With tax season approaching, it’s important to be prepared so you can take all of the deductions to which you’re entitled. Unfortunately, many CPAs miss essential deduction credits that doctors should be taking, or they apply taxes that should not be paid, and most doctors are none the wiser. Here is a list of 10 items dentists can’t miss on their income tax returns.
- Domestic production activities deduction (Line 35, Form 1040)—Claim a Section 199 manufacturing deduction for the on-site production of crowns, inlays, onlays, and other restorations; implants; lab items such as retainers; study models; appliances, including removable aligners; placement of orthodontic brackets; printed x-rays; ICAT images; and records. These records can be properly assembled after the tax year with no issues since the activity took place regardless of whether the doctor knew about the deduction.
- Section 179 elections—Did you get a big tax bill with little notice? Make use of the Section 179 expensing election to write off equipment purchased in 2017 that otherwise would need to be depreciated over time.
- HSA contributions (Line 25, Form 1040)—Doctors covered under a qualifying High Deductible Health Plan (HDHP) should establish a Health Savings Account (HSA) and fund the maximum tax-deductible contribution to cover future medical expenses. Doctors can deduct up to $3,400 for a single policy and $6,750 for a family policy in 2017. In addition, doctors and spouses age 55 or older can make additional tax-deductible “catch-up” contributions of $1,000 each. If you missed the contribution in 2017 or missed one of the catch-up contributions, you have until April 17 to make this contribution. (Many people are told they can only make a single catch-up contribution, which is not accurate if both spouses are over age 55.)
- Self-employed health insurance deduction (Line 29, Form 1040)—Medical insurance premiums remain 100% deductible for all doctors (C corporation, S corporation, unincorporated, etc.). This is even if no staff coverage is provided, since the Affordable Care Act nondiscrimination rules are not yet in effect.
- Properly classify meals and travel—Separate fully deductible (100%) travel, lodging, and continuing education expenses from meal and entertainment expenses (50% deductible) for tax reporting purposes. In addition, make sure that all meal expenses for staff meetings, functions, and outings are classified as “office expenses,” since they remain fully deductible under Section 274(n) of the Internal Revenue Code.
- Pension startup credit—Make sure your corporation uses the tax credit for small employer pension plan startup costs of up to $500 annually for the first three years of a new plan.
- Nondeductible IRAs and Roth conversions (Line 15, Form 1040)—Fund nondeductible IRA contributions for the doctor and spouse of $5,500 per spouse ($6,500 if age 50 or older) to avoid the 3.8% tax on personal investment income. If you are making backdoor Roth conversions, confirm these conversions were not taxed on line 15b.
- Children on a separate return—For employed children through your practice, age six or older, confirm they are filing on a separate return.
- Net-investment income tax (Form 8960, Form 1040)—Confirm that earned income through the business is not being taxed under the net investment income tax. This includes income from active trade or business rentals, such as an office building.
- Credit for child and dependent care expenses (Line 49, Form 1040)—Contrary to popular belief, you do not phase out of this credit based on income. Each year, doctors can take 20% of child care expenses, up to $600 for one child or $1,200 for multiple children. This includes the cost of private school and summer camp.
Andrew Tucker, JD, CFP, CPA, and John K. McGill, JD, MBA, CPA, provide tax and business planning for the dental profession and publish The McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC. It is your one-stop resource for tax and business planning, practice transitions, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com or call (877) 306-9780.