Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

RECENT TAX LAW CHANGES

by Andrew D. Schwartz, CPA

Taxes are going down again, thanks to the Jobs and Growth Tax Relief Reconciliation Act of 2003 passed by Congress last month and signed into law by President Bush.  How will this year's tax-cut package affect you?

Check's In The Mail

Remember a few years ago when the government sent you a check for $300 if you were single or $600 if you were married?  Even if you disagreed in principle with the government issuing those rebates, wasn't it great getting your check?

Well, it looks like they're at it again.  Unfortunately, not everyone will be getting a check this time, since the rebate only applies to families with children under the age of 17.  And then, only to those families whose income did not exceed a certain threshold in 2002.

To see if you qualify, multiply the number of children in your household under the age of 17 by $20,000, and add that amount to $110,000 ($75,000 if you're a single parent).   If this total exceeds your adjusted gross income reflected on the bottom of Page 1 of your 2002 Form 1040, you should expect to receive your rebate check some time this summer.

Lower Rates Means Less Taxes

For 2003, the tax rates of all but the two lowest brackets have been cut by 2%, and the top bracket, for people whose taxable income exceeds approximately $312,000 this year, has been cut by 3.6%.  What does this means to you? Depending on your bracket, instead of paying taxes at 27%, 30%, 35%, and 38.6%, you'll be taxed at  25%, 28%, 33%, and 35%.

So how much will the lower rates save you?  If your taxable income will exceed $311,950 this year, multiply the excess by 3.6% and add $5,103 if you're married or $5,671 if you're single.  Otherwise project your taxable income for 2003, subtract $56,800 ($28,400 if you're single), and multiply the difference by 2%. 

This tax act also increases the 10% tax bracket from $6,000 to $7,000 for single individuals and from $12,000 to $14,000 for married couples.  Don't get too excited about this change though, as it only cuts a married couple's tax bill by $100 and a single person's by $50.

A Little Marriage Penalty Relief

Under the current tax rules, a married couple comprised of two working spouses generally pay more in taxes than if they had remained single.  This tax trap is known as the marriage penalty.  The 2001 Tax Act instituted some changes to reduce the marriage penalty, but the changes weren't slated to take effect until 2005. 

Fortunately for married couples, this tax-cut package provides some immediate relief from the marriage penalty.  This year and next year, the standard deduction for a married couple will be exactly double the standard deduction of a single individual.  Prior to this change, a married couple that didn't itemize would have claimed a deduction of $7,950, while two unmarried non-itemizers would be allowed a combined deduction of $9,500.

The 2003 Tax Act also increased the 15% tax bracket to be double that of a single person.  Prior to this tax act, the 15% tax bracket would have ended at $47,450 for a married couple, as compared with $56,800 for two single people.  That means a tax savings of about $1,000 for most married couples this year.

Good News for Investors

If you hold investments within your non-retirement accounts, this tax-cut package will save you taxes.  That's because the tax rate on dividends was slashed to only 15%, a reduction of 23.6% from the previous top tax rate of 38.6%.

The maximum long-term capital gains tax rate was also cut to 15% for most taxpayers, but only for post-May 5, 2003 transactions. Remember, to qualify as long-term, an investment must be held for more than one year before being sold.

For people in the lowest tax brackets, the capital gains tax rate is now only 5% through 2007, and then will decrease to zero percent in 2008.  Now's the time to formulate a strategy of gifting appreciated investments to your dependents, and letting them sell those investments.  As long as they'll be 14 or over in the year of sale, you'll take advantage of these new low capital gains rates, and save quite a bit of taxes.

Great Time To Buy Equipment and Autos

This tax-cut package also provides a huge tax break to people who purchase machinery, equipment, and automobiles that they put into business use.  Under the new rules, you can now write off the first $100,000 of machinery and equipment that you purchase this year.  And if you spend more than $100k, you can write off 50% of the excess.  (Unfortunately, real estate doesn't qualify for this accelerated deduction.)

Let's take a look at a physician who opens an office from scratch and purchases $200,000 of medical equipment.  Prior to this tax act, the doctor could claim $95,000 in depreciation the first year.  Now, thanks to this tax law change, the allowable deduction jumps to $157,143.

This tax act provides an incentive to buy SUVs and automobiles as well.  By purchasing one of those huge SUVs (with a gross loaded weight in excess of 6,000 pounds, such as an Expedition), you can write off 100% of its purchase price, assuming you use the vehicle 100% in connection with your trade or business.  If you'd prefer something smaller, the first year depreciation for a luxury auto was bumped up by $3,050 to $10,710. 

Increased AMT Exemptions

The Alternative Minimum Tax (AMT) has become a big tax problem lately, with more and more middle income taxpayers getting hit by the AMT each year.  The problem is that while the tax code has been indexed for inflation over the years, the AMT hasn't.

The 2003 Tax Act addressed this issue by increasing the AMT exemption for 2003 and 2004 only.  So if you're sitting on some ISOs, or have some other tax saving ideas that would have backfired due to the AMT, now's the time to take another look at those opportunities.

Save Taxes Now

Basically, there are two ways for you to pay in your taxes during the year - by having taxes withheld from your salary at work or by remitting quarterly estimated tax payments.

If you're an employee, you should notice an increase in your net pay as soon as the IRS comes out with new withholding tables to reflect these tax law changes.

If you're self-employed, or pay quarterly estimates for other reasons, you might be able to reduce your second, third and fourth quarter estimates for 2003.  Before cutting down your payments, however, it's a good idea to work through a tax projection factoring in the recent tax law changes.

Whatever Happened To Tax Simplification?

With the 2001 Tax Act scheduled to sunset in 2010, and the 2003 Tax Act scheduled to sunset in 2008, and every provision seeming to change every year, Congress has made the tax code significantly more complicated.  Who knows if the government can ever come up with a simplified tax code that is fair to most people, while still being able to raise the revenues that the government needs to operate?  

 TOP

DISABILITY INSURANCE:  WHAT YOU NEED TO KNOW BEFORE YOU BUY

by Lawrence B. Keller, CLU, ChFC, RHU

Overview

You may have heard that the disability insurance policies available today are dramatically different from those available a few years ago. Although this is true -- especially for physicians who perform invasive procedures -- quality coverage can still be found.  It is important to understand how policies are offered and to know what provisions should be included in an individual disability policy.

How Policies are Offered

Types

Disability insurance can be purchased on an individual or group basis. Group insurance is usually provided by an employer or purchased individually from a sponsoring medical association. Although initially low in cost, group policies do have limitations. They can be canceled (by the association or insurance company), rates increase as you get older, and premiums are subject to adjustments based on the claims experience of the group. In addition, group and association contracts often contain restrictive definitions of disability as well as less-generous contract provisions.

Coverage Limits

Most insurance companies will issue disability insurance coverage equal to approximately 60 percent of earned income; however, interns, residents, fellows and physicians just entering practice are provided with “special limits.”  These special limits permit them to purchase benefits in excess of what their current earnings would normally allow. 

The Cost of Disability Insurance

Premium rates are based on several factors including age, gender, monthly benefit amount, riders added to the policy and the occupational classification the insurance company assigns to your medical specialty.

The younger you are when the purchase is made, the lower the cost of the insurance. Therefore, you should consider purchasing a policy as early in your career as possible to lock in lower premium rates.

Although women are better risks for life insurance coverage, this is not the case with disability insurance. Rates for females are substantially higher and their policies can cost 50 to 75 percent more than men.

The occupational classification assigned by the insurance company, to your medical specialty, will significantly impact the premium rates as well as the policy provisions offered to you. Generally, if you perform invasive procedures, you will be placed in the “surgical” category; where the definition of disability may be more restrictive and the premiums charged will be higher as compared to those of a non-invasive, non-surgical physician. Each insurance company has their own occupational classification guide and insurance companies may treat the same medical specialty differently.

 What to Look for in a Disability Policy

The renewability provision is one of the key features of an individual disability income insurance policy. This provision defines your rights when it comes to keeping your disability policy in force.  If you purchase a policy that is Non-Cancellable and Guaranteed Renewable, you can remain in control of your financial security.  The insurance company cannot cancel, increase your premiums, change any provisions or add restrictions to the policy -- even if the issuing company no longer offers similar policies in the future.

Definition of Total Disability

Arguably, the definition of disability is the most important aspect of a disability policy. As a physician, you must pay careful attention to the definition of disability found in your policy, as it will ultimately determine how any claim you make for benefits will be judged.  There are three definitions of “disability” commonly found in the insurance industry, and each has significant differences.

“Own-occupation”

Although difficult to find, “Own-Occupation” (also known as true or pure “Own-Occupation”) is usually the definition of choice for physicians as it is the most liberal definition of total disability available. This type of policy pays benefits if you are disabled and “not able to perform the material and substantial duties of your occupation.” Therefore, you would be considered totally disabled if you could no longer practice your medical specialty, even if you are at work in some other capacity, as long as you are not able perform the material and substantial duties of your specific medical specialty.

Modified “Own-occupation”

This type of disability policy has become the most prevalent in the industry today and typically pays benefits if you are “unable to perform the substantial and material duties of your occupation and you are not working.” Although benefits are still contingent upon your ability to practice your medical specialty, this definition generally will not allow you to continue receiving full disability benefits if you are at work in some other capacity.

“Any Occupation”

This definition is the most restrictive -- it is commonly found in group or association policies. Under this definition, you are eligible to receive benefits only if you are found to be “unable to work in any occupation which you are reasonably suited to by your education, training or experience.” Unfortunately, it is the insurance company that makes this determination and physicians, being as educated and well-trained as they are, will find it extremely difficult to collect benefits on this type of policy. You should take every precaution to avoid purchasing a policy that contains this definition.

Hybrid Definitions

Many policies offered to physicians today might incorporate an “Own-Occupation” with a Modified “Own-Occupation” definition. Here, the policy would contain a true “Own-Occupation” definition for a limited time period (typically one, two or five years), and then convert to the more restrictive Modified “Own-Occupation” definition described above.  Until recently, in certain states such as California and Florida, and for certain medical specialties, this often was the best definition of disability made available. 

Optional Riders

Residual Disability Rider

Unless your policy contains a residual disability rider, you may have to be totally disabled to collect any benefits. While an “Own-Occupation” policy protects your ability to practice your medical specialty, it may not sufficiently protect your income level. There are many disabilities that might allow you to continue working in your occupation, on a limited basis, while suffering a loss of income. Adding a residual disability rider to your policy would allow you to continue receiving benefits, proportionate to your loss of income, if you returned to your medical specialty on a part-time basis.

Furthermore, with policies such as Modified “Own-Occupation” or “Any Occupation”, this rider might allow you to continue receiving benefits if you decided to work in another capacity, or if the insurance company determined that you could work in another “reasonable” occupation with reduced earnings.

Cost of Living Adjustment (COLA) Rider

A COLA rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. This adjustment can be a flat percentage or tied to the Consumer Price Index. Ideally you want a COLA that is adjusted annually on a compound interest basis with no “cap” on the monthly benefit.  Although important, if cutting the cost of coverage is an issue, this might be the first optional rider to consider excluding from your policy.

Future Purchase Option Rider

This rider is a must for young physicians. It provides you with the ability to increase your disability coverage, regardless of your future health, as your income rises.  It is important to know when you can increase your coverage, as well as by what increments, on any given option date.  Some companies may allow you to use your entire option in one year as long as your then current income warrants the increase; Others, however, may limit the amount that you can purchase.

Summary 

Purchasing a high-quality disability insurance policy has never been easy. Unfortunately, due to adverse claims experience, the individual disability insurance marketplace has become even more complicated for physicians.  Policies vary greatly in terms of the definition of disability made available, the contract provisions offered and the premiums charged.  It is more important than ever that you take the time to compare each of the policies you are considering, and understand how and why they differ. The best approach is to employ the services of a professional insurance agent who specializes in working with physicians.  He or she will not only be familiar with your occupation, but with which companies’ policies are best suited to your particular specialty. Then you and the agent can decide which insurance company’s policy best meets your individual insurance needs.

Lawrence B. Keller, CLU, ChFC, RHU is the founder of Physician Financial Services, a New York City-based firm, specializing in insurance, investments, and financial services for physicians.  He can be reached for questions or comments via email.  

TOP

Copyright - CPANiche, LLC - 2004