Charles Blair, DDS
John McGill, MBA, CPA, JD
My wife and I reported approximately $140,000 of income on our 1997 income-tax return. Since I had a profit-sharing plan for my office, we were not able to contribute any amounts to IRAs for either of us, since we were over the income limitation. Now, I understand that this has changed. What are the new rules?
Your question points out a very common misconception regarding IRA contributions. Individuals with at least $2,000 of earned income can make a contribution to an IRA, regardless of their income level and whether or not they actually participate in a qualified retirement plan.
The income limit only applies to determine whether or not an individual who participates in a qualified retirement plan can deduct the contribution made to his or her IRA. In your situation, your income level is too high for you to deduct any contribution to your IRA. However, under a recent tax-law change, your wife can deduct her full $2,000 contribution to an IRA, despite the fact that you are covered under a qualified retirement plan.
Even though she may be able to deduct her $2,000 contribution to an IRA, this still may not be the preferred alternative. Rather, in most cases, it is preferable for doctors and spouses to make a $2,000 contribution to a nondeductible Roth IRA. While contributions to Roth IRAs are not deductible, the earnings build up on a tax-deferred basis and can be withdrawn tax-free after age 591/2 or five years, whichever is later.
In most cases, the value of the tax-free income upon withdrawal exceeds the benefit of deducting the contribution made to the IRA, but make sure your tax adviser performs this calculation based upon your own individual facts and circumstances.
Several years ago, I was selected for an IRS audit. As part of that process, the agent spent a great deal of time looking for unreported income. I felt like I had been convicted of a crime, especially when the audit resulted in no change to my federal income-tax liability for the year involved. My CPA tells me that the law has now been changed to prevent this type of experience in the future. Is he correct?
Yes. The 1998 Tax Act added tax-law section 7602(d), which prohibits financial status or economic-reality examination techniques to determine the existence of unreported income by IRS agent`s audits of doctors, unless the IRS has reasonable indication that there is a likelihood that such unreported income exists.
I was at a meeting and the speaker said that, beginning in 1999, dentists could deduct home-office expenses, such as depreciation, utilities, etc. What do you say?
Section 932 of the 1997 Tax Act amended Internal Revenue Code Section 280A(c) to liberalize the standards for home-office deductions. This section expanded the definition of "principal place of business" to include situations where the home office is used for administrative or management activities of a dental practice, provided that there is no other fixed location where the doctor actually conducts administrative or management activities.
In most cases, this change will have little impact on dentists. Very few dentists will choose to handle all of the administrative or management activities of their dental practice - such as billing and collections - exclusively from their homes. However, dentists who actually operate their entire practice from home should be able to deduct home-office expenses.
It`s recommended that you contact your tax advisers before undertaking any tax-related transactions.
Dr. Blair (left) 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 ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.