Charles Blair, DDS and
John McGill, MBA, CPA, JD
Over the past several years, I have paid my disability-insurance premiums personally, so that the benefits will be tax-free if I am disabled. However, at the end of each policy year, if I have not been disabled, my professional corporation reimburses me for the disability-insurance premiums paid during the prior policy year. In this manner, the premiums end up being paid with pre-tax (tax-deductible) dollars. In the event that I was disabled, no reimbursement would be received for that year, and I would take the position that, since the premiums were personally paid during that year, the proceeds should be tax-free under Section 104 of the Internal Revenue Code. My accountant has informed me that this strategy will no longer fly. Do you still recommend this?
The IRS has never ruled on this specific issue, as of the date this is written. While we concede this is certainly a gray area, we believe that it is worthwhile to continue this strategy, since the risk is extremely low. The risk that any one dentist will become totally and permanently disabled, and receive disability- insurance proceeds for the remainder of his/her life, is fairly low. And, even if this were to happen, the probability of audit is only around 1 percent annually. Even in the event of audit, there still is probably a 50/50 chance that your position would be upheld. When the various probabilities are multiplied by each other, the expected value of any loss sustained is very small in comparison with the tax benefit of deducting the premiums. We would recommend that you continue this strategy, until such time as the IRS rules definitively against it.
I am an unincorporated dentist and my husband is an unincorporated optometrist. We practice independently as separate businesses.
Because my net income is somewhat greater, I wanted to start a SEP plan and have my husband maintain his IRA plan. Our accountant said that this was impossible, since once I start a SEP plan, it would void the deductibility of my husband`s IRA contribution. Is this correct?
Probably so. Under the current Internal Revenue Code, contributions to an IRA are deductible if neither spouse participates in a qualified retirement plan, regardless of his/her income level. If one spouse participates in a qualified plan, contributions made to an IRA account by that spouse, or by the other spouse, are fully deductible only if the couple`s adjusted gross income does not exceed $40,000. Deductibility is phased out between $40,000 and $50,000 of adjusted gross income, and no deduction is allowed if the couple`s adjusted gross income exceeds $50,000.
Rather than contribute to a nondeductible IRA, your husband could set up a SEP in his own practice and contribute the $2,000 on a tax-deductible basis to the SEP. In fact, he could contribute up to a maximum of 15 percent of his earned income.
Your husband would be required to cover all employees who had worked in his practice for at least three years. Even then, he could protect himself against increasing his overhead by contributing the amount of each qualifying employee`s raise into the SEP. The employee can leave the contribution in, to grow on a tax-deferred basis, or withdraw the contribution and pay federal and state income taxes, as well as a 10 percent penalty.
Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair-McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive. Suite 230, Charlotte, NC 28217, phone (704) 523-5882.