Sorry, no deductions

At the end of 1999, my rollover IRA balance totaled more than $750,000. As a result of substantial stock market losses, my balance is now less than $400,000. How can I deduct this loss?

Charles Blair, DDS
John McGill, MBA, CPA, JD

At the end of 1999, my rollover IRA balance totaled more than $750,000. As a result of substantial stock market losses, my balance is now less than $400,000. How can I deduct this loss?

No deduction is allowed for losses occurring inside tax-deferred retirement and/or IRA accounts. Rather, the loss is indirectly recognized since you will be taking lower amounts of taxable distributions in future years as a result of your stock market losses.

I have contributed to Roth IRA accounts on behalf of my children, whom I have employed in my practice for several years. Originally, I had planned to fund their college with custodial account and Educational IRA funds. However, due to investment losses, I now am faced with the prospect of also invading their Roth IRA accounts to pay for their education. What taxes and penalties will I (or my children) pay?

Amounts less than or equal to your original contribution may be withdrawn from a Roth IRA without taxation. However, the excess, representing the investment earnings on your contributions, will be subject to federal and state income taxes.

Normally, distributions from a Roth IRA before age 591/2 are also subject to a 10 percent penalty tax. However, Section 72 (t) (2) (E) provides an exception for distributions taken for educational purposes. Accordingly, while we generally recommend using Roth IRA balances only as a last resort for educational purposes, your federal and state income taxes on amounts required to fund education should be fairly minimal.

I started a 401(k) profit-sharing plan in my practice two years ago at age 50. Now I understand that I can make extra contributions to the plan because of my age. Is this correct?

Yes. Provided that your retirement plan is properly drawn, all eligible employees over age 50 (including the doctor and spouse) are now allowed to make "catch-up" salary deferrals to their 401(k) profit-sharing plans. In 2002, the maximum "catch-up" contribution is $1,000 for each eligible employee. This maximum increases to $2,000 in 2003; $3,000 in 2004; $4,000 in 2005; and $5,000 for years thereafter.

I am planning to buy some new or used digital radiography and intraoral camera equipment. Since my income is up, I would like to take advantage of the tax deductions this year, if the tax benefits of the purchase will be significant. I am planning to spend $50,000. What should I do?

Purchasing new dental equipment this year can generate dramatic tax savings, says Bo Elliot, CPA, a partner in the firm of Elliot and Warren, LLP, which specializes in dentists' accounting needs — (888) 333-8815, bo@elliot-warren.com.

The tax law allows the doctor to immediately expense (deduct) the first $24,000 of new or used equipment purchased this year, says Elliot. In addition, the law allows a special 30 percent bonus depreciation on purchases of all new dental, office, and computer equipment and leasehold improvements (but not office buildings).

Thus, on a $50,000 purchase, you would be entitled to immediately deduct the $24,000 expensing election amount under Section 179, bonus depreciation equal to $7,800 ($50,000 - $24,000 = $26,000 x 30% = $7,800), as well as $2,730 in regular depreciation expense on the remaining $18,200. Since tax rates are higher this year than next, Elliot recommends that doctors looking to add new dental or computer equipment for their practices act immediately to qualify for these favorable tax savings in 2002.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication.

This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration.

McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($184 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.

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