Charles Blair, DDS
John McGill, MBA, CPA, JD
My wife has been handling the payroll and books for my practice for 15 years. My practice has grown considerably over the past few years . Recently, I received a notice from the IRS that I must begin depositing my payroll taxes with the IRS electronically during this year or face substantial penalties. We are clueless regarding what we should do about this. What do you recommend?
We have some good news for you. The IRS has announced that it would not apply penal-
ties until January 1, 1998, for those doctors who are required to deposit payroll taxes electronically, but who fail to do so. While the extension of time is meant to give dental practices and other small businesses a window of opportunity to become more familiar with the electronic payment requirements, the changeover to electronic deposits of taxes is inevitable. Accordingly, we recommend that practitioners utilize an outside payroll service to meet their practice`s payroll needs.
While many standard computer programs provide payroll check preparation, few will automatically prepare required federal and state payroll tax returns, annual W-2 and W-3 forms and provide an electronic means of depositing payroll taxes as required by the IRS. Since a good payroll service will take care of all these jobs for you at a reasonable cost (usually $400-$800 a year), we highly recommend switching to such a service immediately. The practice will be much better served by using your wife`s talents to implement more flexible payment arrangements, improve collection and provide embezzlement-control services for your office.
I recently sold my practice and have retired at 70. Fortunately, I was able to set aside the maximum funds in my retirement plan for many years. My account balance now exceeds $2,000.000. My accountant told me that distributions from my plan will be hit with an extra 15 percent tax, but I heard somewhere else that this has been repealed. Who is correct here?
The 1996 tax act suspends the 15 percent excise on excess distributions from qualified retirement plans and IRAs for 1997, 1998 and 1999. The 15 percent excise tax would become effective again in the year 2000, unless changed by future legislation.
Since you must begin taking distributions from your retirement plan and IRA beginning at age 70 1/2, you will not have to worry about the excise tax applying for the next three years. In addition, only distributions in excess of $155,000 (indexed for inflation) are subject to the excise tax. Thus, assuming that the application of the tax resumes in 2000, only a small part, if any, of your distributions will be subject to the excise tax.
My wife has been employed in my practice for many years as an office manager. While I have paid her a minimal salary of $3,000 a year, it probably would cost me $30,000-$35,000 to replace her with an unrelated third party. My wife and I are substantially older than most of the other four employees in our practice and so we are interested in maximizing our savings for retirement. Would it be possible for me to pay her a higher salary in order to generate larger retirement-plan contributions on her behalf?
It is possible. The 1996 tax act repealed the rules that required husband and wife working together in a dental practice to be considered as a single employee for purposes of computing retirement-plan contribution amounts. Beginning in 1997, each spouse can receive the full contribution permissible under the plan with respect to salary earned. If your practice sponsors an age-based retirement plan, paying your spouse her full fair-market salary as an office manager ($30,000-$35,000) could generate a substantial retirement-plan contribution on her behalf, says Joe Davis, president of Horizon Benefits, Inc., (704) 531-8111.
We would recommend that you consult with a competent retirement-plan adviser at your earliest opportunity to review your situation.
My wife and I have been approved to adopt two children. Someone mentioned to me that the new tax law contains some tax benefits to help offset the $15,000 of adoption expenses that we have incurred. Can you tell me anything about this?
The 1996 tax law provides a tax credit for qualified adoption expenses effective for tax years beginning in 1997. The maximum credit is $5,000 per child ($6,000 for a special-needs child). Any unused tax credit can be carried forward for up to five years.
Adoption expenses may not be taken into account in figuring the credit until the year in which the adoption becomes final. Unfortunately, the tax credit is phased out for doctors with a modified adjusted income above $75,000 and it is eliminated once the doctor`s modified adjusted gross income exceeds $115,000.
It is recommended that you contact your tax attorney or other advisers before undertaking any tax-related transactions.
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 ($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.
