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Characteristics of the Physician-Investor

[By William H. Mears, CPA, JD]

Generally, a brokerage firm will regulate the use of a margin account by managing the physician client’s risk, and by studying the doctor’s assets and credit history. Margin accounts at brokerage firms are watched carefully to make certain that the brokerage firm does not lose money on the individual. But, when investing on a leveraged basis, physician clients should be aware of the magnification of the market impact on their account, whether favorable or unfavorable.

Margin Investor Awareness

The physician or executive margin-investor should:

• Be sophisticated

• Be of high net worth

• Be aware of the risks

• Be told the horror stories involving leverage, and

• Be aware of the increased returns and liquidity created by margin

Model Tax Rules on Margin Transactions

Investment interest expense can be deducted as an itemized deduction by an individual physician investor only to the extent that the individual has investment income defined as taxable interest, dividends, and short-term capital gains.

Long-term capital gains cannot offset investment interest expense. To the extent that a physician-investor has excess investment interest expenses for a year, these expenses can be carried forward to future years.

If the proceeds of a loan are used to invest in tax-exempt debt, the interest expense incurred to carry that debt will not be deductible for tax purposes.

If the proceeds of a loan are used to invest in tax-exempt debt, such as municipal bonds, the interest expense incurred to carry the debt will not be deductible for tax purposes.

Assessment:

Where you aware of these tax implications on margin before reading this post?

What has been your experience with margin calls, and did you originally fit the criteria above? Please opine and comment?

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