Charles Blair, DDS
John McGill, MBA, CPA, JD
I am incorporated as a regular C corporation and have been in practice for 30 years. My corporation pays all of the medical- insurance premiums for my family, but we have recently switched to a high-deductible policy to reduce premium costs. My wife is facing major surgery that may cost $15,000-$20,000. With my current insurance policy, that means I must pay almost $5,000 out of my pocket. Can I deduct this on my tax return?
Medical expenses can be taken as an itemized deduction on Schedule A of your individual income-tax return, but only to the extent that the total of your medical expenses exceeds 7.5 percent of your adjusted gross income (AGI). For example, if your AGI from practice net income, interest, dividends and other sources is $100,000, the first $7,500 of personally paid, unreimbursed, medical expenses cannot be deducted. Thus, in your case, if your income is at that level or above, none of your projected out-of-pocket expenses related to your wife`s surgery would be deductible.
Since you are incorporated as a regular C corporation, there is another approach that can meet your needs. Your corporation can establish a medical-expense reimbursement plan that allows employees to be reimbursed for all medical expenses not covered by health insurance - deductibles, copayments, etc. The corporation can deduct the reimbursement as paid and it is tax-free to the employees.
If this plan is set up as a self-insured plan (no insurance company involved), all eligible employees must be covered with the same dollar limit. Alternatively, the corporation may elect to use an insured, medical- reimbursement plan covering only one or more employees or classes of employees, subject to certain limits.
I am a doctor, age 50, planning to sell my personal residence and move into a larger more expensiv eone. Unfortu-nately, I have lived in my current house for only 2 1/2 years. I understand that I must have lived in the house for at least three out of the last five years to avoid paying tax on the gain from the sale of this house. What can I do to avoid these taxes, if anything?
The three-out-of-five rule that you are referring to applies only in the case of a doctor age 55 or older who is seeking to claim the $125,000 one-time exclusion on the gain from the sale of a principal residence. (The 1997 tax law changes this provision for all sales after May 7, 1997. Accordingly, confer with your tax adviser for specifics.) It does not apply to your situation since you are under 55 and also are planning to reinvest in a larger, more expensive home.
In your situation, the tax treatment on the gain from the sale will be determined under Section 1034 of the Internal Revenue Code. This section has no time limit for ownership of your current residence. As long as you purchase a more expensive home within two years before or two years after the sale of your current personal residence, you can roll over the existing gain into the new house and avoid capital gains taxes.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings and court cases. It is recommended that you contact your tax attorney or other adviser before undertaking any tax-related transaction.
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.
