World War II ended in 1945 and the baby boom soon followed. From 1946 to 1964, 76,000,000 baby boomers were born. This massive generation has had and will continue to have significant effects on the U.S. economy.
During their prime working years, the baby boomers fueled GDP and the greatest bull market in history. However, the baby boomers are aging and leaving the work force. In fact, 10,000 boomers turn 65 years old every day and will continue to do so for the next 15 years.
As this generation retires and ages, they are having a new effect on the economy. This effect comes in the form of increased government liabilities and spending from Medicare and Social Security.
Will the government be able to fund these liabilities?
Given the fact that the government has been poor stewards of the Medicare and Social Security systems, the answer is most assuredly no.
Consequently, our debt is racking up to the tune of trillions of dollars. These future obligations to my parent’s generation are on shaky ground indeed. Unfortunately, serious attempts to stabilize this system, like tort reform, have been stymied by special interest and their deep pockets.
Instead, the answer seems to be more taxes. Unfortunately, as physicians we are in the crosshairs and can expect to see new taxes and fees being proposed and implemented regularly. However, since doctor’s net take-home pay only accounts for 10% of all health care spending, they could tax us at 100% and it still wouldn’t fix the problem.
One such tax is the Affordable Care Act’s 3.8% Medicare tax on all investment income for those making more than $200,000 as an individual or $250,000 as a married couple.
I recently read a post from another financial blogger lamenting about this new tax and its effect on his 2013 return. Remember that this tax is in addition to the capital gains tax. Many physicians who are heavily invested in paper assets are getting their financial feathers ruffled and wondering when enough is enough.
I have written extensively about how taxes are the greatest obstacle that physicians face in achieving their financial goals and a comfortable retirement. Unfortunately, the fact that we are already taxed heavily has not stopped the incessant drum beat that targets us for more and more taxes.
Clearly, many feel like we just don’t pay enough. The media feeds a public perception that doctors are rich. Although personally, I know very few doctors who are. Most work well past their desired retirement age trying to make ends meet.
Given the current economic and political environment, you would think more doctors would make it their mission to learn more about taxes and tax law. If they did, they would discover that this new 3.8% Medicare tax is on NET investment income.
Why does that make a difference?
For real estate investors, that fact makes all the difference in the world.
You see, net income is the income investors receive after expenses have been subtracted out. This is where depreciation comes in. Regular readers of my blog will remember depreciation. This is a paper or phantom loss that the government gives to real estate owners. Think of it as a non-monetary expense.
To better understand it, let me give you a hypothetical example. Consider a real estate investment in which the owner yields $5,000 in cash in a given year. In the same year, that investor might have $5,400 in depreciation. Therefore his NET income would be -$400. In this scenario, there would be no tax on this paper loss.
What other investments can do this? This is yet another reason why you should be looking to diversify into this compelling asset class.
To Your Wealth!
Dennis Bethel, M.D.
P.S. Don’t let the rise in health care spending and the accompanying taxes that it will generate bust your financial bubble. Learn all you can about taxes and the advantages that come with this asset class. Send me an email with your questions…email@example.com.