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Newsflash- You have to pay taxes!

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  • Newsflash- You have to pay taxes!

    Guess what? If you're earning money, you have to pay taxes.

    I just got off the phone with an advisor helping a doctor out of a tax mess. Hopefully we'll be able to work this into an anonymous guest post/case study to run on the blog. This doc has made all kinds of financial mistakes in the first half of a career, but the tax mess basically came from not paying taxes that were obviously due. And it wasn't like this was the doc's first year out of residency.

    If you look at your paycheck and nobody else is taking taxes out of it, YOU have to take taxes out of it. If you are paid on a K-1 or a 1099, you are the employer and must withhold the taxes. You send them in once a quarter as a quarterly estimated payment to the IRS. They're actually pretty nice about it and basically will even let you get away with not doing it that first year (as long as you pay the taxes due in April) but that niceness doesn't last forever.

    If you are filing taxes as an S Corp, you cannot pay yourself everything as a distribution and nothing as a salary. That will result in you not paying any Social Security or Medicare taxes. That is not okay. The IRS will come for the money, plus penalties and interest. Now you can have an argument about what a reasonable salary in your field is, but you can't argue for a salary of $0 as a practicing physician. It's not going to work.

    Other mistakes that made things worse:

    • Inadequate savings rate

    • Divorce

    • Cashing out retirement plans

    • Signing a bad child support agreement


    You want to know how highly paid docs get to age 60 with a net worth under $500K? This is how it happens.

    You don't really want to owe anyone money, but if you had to make a rank list of the people you don't want to owe, the IRS would come in fairly close to the top of the list.
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

  • #2
    Wow, that sounds terrible.

    Just taking one part of that sad story, whenever I hear someone talk about "cashing out" from their retirement account(s) I scream "NO!!!!!!!!".

    You pay tax, you pay penalties (usually), and you lose compounding time.  You can almost never make that up.  And you can't just "double up" your contributions later to somehow catch back up.  Once you hit the annual contribution limit, that's it.  It's very difficult to recover from a mistake like that.  I'd say cashing out your IRA/401k should be an absolute option-of-last-resort if you are desperate only.  Don't do it.

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    • #3
      You make some excellent points. I've seen a few of these scenarios, myself.

      As Judge Learned Hand said in Commissioner v. Newman, "Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."

      Paying taxes is a sign of success. If you start to feel like the tax "tail" is wagging the dog, it's probably time to take a second look at your tax planning strategy. After all, there's a definite legal distinction between tax-avoidance and tax-evasion.. Crossing that line can be a very painful lesson.

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      • #4




        You make some excellent points. I’ve seen a few of these scenarios, myself.

        As Judge Learned Hand said in Commissioner v. Newman, “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

        Paying taxes is a sign of success. If you start to feel like the tax “tail” is wagging the dog, it’s probably time to take a second look at your tax planning strategy. After all, there’s a definite legal distinction between tax-avoidance and tax-evasion. Crossing that line can be a very painful lesson.
        Click to expand...


        FIFY

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        • #5
          Than you Craigy!

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          • #6
            Nobody likes paying taxes but you better do it.

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            • #7
              The only things worse than paying tax is not having to pay tax. -- Jim Cramer

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