Change You Can Believe In: Death Taxes and Tax Rate Rollbacks

Last month I discussed the upcoming income tax and Social Security tax changes. As you can see in Table 1 below, you should expect to pay about 10% more in income taxes in a few years. But that’s just one of the tax law changes that will directly affect you in the next two years. Here’s a run-down.

Last month I discussed the upcoming income tax and Social Security tax changes. As you can see in Table 1 below, you should expect to pay about 10% more in income taxes in a few years. But that’s just one of the tax law changes that will directly affect you in the next two years. Here’s a run-down.

2010…A Great Year to Die
You’ve heard the old cliché that there’s nothing certain except death and taxes. Well in few years you’ll have to add death taxes to that list as well. What I’m about to tell you will make you roll around in your coffin. When you die, the executor of your estate must calculate the value of your estate, which includes everything for which you have an incident of ownership. In 2009 if your estate is valued at $3.5 million or less, you pay no death taxes. In 2010, the estate tax is repealed completely so you could die with an estate of $50 million and pay no death taxes. The problem comes in 2011, when only the first $1 million is exempt and the rest of your estate is taxed at a whopping 50%. Because of this problem, it’s essential you review how your current assets are titled between you and your spouse. A lot of physicians make the mistake of thinking that life insurance policies are not taxed. It’s usually true that the beneficiary of a life insurance policy pays no income tax, but the death benefit is included in your estate if you own the policy so that you might pay death taxes on it. In this case it’s essential for you to consider creating trusts with an estate planning attorney to minimize assets that put you beyond the estate tax exemption. The problem is that the estate tax code is another political football just like the income tax code, making planning difficult.

IRA conversions
There’s one thing that frustrates me even more than EMTALA—not being able to contribute to a Roth IRA (okay, maybe EMTALA is worse). For married couples making over $176,000 in 2009, you’re out of luck. In 2010, that changes because you can convert your traditional or SEP IRA to a Roth IRA. Right now you can only do this conversion if you make less than $100,000, but in 2010 you can make the conversion regardless of income. The question then becomes, should you convert or stay put? That gets back to the idea of the difference between traditional and Roth IRAs. As I wrote in a previous article (see January 2009 or go to www.epmonthly.com), the decision to contribute to a traditional or Roth IRA depends on the difference between your pre- and postretirement tax rates.  If you decide to convert to a Roth IRA, you will pay taxes on ALL amounts that are converted since you were given a tax deduction when you first made the contribution. Our benevolent government has decided to give us a break by allowing us to spread the payment of our tax bill on the conversion over 2 years. There is a silver lining here. You may not owe a huge amount in taxes if stock prices are still depressed next year. Also, you may have a back door way of contributing to a Roth IRA after all: you could contribute (but not deduct) to a traditional IRA and then immediately convert it to a Roth IRA.

The Mother of All Taxes
Let’s face it: EMTALA is a tax directly on emergency medicine physicians. I somewhat jokingly call it the Emergency Medicine Tax and Larceny Act. Just because we don’t list it on our tax returns doesn’t mean we don’t pay it.  This tax is larger than the total amount of income taxes you pay in a year.  Don’t let on call consultants think that they are the ones bearing the responsibility of uncompensated care. We bear more of this than any specialty by far. Our daily work is already tough enough. While we always act in the best interests of our patients, when a good or service has a price of zero, it has a value of zero. Do any of us think that our services have no value? Well, that’s exactly what our elected officials think. Unfortunately, it looks like there won’t be any tax law changes in this area anytime soon—just more continued taxation on EPs. So the only solution here is to collectively stand up to our lawmakers and tell them that massive unsubsidized mandates threaten the safety net so many people depend on. After all if they can emergently cough up trillions to bail out mismanaged companies, I’m sure they can address this problem also. Fellow EPs, it’s not a crime to be paid for our essential services.

Click on image of Table 1 to view high-res PDF version.

Estate Tax: 
Informally known as the death tax, it is the amount of tax due upon the death of the individual if the value of the individual’s estate exceeds a certain amount, known as the estate tax exemption.
IRA Conversion: 
The process of converting one type of IRA to another, usually referring to converting a traditional IRA to a Roth IRA.
SEP IRA: 
A Simplified Employee Pension IRA is an easy-to-administer type of retirement plan which can be setup by an employer or a self employed individual.