Summary: Most people would look at a doctor or other high-income professional and assume that they have it made. But the reality is, they are likely drowning in debt and pay insane amounts of taxes, so most don’t feel this way. So what can be done to address the economic challenges high-income professionals face? Learn how to pay zero taxes on your doctor’s salary.
plight n. /plīt/a dangerous, difficult, or otherwise unfortunate situation.
I don’t use the word “plight” very often, but when I think about the economic challenges doctors and other high-income professionals face, I think it’s more than appropriate.
Most people would look at this group and assume they have it made. If you are a high-income professional reading this article, do you feel that way? Do you feel you are on top of the world financially?
I’m guessing not.
And the reasons are simple. You finished residency training or some other advanced degree with a mountain of debt, you got a late start to earning real income, and to make matters worse, you are also in the highest possible tax bracket.
This is what I call the plight of the high income professional.
However, this article isn’t about school debt or getting a late start. Because these are in the past, and there’s nothing you can do about it. I’m not much for focusing on things you can’t control.
Let’s focus on what you can control: how much you pay in taxes
I probably don’t have to tell you that as a high-income professional you’re essentially screwed from a tax perspective. In fact, when you add up income, property and sales tax, it’s likely that your first 6 months’ worth of paychecks go to the government before making a penny yourself.
To make matters worse, come tax time, you have little to no tax deductions. Almost all tax deductions start phasing out over $100,000 and by the time you hit $150,000, there’s virtually nothing left to shelter your income. Not only that, the recent tax reform singled out high-income earners and made the situation worse by eliminating some deductions like state and local taxes and capping others like the home interest deduction.
So let’s get back to what you can control.
What if I were to tell you that you could be paying zero taxes on the income from your current job? Yes, ZERO.
It may be hard to believe but I’m living proof that it’s possible. My wife and I (we’re both physicians) have been paying zero taxes on our clinical income for the past five years, legally.
How?
By taking advantage of the tax incentives that are built into the tax code.
See, the government wants you to be an economic engine, which means someone who stimulates the economy by creating jobs. They reward business owners. They don’t reward workers or employees.
Once we learned this, we simply became business owners. More specifically, we focused on creating a real estate business because the government gives you extra deductions that are only available to those involved in real estate.
So how does it work exactly?
For many of you, this might all sound really daunting. And I would agree with you if you told me that I had to go out and start a successful business from scratch.
Fortunately, the path to zero taxes isn’t as hard as you might imagine. The key to unlocking all of the above-mentioned tax benefits is something called Real Estate Professional Status (REPS).
We like to call it, “The greatest wealth-building secret that nobody knows about.”
And it’s true. We’ve done informal polls of physicians and found that less than 1% are using this status to shelter taxes.
How do you become a Real Estate Professional?
Anybody can become a real estate professional. You don’t need a license or a special degree to become one. It’s a status you can claim when you file your taxes if you meet two requirements.
The first is, real estate has to be your primary profession. You have to spend more time on real estate than any other job. For me to claim REPS, I cut back on my hospitalist work to less than half-time. For others with stay-at-home spouses, it’s even easier. Your spouse automatically meets this criterion because they don’t have another W2 or 1099 job.
Some of you might be saying to yourself, “I can’t cut back because I can’t afford to get paid less.” Well, if you put in place the right plan, you can more than make up for the loss in income with the tax savings and cashflow from real estate. That’s what we were able to do. It paid for me to cut back.
The second criterion is an hours requirement. You need to spend a minimum of 750 hours on real estate. 500 of these hours need to be dedicated to managing your rental properties. This means being involved in the day-to-day operations, for example, managing the property managers, overseeing renovations, and managing the finances of your real estate business.
How does exactly does being a Real Estate Professional help you save on taxes?
Achieving this status alone doesn’t magically save you on taxes. You also need to create and implement a plan to shelter your income using the tax incentives I mentioned earlier.
The way we do it is through cashflowing rentals. We buy properties that we rent out. Things like single-family homes, duplexes, and small apartment buildings. We taught ourselves how to buy these properties so that they generate monthly tax-free cashflow and at the same time, generate paper losses that we strategically create to offset our clinical income.
You don’t have to choose rental housing. You can also do this with commercial properties like medical office buildings, retail and office space, warehouses, and storage facilities. We like rentals because it’s always in demand (housing is a basic human need), they tend to hold up better in a recession, and it’s very accessible for most of us non-business people.
Think about how many people you know who became “accidental landlords.” These are the people who owned a condo or a small home before they got married and decided to rent it out instead of selling.
Also, many of us have rented a home before, so things like lease agreements and day-to-day repairs aren’t foreign to us. This is in contrast to buying and managing something like a warehouse. Most of us have little or no exposure to this type of asset class.
The other great thing about rental housing is that the business model is proven. It’s like buying a franchise. Everyone knows the product (housing), there’s a demand for it, and there are well-documented people, processes, and systems in place to help you successfully run your rental business.
So what’s stopping you?
Starting a real estate business likely feels daunting to you. You are probably asking yourself, Where do I even start? How do I go about learning what I need to know to be a successful real estate investor? How can I compete with people who are more experienced than I am?
These are great questions and the right ones. The key is to keep asking these questions and then find someone who can give you the answers. Find a mentor who has already succeeded in doing what you want to achieve. Take courses, read, and listen to podcasts. Start networking with people in real estate.
Just like anything you’ve accomplished before, real estate takes time and effort. Although, take it from me: the amount of effort required to become a successful real estate investor is significantly less than what you had to go through to get your advanced degree.
Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians, professionals, dentists, or lawyers group!
Also, if you’re interested in learning more about how to achieve financial freedom through real estate investing. (including how to qualify for REPS!), check out our Zero to Freedom Through Cashflowing Rentals Course. Registration will open again in a few months, so click here to be put on our waiting list so you can be the first to be notified when course registration opens!
