Monthly Archives: February 2017

Strategies for Reducing Your Effective Tax Rate

As winter gives way to spring, many physicians are finding themselves in the familiar position of preparing their tax returns in advance of the April filing deadline. Compounding the stress is the complex tax code. Doctors tend to be among the busiest of professionals, making it a challenge to keep up with all the rules and nuances of tax code.

In short, tax planning is all about using legitimate and legal methods to pay as little in taxes as possible. An effective strategy will do one of the following:

  1. Reduce your taxable income
  2. Reduce your actual taxes owed
  3. Defer taxation to a future year

Reducing Taxable Income

Federal Income tax seems to hit high-income wage earners the hardest. Plus, it gets proportionately higher as income increases. Therefore, a major area of focus in strategic tax planning tends to be reducing taxable income. Unfortunately, many high-income wage earners, physicians included, do not take advantage of the deductions which can reduce taxable income which results in paying more Federal Income tax then necessary. Here is a partial list of items that tend to be available to most wage earners:

  • Charitable Contributions
  • Mortgage Interest
  • Property Taxes
  • State Income Taxes
  • Student Loan Interest
  • Retirement Plan Contributions
  • Miscellaneous Deductions: Such as Professional fees that exceed 2% of your adjusted gross income, including legal, accounting, investment, and financial planning fees.
  • Capital Losses
  • Travel expenses in connection with a job search are potentially deductible.
  • Continuing education expenses are potentially deductible.
  • Medical expenses above 10% of your adjusted gross income.
  • Long-Term Care Insurance Premiums
  • Pre-school or childcare expenses paid for your children so that both spouses can work.1

Physician Tax Deductions

For self-employed doctors and practice owners, travel related to the operation of your practice tends to be fully deductible. However, typical commuting expenses are not. Most business meals and entertainment expenses are only partially deductible. To account for these, you should keep a log noting the amount spent, date, time, place of expenditure and business purpose.2

Note: The preceding list of available tax deductions is only a partial representation. It is not comprehensive and varies from person to person. Please consult a tax professional with knowledge about your specific needs.

Reducing Actual Taxes Owed

In addition to tax deductions, physicians and other high-income wage earners should try to fully leverage all tax credits for which they are eligible. Because tax credits actually reduce your tax bill dollar for dollar, they are even more advantageous than a tax deduction. That said, quite a few tax credits have income caps that make it hard for physicians to qualify.

The following is a partial list of tax credits:

  • Higher education expenses
  • International or domestic adoptions
  • Energy-efficient home improvements (Ex. High-efficiency furnace, Solar power, etc.)
  • Each child that you have
  • Childcare so that you and your spouse can work

Delaying the Due Date

One final tax planning strategy is to delay the due date on taxes owed for as long as possible. Though this is sometimes appropriate, it can be risky for high-income professionals because they could potentially be delaying their taxes to an even higher bracket later on. Taking advantage of tax-deferred savings vehicles or utilizing 1031 exchanges in a real estate transaction are good examples of the deferral strategy.3


When seeking out a tax professional, it’s recommended to find one willing to meet with you throughout the year to help implement proactive strategies. If you wait until after the year is over to sit down with a professional and dissect your tax situation, your options for reducing your tax burden may be extremely limited.

Many doctors assume that reducing their tax burden can be achieved by finding the right accountant to prepare their taxes, when in reality it’s small changes in the way you live your financial life that can really move the needle. Rules are in place to promote home ownership, business ownership and support for charities to name a few examples. By understanding how the tax code works, you can keep more of what you earn, now and in the future.

Have Questions?


  1. Credits and Deductions for Individuals. Department of the Treasury, Internal Revenue Service. Washington, D.C. : Internal Revenue Service, (January 18, 2017)
  2. Ike Devji, JD, “Income Tax Deductions Commonly Overlooked By Doctors” (February 18, 2014). http://www.physicianspractice.com/blog/income-tax-deductions-commonly-overlooked-doctors
  3. Robert W. Wood, “Ten Things to Know About 1031 Exchanges” (January 26, 2010). https://www.forbes.com/2010/01/26/capital-gains-tax-1031-vacation-home-personal-finance-robert-wood.html

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Larson Financial Group, Larson Financial Securities, and their representatives do not provide legal or tax advice. Please consult the appropriate professional regarding your legal or tax planning needs.

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Investment Shock Absorbers

February 2017 | By Jim Parker, Vice President DFA Australia Limited

Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner stomach-churning, and every red light an excuse to assume the brace position. Owning an undiversified portfolio can trigger similar reactions.

In a motor vehicle, the suspension system keeps the tires in contact with the road and provides a smooth ride for passengers by offsetting the forces of gravity, propulsion, and inertia.

You can drive a car with a broken suspension system, but it will be an extremely uncomfortable ride and the vehicle will be much harder to control, particularly in difficult conditions. Throw in the risk of a breakdown or running off the road altogether and there’s a real chance you may not reach your destination.

In the world of investment, a similarly bumpy and unpredictable ride can await those with concentrated and undiversified portfolios or those who constantly tinker with their allocation based on a short-term rough patch in the markets.

Of course, everyone feels in control when the surface is straight and smooth, but it’s harder to stay on the road during sudden turns and ups and downs in the market. And keep in mind the fix for your portfolio breaking down is unlikely to be as simple as calling a tow truck.

For that reason, the smart thing to do is to diversify, spreading your portfolio across different securities, sectors, and countries. That also means identifying the right mix of investments (e.g., stocks, bonds, real estate) that aligns with your risk tolerance, which helps keep you on track toward your goals.

Using this approach, your returns from year to year may not match the top performing portfolio, but neither are they likely to match the worst. More importantly, this is a ride you are likelier to stick with.

Just as drivers of suspensionless cars change their route to avoid potholes, people with concentrated portfolios may resort to market timing and constant trading as they try to anticipate the top-performing countries, asset classes, and securities.

Here’s an example to show how tough this is. Among developed markets, Denmark was number one in US dollar terms in 2015 with a return of more than 23%. But a big bet on that country the following year would have backfired, as Denmark slid to bottom of the table with a loss of nearly 16%.1

It’s true that the US stock market (by far the world’s biggest) has been a strong performer in recent years, holding the number three position among developed markets in 2011 and 2013, first in 2014, and sixth in 2016. But a decade before, in 2004 and 2006, it was the second worst-performing developed market in the world.1

Predicting which part of a market will do best over a given period is also tough. For example, while there is ample evidence to support why we should expect positive premiums from small cap, low relative price, and high profitability stocks, these premiums are not laid out evenly or predictably across the map. US small cap stocks were among the top performers in 2016 with a return of more than 21%. A year before, their results looked relatively disappointing with a loss of more than 4%. International small cap stocks had their turn in the sun in 2015, topping the performance tables with a return of just below 6%. But the year before that, they were the second worst with a loss of 5%.2

If you’ve ever taken a long road trip, you’ll know that conditions along the way can change quickly and unpredictably, which is why you need a vehicle that’s ready for the worst roads as well as the best. While diversification can never completely eliminate the impact of bumps along your particular investment road, it does help reduce the potential outsized impact that any individual investment can have on your journey

With sufficient diversification, the jarring effects of performance extremes level out. That, in turn, helps you stay in your chosen lane and on the road to your investment destination.

Happy motoring and happy investing.

Have Questions?


  1. In US dollars. MSCI developed markets country indices (net dividends). MSCI data © MSCI 2017, all rights reserved
  2. . In US dollars. US Small Cap is the Russell 2000 Index. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. International Small Cap is the MSCI World ex USA Small Cap Index (gross dividends). MSCI data copyright MSCI 2017, all rights reserved.


‘‘Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006. The articles are designed to help fee-only advisors communicate with their clients about the principles of good investment—working with markets, understanding risk and return, broadly diversifying, and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and discipline. Jim’s flags metaphor has been taken up and recognized by Australia’s corporate regulator in its own investor education program.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved.

All expressions of opinion reflect the author’s judgment at the date of publication and are subject to change without notice in reaction to shifting market conditions. This material is provided for informational purposes, and it is not to be construed as general financial product advice nor an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

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