungry.
Amy: [laughs] This bucket of fish is there, and unfortunately, some survive, and some don't. Some of them also, mate, now you've got some extra fish.
Jag: [laughs] That's a great analogy. I love it.
Amy: You're going to be taxed on growth, new opportunity. This bucket has new money in it. Basically, if you think about certain types of investments, it gain something and certain types of investments have to pass those gains back to the investors each year. That, when it comes to investments, hopefully unlike the fish, can create a pretty big surprise tax bill at times. My husband has a fish tank in his office, and it recently had babies, which is probably why I thought of that.
Jag: I love the analogy. It's great, though.
Amy: Why this is important? If we tie it back to our healthcare professionals, most of the healthcare professionals we know have pretty sizable taxable accounts because they realized, I've got money coming in, I'm not saving enough, I need to save more. If we're not careful about what kinds of investments they have and the tax consequences of this, what can happen is in any tax year, they can get hit at the point in time they're filing their tax return with a tax bill they weren't expecting because you don't know about this during the year.
Jag: That goes back to what we were saying a few minutes ago, which is CPA is looking backward, but you are looking forward and trying to avoid any unexpected tax consequences. As we wrap up Amy, are there any other tax issues our healthcare professionals should be aware of?
Amy: Earlier, I mentioned tuition benefits that employers may give to an employee. This is a great benefit. I'd love it if, as a financial advisor, I could send my kid to college through a benefit and not need to pay for it or pay a lot less. If people have these, it's important to pay attention to the nuances because sometimes these benefits are taxed to the employee, and sometimes they are not. There are a number of rules that would be more than a podcast to pay attention to. I think the takeaway here is if you're in the situation, dig into your particular plan compared to the IRS guidelines around what taxation will look like, or just ask your CPA or financial advisor for some help on that.
Student loan forgiveness. Now, this has been a hot topic recently, so I'm going to talk about two specific types of loan forgiveness. They aren't the government waiving loans. The first I'm going to talk about is if you have worked for a nonprofit for 10 years, your loans may be able to be forgiven. There's no income tax if loans are forgiven that way from the federal government.
However, there are some forms of student loan repayment where you are paying, and after you've paid 20, 25 years, the loan can be forgiven if there's still a balance. That amount, whatever is forgiven, is included as taxable income in that year. I've seen scenarios where that loan is going to be 20, 25 years out if someone makes the minimum payments even bigger than what it starts.
Jag: Right, because the payment isn't covering the growth and interest. Okay.
Amy: Yes. In that scenario, does it make sense to keep the loan and plan to pay the tax bill in that year? How are you going to do that? It might mean you actually need more taxable investments to be building through savings, knowing that you're going to have to deplete them to pay the tax bill.
Jag: I'm glad you mentioned that because student loans are certainly a major factor in our healthcare community with doctors, nurses, anybody who went to medical school. They can certainly add up and to think that [unintelligible 00:15:18] it's forgiven. Sometimes, some cases, as you mentioned, if it's forgiven, you got to pay taxes on what's forgiven, and that can be quite a pretty penny.
Amy: Yes, it can on top of your income at that point already, which was higher. Next thing I'd say, just as we wrap up, charitable giving. That's great. If you're doing it, count it. Let it help you in your taxes. A lot of times, it's not keeping track of records, and then it's not being counted. Last, I think we already said it, but work with the CPA and make sure your CPA and financial advisor are willing to work together. I think that's very, very important.
Jag: I can't tell you how beneficial that's been to have a team working together in my personal life. If you want to have Amy and her team at Thimbleberry Financial as the financial advisor part of that equation, how do our listeners best find you, Amy?
Amy: They can give us a call at 503-610-6510, or they can reach us online at thimbleberryfinancial.com.
Jag: Very good. That'll be a wrap for this tax prescription edition of ThimbleberryU. To all our listeners, may your financial health be robust and resilient. Thanks, Amy.
Amy: Thanks, Jag.
Jag: Securities offered through registered representatives of Cambridge Investment Research, Inc., a broker/dealer, member FINRA/SIPC. Advisory Services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Thimbleberry Financial are not affiliated. Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker/dealer, member of FINRA/SIPC. Advisory Services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Thimbleberry Financial are not affiliated.
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