The topic today folks is a short but poignant one. Yesterday, I noticed on a blog somewhere out there in cyberspace that apparently the $44K incentive money isn’t exactly all that it’s counted on to be. Most people probably do not recognize that even though it’s originating from a federal program, the federal government is going to be taking about a third of it right back in taxes based on how it’s paid out. Unlike tax write-offs that we can all qualify for if we are using money for business expenses, apparently this isn’t the case for the $44K, which is slated to be paid to individual doctors.
How does $29K sound? If you’re the federal government, let me say it sounds like a really good deal for saving money. Will $12K in the first year recoup all that is needed to be put into computer hardware, complex software, office rewiring/networking, and IT consulting and maintenance costs?
I’ve said it before and I’ll say it again. Go for an EHR system if you want it for your practice to be more modern and electronic, not for incentive carrots. You know those baby carrots that are left after all the outsides are shaved away? Yeah, the two-inch stubbies you can find in the produce aisle in plastic bags. Well, I wonder if this is an apt comparison with what you can really expect from the incentive money in the end.
Dr. West is an endocrinologist in private practice in Washington, DC. He completed fellowship training in Endocrinology and Metabolism at the Johns Hopkins University School of Medicine. Dr. West opened The Washington Endocrine Clinic, PLLC, as a solo practice in 2009. He can be reached at doctorwestindc@gmail.com.
Assuming you automatically pay at the top marginal rate is a fallacy. You are assuming that each new dollar will be taxed at the top marginal rate without taking any other tax preference into account. That’s not how the system works.
This is so whether you take the payments as personal income or If you run your practice as a business, incorporated or not.
As personal income, you would offset the income with your deductions, etc. You need to see what your effective tax rate, that is, tax owed over AGI is. If you are like most upper income tax payers, it is more like 15%.
If you take it as a business, incorporated or not, you would offset it with your business expenses. You need to take your total income tax situation before you can speak to the impact of the incentive payments.
Commenting just to subscribe.
Carl, I know how to figure taxes. Prior to opening my own practice in 2009, I did my own every year. Last year, my effective tax rate after the adjusted gross income (AGI) was figured and all the deductions my DC-based CPA — at a good firm — could squeeze out, was 30%. I haven’t had a 15% effective tax rate since I served ice cream at Dairy Queen in college. Maybe I am misunderstanding something when you say that most upper income tax payers, after deductions, have an effective tax rate of 15%. That just doesn’t seem correct.
JW, there is a yellow bar where you can subscribe at the top of the post.
According to IRS for the latest available year, 2008, those persons with an AGI of $100,000 and above, the overwhelming percentage pay an effective rate between 15 and 20 percent.
The percent of persons who earn $200,000 and above and have an effective tax rate above 30 percent is about 20 percent.
http://www.irs.gov/pub/irs-soi/11inhincomesprbul.pdf
Carl, thanks for that reference. Have to admit that it’s difficult to follow the calculations since it’s such a long document, more difficult than most IRS documents I’ve seen.
I think that doctors themselves, especially self employed ones, represent where the rubber will meet the road, unfortunately. I’d wager a chocolate bar that doctors are not in the category of high income taxpayers who are going to qualify for such a low effective tax rate. M effective rate was 35% (previosuly misquoted) in 2010, and my after- deduction tax base was pretty mediocre (nowhere near $200K) as a new business owner starting a practice from scratch. I deducted as much as I was legally able. I guess I don’t fit that IRS cookie cutter. Wonder how many doctors will.
As they say, your experience may differ and yours does for sure.
More to the point, PMs or the PM side of EMRs generally don’t work well with accounting systems, so you can’t get a good idea of where a practice stands as a business.
FYI, to get at cumulative percents, I had to move much of the table into excel.
Taxable!!! That’s just wrong.
I incorrectly assumed (yeah I know what it makes me) that it wasn’t. Thanks for pointing this out.
@Yvonne, completely agree. It’s a bit of a false gift. You should see my statistics post from 7/27/11. It really burns when you consider what’s being asked for by CMS. But then again, that’s just one reason why I’m no longer doing any business with CMS.