For personal questions or if you’re an instructor who would like to access my slides, message me on Instagram: instagram.com/breakingbad... or find my email on the About page of my channel. 𝗖𝗵𝗲𝗰𝗸 𝗢𝘂𝘁 𝘁𝗵𝗲 𝗼𝘁𝗵𝗲𝗿 𝗙𝗔𝗤𝘀 𝗮𝘁: 1) Student Tax Questions Pt 1: ua-cam.com/video/8y-2xoTEtzc/v-deo.html 2) Student Tax Questions Pt 2: ua-cam.com/video/ZyiLNOQHaiU/v-deo.html 3) Should I invest in Real Estate with my Line of Credit?: ua-cam.com/video/j7qVMnWxynQ/v-deo.html
Wow, this was extremely helpful! I’m a new staff and was really struggling to even understand the basics. I hope you do a seminar on salary vs dividend etc!
Thanks Dr. Steph for the eye-opening tax hints. What if I'll be expensing all my earnings and there's nothing much left in the corporation to pay less taxes? Should I stay self-employed for now until I would be able to leave money in the account and then incorporate?
If you’re needing to take out all your earned income for expenses and there’s nothing left in the corp to be invested, it sounds like it’s better to not incorporate yet. A sole proprietor can also deduct business expenses similar to a corp would, without needing to pay the highlawyer and accountant fees to incorporate and file taxes.
Can you continue the Dr. Steph example into retirement? I want to see what happens in each scenario when it comes time to pay tax later on when you’re in the lower tax bracket
Thank you so much for this, Dr Steph. I was feeling pressured into incorporating right away after moving from Australia by my accountant. You’ve given me a lot of information to consider! Was using the OMA easy to incorporate? My accountant referred me to a lawyer who was charging $3k and as someone who had just started working after a very costly move overseas , I’m not sure I can justify that expense at this stage if I decide to incorporate.
I found using the OMA pretty easy, I had filled in a form with info re: who were my shareholders, name of the corp...etc it was done within 3-4 weeks, especially since I have a pretty standard med corp.
Regarding the Small Business Deduction: I may be wrong but I am guessing that a well-paid and frugal physician who takes out minimal salary from their corporation can start to amass considerable wealth in their corporation. At a certain point, doctors will need to determine what to do when their passive income exceeds 150k per year. Is there a standard way doctors handle this? This might be a topic for 5-10 years into practice for most...
Hi Adrian, do you mean the $50K passive income limit? In order to receive 150K in passive income (aka dividends), a corporation's investment portfolio would need to reach almost $3M with a pretty generous dividend assumption of 5%. Most portfolios aren't 100% consistent of 5% dividend paying stocks (maybe only a fraction of your portfolio are dividend stocks), as many stocks pay much less dividend yield (
Thanks for the video! Quick question: If you are paying the 12.2% initial Corp tax rate on earned income during working years, but then have to pay the full marginal tax rate when this is withdrawn in later lower income years, then it's really only advantageous if your marginal tax rate when you withdraw is atleast 12.2% lower than 53.5% right? I appreciate that you also get to hold onto more money for investment purposes in your corp which will be advantageous from a compounding point of view. I always just wondered if you paid the full marginal tax rate when you withdrew or was it marginal tax rate - 12.2% (because you had already paid that 12.2% to get it into the corp) Hope that makes sense and appreciate all the wisdom!
Thanks ZH for the question. To answer this, I am going to assume that you are paying yourself a salary rather than a dividend from the corp b/c the taxation for whether you're paid a salary or dividend is different. The gist of your question is asking whether you'll be double taxed when you take the salary out. The simple answer is No and here's why: Let's say your corp earns $220K and is taxed at the 12.2% on that active income while leaving it in the corp. Then 10 yrs later you decide to take a salary of $220K from your corp, you will pay the 53% marginal tax personally. But remember, employee salaries in a corp (even if you're the sole employee) is considered a deductible "expense" to the corp, thus corporations deduct the 220K and will not pay taxes on it which is where the "-12.2%" you were referring to comes from. If you only had active income of say $200K the year you take $220K as a salary then you wouldn't be paying any corporate taxes on the 200K, b/c on paper it looks like your corp was operating at a loss that year. The 12.2% doesn't get deducted from the 53% personal tax rate, it gets deducted from the corporation taxes. Hope this clarifies it!
@@BreakingBadDebt Thank you so much for this information! I had a question along this vein. In your "Dr. Steph goes on mat leave" case example, you show the taxes paid as $145,303 as unincorporated versus $138,478 as incorporated, which represents a tax savings. However, this doesn't seem to include the 12.2% tax that would have been paid on the money left in the corporation in the first year (so $100k in this case). Once you take that into account, doesn't this tax savings become much smaller, and in some cases even cause a breakeven? Thank you.
@@SiirEgg Hey, so you are right that the 100K left in the corp is taxed at 12.2% but the reason I didn't include that in the Y1 calculation is for simplicity, but also b/c of this rule: Income is not allowed to be taxed twice (which is why a wealth tax policy is hotly debated b/c it would imply a double taxation...but that's a debate for another time :) ). So if the 100k left in the corp is taxed in Y1 at 12.2%, and then when it's taken out in Y2 it's taxed at Marginal 43% tax rate, then that would be double taxation b/c the same 100K would be taxed at both 12.2% AND 43.41% which is against the rules. This would also not make sense b/c then there's no incentive to incorporate just to be taxed at a higher tax rate. So to avoid the double taxation, in Y2 when that 100K is taken out of the corp, your corp gets to deduct the 100K income and you would get the 12.2% back as a refund. Hence I didn't include the 12.2% tax at all in the above calculation at all b/c it cancels out and to keep it simple. The other benefit to leaving that 100K in the corp in Y1 is b/c you can invest more it after tax and it can grow. The mat leave example isn't exactly a good example of this b/c you're just leaving it in for 1 yr but I make this clearer in the Tax Deferral example. Hope this helps!
For personal questions or if you’re an instructor who would like to access my slides, message me on Instagram: instagram.com/breakingbad... or find my email on the About page of my channel.
𝗖𝗵𝗲𝗰𝗸 𝗢𝘂𝘁 𝘁𝗵𝗲 𝗼𝘁𝗵𝗲𝗿 𝗙𝗔𝗤𝘀 𝗮𝘁:
1) Student Tax Questions Pt 1: ua-cam.com/video/8y-2xoTEtzc/v-deo.html
2) Student Tax Questions Pt 2: ua-cam.com/video/ZyiLNOQHaiU/v-deo.html
3) Should I invest in Real Estate with my Line of Credit?: ua-cam.com/video/j7qVMnWxynQ/v-deo.html
Wow, this was extremely helpful! I’m a new staff and was really struggling to even understand the basics. I hope you do a seminar on salary vs dividend etc!
As an IMG coming back to practice in Canada, this is very helpful! Thank you
Any updates with new rules?
Thank you for the great information.
Thank you
Thanks Dr. Steph for the eye-opening tax hints. What if I'll be expensing all my earnings and there's nothing much left in the corporation to pay less taxes? Should I stay self-employed for now until I would be able to leave money in the account and then incorporate?
If you’re needing to take out all your earned income for expenses and there’s nothing left in the corp to be invested, it sounds like it’s better to not incorporate yet. A sole proprietor can also deduct business expenses similar to a corp would, without needing to pay the highlawyer and accountant fees to incorporate and file taxes.
Can you continue the Dr. Steph example into retirement? I want to see what happens in each scenario when it comes time to pay tax later on when you’re in the lower tax bracket
Thank you so much for this, Dr Steph. I was feeling pressured into incorporating right away after moving from Australia by my accountant. You’ve given me a lot of information to consider! Was using the OMA easy to incorporate? My accountant referred me to a lawyer who was charging $3k and as someone who had just started working after a very costly move overseas , I’m not sure I can justify that expense at this stage if I decide to incorporate.
I found using the OMA pretty easy, I had filled in a form with info re: who were my shareholders, name of the corp...etc it was done within 3-4 weeks, especially since I have a pretty standard med corp.
Regarding the Small Business Deduction:
I may be wrong but I am guessing that a well-paid and frugal physician who takes out minimal salary from their corporation can start to amass considerable wealth in their corporation. At a certain point, doctors will need to determine what to do when their passive income exceeds 150k per year. Is there a standard way doctors handle this? This might be a topic for 5-10 years into practice for most...
Hi Adrian, do you mean the $50K passive income limit? In order to receive 150K in passive income (aka dividends), a corporation's investment portfolio would need to reach almost $3M with a pretty generous dividend assumption of 5%. Most portfolios aren't 100% consistent of 5% dividend paying stocks (maybe only a fraction of your portfolio are dividend stocks), as many stocks pay much less dividend yield (
Thanks for the video! Quick question:
If you are paying the 12.2% initial Corp tax rate on earned income during working years, but then have to pay the full marginal tax rate when this is withdrawn in later lower income years, then it's really only advantageous if your marginal tax rate when you withdraw is atleast 12.2% lower than 53.5% right?
I appreciate that you also get to hold onto more money for investment purposes in your corp which will be advantageous from a compounding point of view. I always just wondered if you paid the full marginal tax rate when you withdrew or was it marginal tax rate - 12.2% (because you had already paid that 12.2% to get it into the corp)
Hope that makes sense and appreciate all the wisdom!
Thanks ZH for the question. To answer this, I am going to assume that you are paying yourself a salary rather than a dividend from the corp b/c the taxation for whether you're paid a salary or dividend is different.
The gist of your question is asking whether you'll be double taxed when you take the salary out. The simple answer is No and here's why:
Let's say your corp earns $220K and is taxed at the 12.2% on that active income while leaving it in the corp. Then 10 yrs later you decide to take a salary of $220K from your corp, you will pay the 53% marginal tax personally. But remember, employee salaries in a corp (even if you're the sole employee) is considered a deductible "expense" to the corp, thus corporations deduct the 220K and will not pay taxes on it which is where the "-12.2%" you were referring to comes from. If you only had active income of say $200K the year you take $220K as a salary then you wouldn't be paying any corporate taxes on the 200K, b/c on paper it looks like your corp was operating at a loss that year. The 12.2% doesn't get deducted from the 53% personal tax rate, it gets deducted from the corporation taxes. Hope this clarifies it!
@@BreakingBadDebt Thank you so much for this information! I had a question along this vein. In your "Dr. Steph goes on mat leave" case example, you show the taxes paid as $145,303 as unincorporated versus $138,478 as incorporated, which represents a tax savings. However, this doesn't seem to include the 12.2% tax that would have been paid on the money left in the corporation in the first year (so $100k in this case). Once you take that into account, doesn't this tax savings become much smaller, and in some cases even cause a breakeven? Thank you.
@@SiirEgg Hey, so you are right that the 100K left in the corp is taxed at 12.2% but the reason I didn't include that in the Y1 calculation is for simplicity, but also b/c of this rule: Income is not allowed to be taxed twice (which is why a wealth tax policy is hotly debated b/c it would imply a double taxation...but that's a debate for another time :) ). So if the 100k left in the corp is taxed in Y1 at 12.2%, and then when it's taken out in Y2 it's taxed at Marginal 43% tax rate, then that would be double taxation b/c the same 100K would be taxed at both 12.2% AND 43.41% which is against the rules. This would also not make sense b/c then there's no incentive to incorporate just to be taxed at a higher tax rate. So to avoid the double taxation, in Y2 when that 100K is taken out of the corp, your corp gets to deduct the 100K income and you would get the 12.2% back as a refund.
Hence I didn't include the 12.2% tax at all in the above calculation at all b/c it cancels out and to keep it simple.
The other benefit to leaving that 100K in the corp in Y1 is b/c you can invest more it after tax and it can grow. The mat leave example isn't exactly a good example of this b/c you're just leaving it in for 1 yr but I make this clearer in the Tax Deferral example.
Hope this helps!
@@BreakingBadDebt Very clear response, thank you, and thanks again for this invaluable content you are providing.