WCI #353: Lesser Known Tax Strategies

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 353 controversial and aggressive tax deductions. If you're finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers and listeners through our online forum. Head over to whitecoatinvestor.com to start learning today. You can do this and the White Coat Investor can help. All right, we got a great quote today for our quote of the day. It is from Morgan Housel who said there are over 2000 books picking apart How Warren Buffett Built his fortune, but none are called. This guy has been investing consistently for three quarters of a century, but we know that's the key to the majority of his success. I love that one because it points out what really matters in investing, which is pick a reasonable plan and stick with it. All right, thanks for all of you out there for what you do. You get something special today for listening to the podcast. In fact, if you're listening to this in the morning, it dropped. You are finding out about a pretty cool thing that those who are actually a WC icon today do not yet know about, which is the presale for WC Icon 25. So they're not going to find out about this until this afternoon. So don't text somebody if you know they're at the conference. They're probably not listening to the podcast today, so they are not listening to this. But from now through the 12th of February, you can get WTICON 25 at the best price we'll ever offer it. Okay, so that conference is fairly similar to the conference we have this year. However, it's going to be in a different city and I'm going to reveal that to you right now. Even though those people at the conference aren't going to find out until this afternoon. We're going to San Antonio. We've been in the west, we've been in the East. Now we're going to try one in the middle. But it's a great property. It's going to be an awesome wellness conference, but also financial literacy. Right. That's why it's called the Physician Wellness and Financial Literacy Conference. We mix both of them in there. It's going to be good for CME dollars and of course it's going to be really good for you to network and to rejuvenate and to learn more about putting your own financial plan in place. Okay, so here's what it is. Here's the deal. The price if you buy it before the 12th is 1499 for an in person general admission. Okay. You can't buy virtual in the pre sale, but you can cancel through July 31. There is a $99 cancellation fee, but this is serious savings compared to what this course will sell for later this year. So if you've been missing out on these or if you just want to come again, this is your chance to get it. This is as cheap as it gets and it's really a deal at this price. I know what it takes to put on these conferences and this is quite a good deal. So suggest you sign up, do it before the 12th and you get this great price. Okay, we've got a guest on today who's been with us for quite some time. I'll introduce her in just a minute. But we're going to talk about some fun stuff. We're going to talk about saving money on taxes. You've heard about these techniques. You've heard you know they're bad. You've heard they're risky. Well, we're going to talk about them and when they're risky, when they're not risky, when they're good, when they're bad, and help you decide if you want to use any of them and if so, which ones you would qualify for and that you would want to use. We're talking about these aggressive, controversial, little known, maybe tax deductions that are out there and I'll bet there's one of them you probably want to use. So let's get into the interview. Our guest today on the White Coat Investor podcast is Alexis Galati. She's an enrolled agent. She, she has an MBA as well as an Ms. In tax and is a ctp. She's the author of Advanced Tax Planning for Medical Professionals. She is the creator of the Doctor's Four Week Guide to Smart Tax Planning, Actionable Strategies for Side Gigs and Locum Tenens. To boost savings. And she's also been a WCI Con speaker. Alexis, welcome to the podcast.

Thank you, Jim. I'm excited to be here.

Okay. As you know, our goal for this podcast is to talk about a few, and it's a pretty good number, actually. Tax techniques, tax reduction techniques. I am a fairly aggressive person when it comes to deductions. When it comes to lowering tax, I view paying taxes as something I'm more than willing to do. I'll pay everything I owe, but I don't like leaving a tip to the irs. And when an area is gray, I like to call it in my favor. But with many of these techniques, pigs get rich and hogs get slaughtered. So today I wanted to clarify for the audience, number one, what the techniques are. Just the basics on them. Number two, when you've gone too far. So we'll discuss those, because there's not always a hard and fixed line on these. But I wanted to go over the considerations of what people ought to be thinking about if they're using any of these techniques. So for those of you out there, if you're not familiar with some of these techniques, you can check out Alexis's book. Many of these have also been discussed on either the White Coat Investor blog or in the WCF forum before. So there's more information available about all of them. If it feels like we went through one just too quickly, know that there's plenty more information out there about it. All right. First technique I wanted to talk about is land conservation easements. And you want to start by describing what that is.

Yeah, sure. So land conservation easements were actually started in the 1970s, and they were really more seen as if you owned your own personal, personal piece of land and you wanted to conserve it, which basically means you're not allowed to really do anything with it. You can't develop it, you can't put houses on it, et cetera. There's just a few minor things you can do, like farming, for example. And so what it basically does is the IRS takes a look at your land and says, okay, if you were to appraise the land, if it were to be developed, then what would that value be? And if you looked at the land, if it weren't to be developed, what would that amount be? And that tax difference is a charitable deduction. So you're basically giving up the right to use the land for anything meaningful. This obviously will provide a tax deduction, and it can usually range from the ones that I've invested in. And so that's Kind of a thing to know is that I've invested in these myself is that for every dollar you put in, you're getting back a certain amount in charitable deduction. So if you put a dollar in, you're getting $5 back in charitable deduct. Can go up to 50% of your adjusted gross income and that saves you about, you know, about 40, 45% in tax. So it's a really, really nice deduction. The problem has been when these have started to be built up for the syndications, there has been a big area of abuse and mainly with crazy appraisals where instead of getting like a 1 to 5 multiple, maybe you're getting a 1 to 20 multiple or 10 multiple and that' you know, you start to kind of get into hot water. So when what's great about these is that yes, you get a kind of big bang for your buck. But there has been a lot of litigation around them. At one point they were actually listed transactions. We can talk more about that, that sort of legality as well, and legislation that happened. But at the end of 2022, land easements for lease syndication purposes have been limited to two and a half multiple. And so it's really a dollar for dollar kind of reduction. You're putting $100,000 into the, into the investment and you're getting $100,000 off your taxes. So you're basically paying this place instead of just paying the taxes essentially. So it's not as beneficial anymore. And you know, for disclosure purposes, I did invest in them from 2018 until 2020, but I understood the risks involved. It's basically that it's pretty much guaranteed that you're going to be audited. And it's not you that's audited, it's the partnership that is audited. But if there's any change at the partnership level, it trickles down to you as the investor. So you have to understand that risk. But know that if you are working with a proper program offer that, you know, they do have audit funds. And so they usually have about $500,000 of audit funds. They're, they've set things up properly. You know, I went through a lot of vetting to feel comfortable with it myself and through a lot of years before I even felt comfortable doing it. And so you just have to make sure that if you are going to do it, which like I said, I don't recommend it going forward just because the cost benefit isn't there anymore, that you properly bet whoever you're going to work with or even if they're offering anything similar, because I've seen this is going to touch off topic we need to talk about after. But there's now, instead of doing land conservation easements, they'll have medical products that they're donating to hospitals at a, at the fair market value, but they're buying it at like a wholesale rate. And then, you know, you're getting, you know, up to 50% AGI again and ET cetera. But that's I've seen started happening in the past few years and it's not, I'm not comfortable with it yet.

Yeah. Maybe we ought to explain for those who don't know what a listed transaction is. What does that mean?

Yeah, so that basically is kind of the, I guess the more media appropriate name is the Dirty Dozen list. And so these are just transactions that the IRS is looking at closely and more for their abusive transactions. And so that's very important language. These transactions are not considered illegal. It's just they've been abused in a lot of areas. And so another one I think we're going to be talking about in a little bit, like captive insurance companies were on that list for a while. And like both with the captive and the land easement, both of those are actually taken off the list retrospectively because the IRS did not go through the proper motions to put them on the list properly. And so technically, looking back, they weren't ever on the list. But. Yes. So they're basically just strategies that the IRS takes a closer look at and scrutinizes further.

Yeah, I've, I've talked to some other people about this and looked some other stuff up about it. Ike devji, he does a lot of asset protection kind of stuff. He calls them the tax scam that doctors sell each other. So I think it's something that is fairly prevalent out there in the medical community. And there was somebody else, a law professor around here, that said that, yeah, it's possible to have one that's okay, but I haven't seen it yet. And so this one's definitely, I think, on the aggressive side. It is in Star wars when they talk about aggressive negotiations, you know, they're talking about a lightsaber duel. But, you know, it's interesting, as I talk to the tax people, I find some are very, very conservative and never want to do anything that could even possibly look bad in an audit and so forth. And then other people are fairly, you know, on the other side of the spectrum. Where would you place yourself on that spectrum?

I AM of the spectrum. All the strategies are court tested, IRS approved. I don't put anything on a tax return I don't feel comfortable defending in an audit. So even if they're, you know, we're playing in the gray area, as long as I feel comfortable defending it, then I'll go for it. So, I mean, there's going to be items on this list that we're discussing today that I wouldn't touch with a ten foot pole. But that's because I just don't feel comfortable that I could, you know, make it stand muster in an audit. But with land easements, I've followed the legislation around it really closely and I have really great resources. And you know, some of the top attorneys that defend these as well that I've spoken with. And so, you know, when I've also done the math, if you were to take the tax savings that you receive and you know, over the six to ten year period that this investment is open. Because the thing is that at least the ones that I invest into, they do a land conservation easement, but they also put some of the money that you've invested into a strategic fund that also invests in other real estate venture debt. There's other alternative investments because one of the stances that the IRS has is that you can't create a partnership for the sake of a tax deduction. So this allows it. Yes, we're investing in this one development, but we're also investing in other things as well. And so over that six to ten year period, you are earning some money off of your investment, but it's small compared to obviously what the major tax benefit in that first year that, that you have. But I've found that if you take that investment or the tax savings and then you invest it even in an ETF, which over the past 10 years it's been about 9% in earnings per year, you'll earn more off of that savings than you would in the interest and penalties that would be involved if it were even to be completely denied. And from my research and understanding is that even the ones that have been adjusted on average, they're still maintaining 80% value. So you're maybe getting adjustment of 20%. And so you, it's kind of like playing an interest game essentially. So it just, with this strategy and any of these strategies we're talking about, it really depends on your situation. It really depends on how you or your advisor feels about those situations and whether they're willing to feel comfortable in defending it before you even think about Investing in it. The education is extremely important. And that's one thing with cerebral. And what we do is we don't take any commissions or kickbacks, we don't sell any products. And it's really about educating and showing the options. So then that way you're at least aware of them and then it's up to you whether or not you want to move forward with it.

All right, let's move to the next one on the list. And we had somebody on the podcast a few weeks ago talking about captive insurance companies. He basically sells them, for lack of a better description, as 831PLANS. Your thoughts on how captive insurance companies work and where the line is when it becomes abusive?

Sure. So I have not had any clients that have done this plan. I've recommended it to some of my clients. And the major reasoning behind it is because you're able to really help mitigate risk within your business, but you have to earn enough money to make it a good cost benefit because they're very expensive to administer, they're very complicated to administer. You have to use a company that is dedicated to them. I highly don't recommend doing them yourself, but essentially what you're doing is you're creating your own insurance company. And instead of you paying some other insurance company these high premiums, you're able to move the money from your business being taxed at ordinary income tax rates to being a deduction for your business. So like let's say you pay 100,000 in premiums and that 100,000 is income to the your captive, which is basically a C corp, but you don't have to pay tax on. I think right now it's about 2.4, $2.5 million in premiums. So your captives not paying any tax on it, it's going and investing in it. It's going into a pool that basically if you do need to make claims, then you can do that. But what's great about it is at the end, when you want to close it down and take the money out, it's now being taxed at capital gains rates. So that's like, that's a really nice savings. But I've seen other advisors when I've gotten their plans, when they're recommending these, in my opinion, you need to have at least 2.5 to $3 million gross in revenue before you even start, before it's even a good cost benefit. Because I mean, this is costing anywhere from like 50 to $100,000 a year for you to administer properly. So which is a deduction in the, not in the first year but in the subsequent years. And so it's, it's really a very specific subset of people that can do this and make it work. And you need to have a genuine risk that you're trying to mitigate or have, you know, replace your, some of your insurance that you already have.

Yeah. I think it's important to point out too, as I understand it, while the money is in the C corp, while it's in the captive insurance company, it doesn't grow tax protected like a 401k or a Roth IRA would.

Correct.

You're paying at corporate income taxes on earnings on that money while it's in there. Correct?

Correct, Correct. Yes. Yeah. So you're at that 21% at the moment. So that's nice. It's going to be lower than your rate if you had kept it in your, you know, had taken it as a distribution or salary. But yes, there is that. And then, you know, like I said, when you go to take it out, you're going to pay tax on it as well.

Yeah. Obviously you don't want to do this unless you have a pretty successful business going. But when do people get too aggressive with.

Yes. When have they tried to do too much into the plan? Like you got to make sure that the amount of premiums that you're do that you're paying are equivalent to what the premiums you would pay if you were to buy like an outside plan. And also too trying to do it yourself. I've only seen it wasn't one of my clients but a colleague who had a client that tried doing it themselves and oh, it was a big mess and like it. They got in a lot of trouble with the IRS and they ended up having to close it all down and tons of penalties, tons of interest.

All right, so the previous two we've talked about land conservation easements and captive insurance companies. I've never done either of those. But the next four things we're going to talk about, I have done and continue to do most of them. The first one is self rentals. Basically you are renting for example, your home to your business. Tell us how this works and when you've gone too far.

So some of you might know as Augusta rule or the 14 day rental rule. It's called the Augusta rule because it originated in Augusta, Georgia where the Masters are at and actually have some clients that do this. They rent their home for two weeks during that master's and they get 30, $40,000 in income and they don't have to pay any tax on that income. So basically if you keep your rent, your home to your business for this 14 days or less, it doesn't have to be consecutive. Your business gets a deduction for the rent and then you as individual don't have to pay tax on that income and it has to be your primary residence. So that's one of the catches. It can't be other like another rental property or anything. It has to be a personal residence. And one area that I've seen people get in trouble besides, you know, not using the proper home is that they try to do too big of a reasonable rental rate. So there's definitely, I mean I've seen this strategy so much on like TikTok and social media and I'm a little more conservative in this area when it comes to determining reasonable rental rate. But you can look at comparable Airbnbs. You can also look at conference rooms in the area for like Regis centers or hotels, et cetera. And what I like to do is get a price per square foot of what a one day rental would be for something like that and get like two or three of them, average them out. And what a lot of people will do though is they'll take like a super nice Airbnb and say, oh, it's you know, two, $3,000 to rent for the week or the month or something and it's not comparable to their home or they try to do it for the entire house as well. I tend to go and say, hey, get that price per square foot, that average and then apply it to the areas that you're using. So like I don't include my home office because I'm doing my home office deduction. I don't include the upstairs where my kids bedrooms are at and like the playroom. I just do it for like the kitchen, the living room, hallway to the bathroom, things like that. And so that's definitely a lot more conservative than other people. But I always try to look at things from the eyes of an auditor. And so like for example, if I tried to include my home office, they'd be like, well that's, I can see that as being double dipping. And so that's kind of my take around it.

Yeah, and that's how we've done it is comparable airbnbs. We actually print them out on the day that meeting was and keep them and keep those in the file in the event we're ever audited. But I think I might actually be more aggressive on this one. Than you are. I generally have used the whole house. I've not tried to limit it to whatever space was touched for the meetings we have there. WCI doesn't have a headquarters outside of my house and so that's what we've done there. Okay, let's go on to the next one. The next one is employing your spouse or children also something that I have done. Tell us about this, how it works, why you might want to consider it and where the lines are.

Yep, I do the same. I have four children. My three oldest are working in my business and so I use the court tested age of 7 as the minimum age. And that's just what's like I said, been tested. I've seen other people do much younger. I sometimes had clients try to do like their one year old or their two year old and they're, I mean they, they've gone off the old, what I feel is an old strategy model of hey, my kids are models in my business. And I feel like back in the day that worked really well because I mean it was really difficult. Not everybody had cameras like we do now. They, you know, if they were doing other things then great. But most of the time now to justify, let's say if you want to do enough for, to put money into the Roth IRA like you want to pay them $6500 and next year it's 2024, it's 7000, it's hard to justify an annual salary for one picture on your website of that. So it's really important when you go to hire a child that they have a legitimate job in your business. So you want to actually create a job role, you know, responsibility card for them and also keep track of the hours that they're working. So like for my kids for example, they're shredding paper, they're stuffing envelopes, they're stamping envelopes or cleaning my office. I want to basically create enough work for them that they can earn their $6,500 or $7,000, however much the Roth IRA contribution is. So then that way I can start going and putting money towards their retirement. Where people get in trouble is they want to hire their, you know, seven year old kid and pay them, you know, $14,000 a year and they're not doing the proper documentation and they're not making sure that their kids are on payroll. Like so they have to actually be on payroll. You don't want them to be 1099 because then they're going to be subject to self employment tax on their return. But it's great if you have like a sole proprietorship or a partnership, you're not having to pay any tax on you know, at all income tax or for federal or state as well as Social Security, Medicare tax if they're in either of those types of entities. If they're an S Corp or a C corp, yes, you have to do pay Social Security and Medicare. But yeah, overall the major areas that I find people having problems is, you know, not properly documenting, not putting having a separate bank account for their kids, putting that money into their going and spending that money on non kid things, whether it's their retirement or parents take it out and then spend money at the grocery store or such instead of on kids activities, et cetera. So it really needs to be geared towards the kids. The whole point is to try to write off some of the support and get a deduction for the business and then you're shifting that income from your higher tax bracket to their ideally zero tax bracket.

Yeah, I think the keys are legitimate work, legitimate pay for that work. Right. And then proper documentation because they're employees. You got to do an i9, you got to do a W4, W2, W3 every year. You got to have a time card, you got to have a separate bank account. And as you mentioned, I don't want people to gloss over this too quickly. This doesn't work for a corporation. It only works for sole proprietorship or partnership where the only owners are your parents. So if your structure of your business is an S corp, you're going to need another business if you're going to do this. But I've never paid my kids enough to max out a Roth ira. I always thought that was a little excessive even with a good timesheet for the work they were doing. But I paid them a few thousand for a number of years. So it's, you know, have you seen this sort of thing audited frequently or.

No, no. I mean knock on wood, you know. No, I don't see it very often. The, you know, I know some people worry about, well, you know, how can my kid be working? Aren't there like child labor laws and such? But there is a federal exemption against, you know, get that Especially if you're working your kids working for your personal business. And I have to disagree with you a little bit on not doing it for S Corp or in the C Corp. A corporation you can still do it. You just have to pay the Social Security, Medicare tax. But a lot of the times the tax savings is still going to be more than what you're paying and adding your kid to your payroll as well as paying the payroll taxes on it.

You mentioned the IRS age of seven. And I can tell people having done this younger than seven, you will get a letter every year. It actually comes from the Social Security folks, and the letter has about three questions on it. What is this person doing for your business is the main thing. What is the job? You know, and you got to put a job description in there. I never heard back from them after sending that in, but I've had to send it in when I had kids younger than 7. So expect to hear from somebody if you got a really young kid you're using as a model or something like that. Okay. Now another one I get asked a lot by docs is they're a 1099 or something and they want to employ their spouse. And I think the main goal they have most of the time is to be able to make 401k contributions for the spouse is what seems to be the goal. Can you talk about employing your spouse and where the lines are?

Yeah, so that's exactly how the conversation usually goes with my clients as well. The only reason to really employ a spouse is, is to let them participate in retirement. And it's the same thing, though, as with the kids. They have to have a legitimate job in your business, and you have to treat them just like any other employee. You know, there's some other benefits could be that if, you know, you go travel somewhere for business and your spouse has the legitimate reason for coming with you, then you can go and write off their travel expenses as well. So there are some benefits to it, but you just have to make sure that what you're paying in Social Security and Medicare isn't more than what any other tax savings would be. And I've even used this strategy for hiring parents. So if you have a parent that you're supporting, and let's say you send them a thousand bucks a month and you want to write off their support and they can have a legitimate job in your business. Well, have them do some admin work for you. Have them do something in the business. So that way you can write that thousand dollars a month off through the business. You just have to be careful if you have older parents that might be on Social Security or have any other state benefits that if their income increases, it might make them ineligible. So that's something you just got to work with your tax advisor on and just look at the numbers to make sure it works out. You're not screwing your parents over.

Yeah. The other thing I think people get really abusive on these is the spouse isn't doing anything. They're not actually doing any legitimate work. They're just trying to put them on payroll. And so that's usually what I emphasize to people is, yeah, if your business has actually hired your spouse to do real work and is paying them a fair wage for that work, then you can do this. But a lot of times what that means for a stay at home parent married to a document is that they're paying a whole bunch more in Social Security tax than they would otherwise and they're still paying at that couple's marginal tax rate. So you're not saving anything on tax here. Usually you're getting access to another retirement account and maybe the ability to write off some expenses.

Yeah.

Okay. Our next subject is going to be tax loss harvesting. And we've beaten this up ad nauseam on this podcast and on the blog for many years. The thing that I think hangs people up a lot is they read the description of what the fund or ETF that you're exchanging into is from the irs. And the words of the IRS is not substantially identical is the phraseology that they like to use. And they say, well, shoot, switching from a Vanguard Total Stock Market fund to a Vanguard 500 index fund has a correlation of 0.99. That's the IRS is going to look at that and be and call it substantially identical. But in my experience, you know, as long as it doesn't have the same Q SIP number, nobody seems to care. They view it as differently. And I feel like I could justify, you know, just about anything because the fund I'm swapping into follows a different index or has a different number of stocks in it or whatever. What are your thoughts on tax loss harvesting and how much people should worry about that substantially identical harvesting?

Partner, I agree with you 100%. I've never seen it ever brought up in my 20 plus years in this industry. And also being an NTPI fellow, like taking that's a three year fellowship that I did in IRS representation that wasn't even something that was ever brought up as a major item. And I think the only time you have to worry about it is if you're doing something else on your return and then they start looking at it, trying to dig for other things to kind of nail you on. So again, like you said, if it's a, if it's a low correlation, then, you know, I don't really think that there's going to be much of an issue with it.

Yeah. Okay. All right, our next one, setting a low salary, you know, forming an S corp and then making your salary really low to save on, you know, certainly Medicare taxes for most stocks. Sometimes people set the salary so low they're actually saving on Social Security taxes. What are your thoughts on this strategy? How do you know when somebody's taking it too far?

When they're not paying themselves a reasonable salary? That's when. That's when. That is. Yeah. With everybody that I work with, when it comes to the S Corps and even the C Corps, I want to make sure that they are paying themselves a reasonable amount. And there's different methods, but my favorite is, you know, the many hats method. Basically the problem is that people just assume like, hey, like I'm earning X and so, you know, gross revenue. I'm only going to pay myself this much to save on that Social Security, Medicare. But this is one area that the IRS loves to nab people on. I mean, if this is probably, I would say the number one thing that is audited on S Corps. And so you need to really take a look at what your rate is if you were to hire yourself off the street, you know, and you can then take a blended rate though of the different jobs that you do in your business. So yes, you're, you're a physician, but you are also your travel agent, you're also your admin, you also doing your bookkeeping, you know, depending upon, you know, if you're doing it all yourself or you, if you have employees, etc. And then you got to allocate your time between. So if you're working 40 hours a week and that's, that's kind of, that's the standard, by the way, for a reasonable comp. They don't look at, you know, if you're a physician, you work 80 hours. Like the comp is still based off of a 40 hour week. And so you take your 40 hours and if only 60% of your time is actually doing, you know, work as a physician, then we only want to take that higher rate for that 60% of the time. So taking a blended rate is great, but you have to substantiate it. You have to look at, you know, the different jobs that you're doing, find an average rate and you know, you can look at census data, you can do research, go look on, you know, salary.com or all these other websites to determine what would be reasonable for you and then, you know, take that blended rate. So Then that way it does help to lower your salary. But where people try to get cheeky and, you know, just do it too low. I mean, the IRS is, you know, might take a few years for them to find it, but they'll nav you for it real fast. And then you're going to owe interest and penalties on and payroll tax penalties and interest, which are far worse than income tax penalties. You don't want to screw around with with payroll. Like, you got to make sure you're doing it properly, otherwise it can really bite you in the butt in the end.

Yeah. So good example of a doc who's abusing this. Let's say it's an ophthalmologist who's actually practicing full time and claims a salary of 50 grand. That's going to be a big red flag, right?

Exactly. Yeah. The IRS has these statistics and so, you know, if they see that, hey, this is really low, like they might, you know, need to inquire like, hey, why was it so low? Like, did you have to take medical leave or, you know, something else happening, you know, there are some legitimate reasons for taking a lower salary one year or more, but again, if you can't substantiate it, then they're going to go and get you with those interest and penalties.

A couple of rules of thumb that I've heard and probably even used over the years. Tell me what you think of them. The first one is, especially for a doc, don't set your salary below the Social Security wage limit. That way you're only saving Medicare taxes and it doesn't look quite as abusive, the irs. And the other one is, you know, pay yourself at least 50% of what the business is making as salary. Do you think those rules are worth anything? You think it's really about getting into the details and just figuring out what a reasonable salary is or is there some value to those rules of thumb?

The IRS has not provided any guidance or has any set formula for figuring out what's considered reasonable comp. I never ever go based off of percentages. That's because I've seen where, when I've run reasonable compensation analysis for my clients, I've even had like ophthalmologists, for example, that will, you know, their salary is below the Social Security wage amount. And so it just depends on what other jobs you're doing and, you know, and everything. And so I think it is worth the time to investigate, you know, like I said, all the jobs that you're doing and find the proper hourly amount and Then take that, the average between all of them or the blended ratio, sorry, between all of them. And it's something that you only really have to do maybe every two to three years, you know, or if there's like a big change event in your business or you retire or you know, slow down or you maybe only start to work, you know, three or four days a week. So I don't, I've never seen any merit to those standard amounts.

Fair enough. Okay, let's get into the next one. And this one's really popular among direct real estate investors that I've seen. That's where this comes up most often is cost segregation studies. Can you describe what that is and when somebody's maybe taking it too far?

Yeah. So cost segregation study is basically when you want to accelerate the depreciation in a building. So what happens is if you let's have a commercial building and it's normally depreciated over 40 years. And so if you say buy a million dollar building, then that million dollars is depreciated straight line, you divide it by the 40 years and that's how much you can take each year. But with a cost segregation study, what it does is it takes that million dollars and then breaks it up into different components of the building that have a different depreciable life. So for different parts of the building that have maybe a five to 15 year depreciable life, you can take that amount and depreciate it over that shorter period of time and then you can start getting into like bonus depreciation as well and etc. What ends up happening is you get a really nice big deduction that first year and then still get nice little deductions continuing forward. But the point is that you're accelerating that depreciation. Where people can get into trouble is that they don't do a proper cost segregation study. Really you should be working. If your building is itself is worth like usually I said the, the hump is about $600,000 or more, then you really need to have a proper cost segregation study done. You know, there are different tools out there for doing like mini cost segs for properties that are, that are not as expensive. But you know what I've found is that generally overall, I mean this is a very legitimate strategy and a great way to reduce. But where also two people can get in trouble is that they don't realize that unless you are doing rep status or maybe you have a short term rental, like you can actually get a benefit of that accelerated depreciation you're spending unnecessary money on doing that cost segregation study. So you know, if you're subject to those passive loss rules and you can't take any losses against your ordinary income because as I mentioned, you don't qualify for that short term rental or long or rep status, real estate or professional status, then like I said, you've just paid too much money for something that really doesn't help. And you don't. And the problem is that if you, even if you did it in the beginning, you're like, hey, I'll get rep status next year. That's still considered passive losses. You can't change the character of those losses from prior years to now be considered active. So it's always best to wait until you know you're going to qualify to actually take the loss before, before doing it.

Yeah, good tips there. Not really a do it yourself project. No, that's kind of what I've taken away from cost segregation studies. You got to hire a firm that kind of specializes in these. And if you don't qualify for the short term rental loophole or real estate professional status, it's not worth doing basically.

Yep.

Yep. Okay, let's get to another one that you occasionally see, usually more in the world of reducing estate taxes, which is a qualified personal residence trust, a qprt, basically an irrevocable trust that allows you to get your home out of your estate to reduce the amount of estate taxes that gets paid upon your death. But they also allow you to remain living on the property with the retained interest in the house for some period of time and then the rest is transferred to the beneficiaries as remainder interest. Who should be thinking about these if.

Anybody, if you have an estate problem, basically it's when you want to start thinking about that because most of the time your residence will be a large portion of your estate. And so but the problem with these is that you lose your step up in basis and that could be a significant tax savings for your heirs basically. And also too you don't, after a certain period of time, if you're still living and you're living in this house and it ends, you have to start paying rent to your beneficiaries and that rental income is taxable to your beneficiaries. So like if you don't have a good family dynamic, then that can start to be kind of sticky situation. But my major thing is the fact that you lose that step up basis.

Yeah, that is a big thing and something those of us with estate tax problems Definitely worry about, you know, the mainstay of our estate tax plan is a trust in which that step up in basis is lost. And so you got to look at it and offset well, is the savings in estate tax going to be worth the additional cost in income tax down the road when these things get sold? In our case we decided it was, but certainly a lot of people may decide just the opposite and this would be a total waste if you don't end up with an estate tax problem anyway.

Yep. And that's the problem is that we don't really know where estate tax exemptions are going. It kind of depends on who's in power and what they decide. But I mean right now it's very generous. But I mean that could revert back to early 2000 levels where it was like a million, maybe $5 million. And a lot of docs, if they're doing things right with their finances, will hit that very easily and then they'll have estate problems.

Right now it's 27 million in index to inflation, but starting in 2026 it's going to be half that. If Congress doesn't change anything that's already set in place in the law, that that's going to be have starting in 2026 and definitely will grab a lot more people at that point. And obviously if they reduce it back to where it's been in the past, it's going to affect most white coat investors. But right now it's 27 million. It's affecting very few of them. Okay, let's get on to one that I hear about a lot. Everybody's interested in car related deductions, you know, so let's talk about the Section 179 deduction for cars greater than £6,000. Can you explain how that works and when someone knows they're abusing it?

Yep. So basically what happens with this is you purchase a vehicle and if you're using it 100% for business, you can go and write off the cost of that vehicle and you know there's bonus depreciation involved. And then you know that like I said the section 179. So it can be really powerful if you need a car. You know, one phrase I always love that you have is don't let the, was it the tax tail wag the dog? You know, don't buy a vehicle unless you actually need the vehicle. And I see this all the time with my clients. They're like, hey Lexus, like what can I do? Like should I just go out and Buy a car. And I'm like, well, do you need the car? They're like, no, no, but it'd be okay. And I'm like, well, don't do it. You know, it's. It doesn't make sense. And so what a lot of people will do is they'll not use that car. Sometimes they'll be personal vehicle, personal and business vehicle, but they're not using it enough. And there's usually that 50% rule where you need to be using it more than 50% in order for it to qualify. And so, and even if it's not just the first year, if you subsequently go down in the next year, then you can get in trouble for that. So you have to actually be buying a vehicle that will be used for business also, too, you know, have some clients that will purchase the vehicle at the very end of the year and drive it one mile and say it's all business. And again, that ties into, well, okay, make sure that you're using it 100% for business next year, you know, or at least, you know, over that 50%. So that's generally where people get in trouble, you know, or they, whoops, I bought a car that really wasn't qualified for that £6,000. I've seen that happen before, too.

Why do you think there's this 6,000 pound limit? I mean, they're okay with ambulances, they're okay with big work trucks, but they're apparently not okay with you using a Honda Civic as your business vehicle to get this deduction. Why is that?

That's a good question. This one's been around for a while and I'm not sure why they decided that. Maybe because most of, like, the real legitimate work vehicles are going to be over £6,000. And so they're trying to make it more affordable for business owners to go out and buy, like, that fleet of trucks that they may need.

But what ends up happening is the Realtors buy Suburbans.

Exactly. Yes, exactly.

All right. I think the key here is to remember that this is a business deduction. You have to use the car for business at least 50% of the time. And if it's not 100%, you got to prorate it, right?

Yep, exactly. Yeah, that can be a problem too, is people don't realize, like, oh, I got a reimbursement, or they try to purchase the vehicle like through the business, you know, which I don't recommend doing unless it's going to be 100% for business. Or, you know, and the thing is that if you're using it for like 95% business, there is some diminish rules. Like if you use it for a little bit, oh, hey, I went to the grocery store, you know, after work sort of thing, that, that's fine. But what I found that is it's easier just to purchase everything personally. For one thing, insurance rates are a lot less expensive for personal versus business. And so if you decide to purchase the vehicle, then you just want to make sure that you're doing it on the up and up.

Can you explain to the doctors that out there listening that their drive from their house to the hospital is not business use?

Well, sometimes it can be. So if you have your home office then, and it's a legitimate home office and you use a lot of times, like I have some physicians that they'll, they're on call, they come home and they're using it to look at images, etc. So they have a legitimate home office. You actually can take your mileage from your home to your other place of business and that is legitimate mileage. However, if you don't have that legitimate home office established, then yeah, you can't do your commuting miles.

Now what does it mean to establish legitimately a home office? Does that just mean you're taking the home office deduction or does that mean you actually do work in that home office before and after you commute each day?

So basically that you use it for, you have it set up properly as a home office. So like you're actually doing work from it. You don't have to necessarily do it like right before, right after, but you need to be using it on a consistent basis. It has to be considered ordinary necessary to have it and it's considered convenience for the employer.

And I know to take the deduction for the home office deduction, you have to use it regularly and exclusively.

Yes.

Is that also a requirement if you're trying to deduct your commute?

Yes. So like for me, for example, you know, cerebral is 100% virtual. So I work from home. So if I go from here and I go to a meeting with a client or I go, you know, to Staples to buy office supplies, that is business mileage. And it can be even too for a physician, like if, let's say they're doing like telehealth or you know, like I said, you know, I have like my husband, for example, he doesn't have his own home office here at the house, but he looks at images all the time. You know, when he's on call. So if you're using it regularly and exclusively for business, you have that need. It's considered, like I said, a convenience for the employer, then yes, you can go and take it. I have not, knock on wood. I have not had any issues with it.

Okay, I think we beat that one to death. Let's move on to one I know you're not a huge fan of, and I am not either, but people have probably heard about it and wondered about it. Let's talk about the restricted property trust. And you'll see this out there and you'll try to figure out what it is. And you read and read and read and nothing tells you what it actually is because the people selling it are trying to hide what it actually is, which is usually a whole life insurance policy. Tell us about restricted property trusts, what you think about them.

Yeah, so full disclaimer. I don't recommend these. I don't do any of them. I don't know a ton about them because I'm like you. My husband and I were talked into a whole life insurance policy when he was in residency and so I'm not a fan of whole life insurance as well. So when I hear I. It's like a dirty word. So. But anyway, so restricted property trust is designed to help business owners, physicians, et cetera, you know, mitigate their income tax. That's kind of how it's sold. The main objective is it's a long term, non taxable cash growth and cash flow using conservative asset class, which is basically the life insurance policy. So this basically means that when you're putting that in, you're getting a deduction for that. But the thing is that it's not a full deduction. If I remember correctly, you're still having to pay tax. I think on 30% it's considered income. And then so you're only getting like a 70% deduction. And then, you know, the kind of. The theory is that when you want to take money out, you can take money out, but it's going against your death benefits.

Yeah. So these get sold under lots of different names. Split dollar policies is sometimes what they're called. But it's basically your employer is buying you a life insurance policy is what it comes down to. And the question is whether the tax benefits of being able to partially deduct the premiums into the policy are worth the fact that your money's going into a whole life insurance policy. And you got to run the numbers and decide if that's really worth it to you. But it certainly adds complexity to your life. And my gut reaction to most things whole life insurance is I don't want to get involved. I don't want to deal with it because at the end of the day, what do you own? You own a whole life insurance policy, which I don't really want to own again, so.

Exactly.

All right. Well, this has been great, Alexis. It's been great to have you on. We'll have links to your course as well as your book in the show notes. Looking forward to seeing you again soon, I believe. Am I going to see you this year at wcicon?

Yes, yes. I'm going to be discussing just about different strategies that taxpayers should be doing, just the basic things because I feel that a lot of people come to me looking for the bells and whistles. And sometimes you just got to concentrate on those basic things first so that you can maximize your savings.

Yeah, I think this podcast is going to drop on the day WC Icon ends. But if you want to hear Alexis's talk, you can still buy the virtual version. We call them Continuing Financial Education. Package them up into an online course each year, all the material from the conference. So if you want to learn more about this and about other topics that are talked about wcicon, you can get that. It'll be ready in just a few weeks and obviously we'll make a big announcement on the podcast and the blog when that becomes available. Thank you so much for your time today and explaining some of these more intricate and aggressive, maybe certainly more advanced and difficult to understand tax techniques that people are using out there.

Thank you so much, Jim. Had a great time.

Okay. I hope you enjoyed that as much as we did. We'll have a link to all of Alexis stuff, book course. She's got some freebies on her website. We'll have that in the show notes, so you can get to that. But it's basically Cerebral Tax Advisors Whitecoat and you can learn more about that. It's fun to talk about these things and, you know, and you get to decide which ones of these you want to use. You know, maybe you want to use a QPRT and you don't want to use a land conservation easement or you want to do tax loss harvesting, but you don't want to, you know, form an S corp. It's your choice. Right. So talk with your tax preparer if you use one, and decide which of these techniques you would find most useful. If you're finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head over to whitecoatinvestor.com to start learning today. All right, don't forget if you want to come to WCICON next year, and you should want to come, it's going to be awesome. San Antonio the dates are February 26th through March 1st, a little later than this year, so it's about 13 months away. You can register@wcievents.com but this is the best price it will ever be. Of course we're going to give you a good price. You're buying a year in advance, right? But $14.99 in person, general admission. And you can cancel through July 31st. Just a $99 cancellation fee. So if you're interested in coming, wcievents.com thanks. For those of you who are telling your friends about the podcast, it does help spread the word. So does leaving 5 star reviews. Our most recent one comes in from Afia Bore, I think is how you pronounce that. Just came in the month we're recording this, which is December. This person says Dr. Dali's material is a must for all doctors. Becoming financially literate and subsequently financially independent is going to be very important if doctors are to ever take back control of medicine. Dr. Dali is leading the charge with books, blog posts, and a podcast that are all very informative and entertaining. I wish I had come across his material earlier. His advice is honest, well researched and practical. He may not ever brag about it, but I'm certain he is making a major positive impact in the medical profession by helping doctors and other healthcare professionals become financially literate. Five stars. Thanks so much for your kind words and for that review. That's a great way to thank us. We know that most of the white coat investors are actually never buying any of our products, right? That's okay if you don't want to come to the conference. You don't want to take our online courses, you don't even want to buy the books. You want to borrow them at the library. That's okay with me. There's enough people that do buy them that it works out, we're able to make payroll and make a fair profit. But one way, if you're one of those people that have not necessarily ever bought anything from us or even our advertisers, this is one way you can give back. A five star review does help spread the word. All right, great episode. We'll see you next week. Keep your head up, shoulders back. You've got this and we can help.

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