Charles Blair, DDS and John McGill, MBA, CPA,JD
I now own shares in a company that recently filed for bankruptcy. The company has been delisted by the stock exchange, so my broker can no longer sell my shares. However, no bankruptcy plan has been approved or liquidation begun. How can I get rid of these shares so that I can claim the loss on my federal income tax return?
Fortunately, you do not have to sell your shares of stock through a broker in order to be able to claim a loss. Rather, you can sell them to a friend or any unrelated third party for a fair price, even if it's almost nothing. The price that you receive would then determine the amount of loss that you can claim on your tax return.
Doctors should be careful not to sell shares of stock to a family member or to any business that the doctor controls. In the event of a sale to such a related party, no loss can be recognized.
I sold my home four years ago when I was going through a nasty divorce. Since then, I have rented, but am planning to take advantage of the low interest rates to purchase a new home soon. Someone told me that I could remove funds from my IRA account, without penalty, to purchase this home, since I was a "first time home buyer." Is this true?
Yes; under Section 72 of the tax law, a "first time home buyer" is defined as a person who has not owned a principal residence during the two-year period ending on the date of acquisition, no matter how many times he or she has previously owned a home. Under these rules, a first-time home buyer can withdraw up to $10,000 from an IRA for use in the purchase of such a home, without paying any early withdrawal penalties.
Doctors should note that the distribution must be used to acquire the principal residence within 120 days. Unfortunately, federal and state income taxes will be due on the withdrawal, so you should maximize the amount of third-party, bank-mortgage financing that you obtain in order to minimize federal and state income taxes paid on the distribution.
I recently read that Congress has dramatically reduced tax rates on long-term capital gains to only 15 percent. I have a very valuable baseball card collection with many famous cards (Ted Williams, Willie Mays, Mickey Mantle, Joe DiMaggio, etc.) that I have been planning to unload. I thought I would sell these cards now to take advantage of the lower capital-gains rates, but someone told me that the lower rates do not apply to these collectibles. Is this correct?
Yes, unfortunately, the Internal Revenue Code has a special rule for collectibles such as baseball cards, antiques, photographs, works of art, coins and stamps, etc. For these assets, long-term gains are taxed at a maximum rate of 28 percent, instead of the normal 15 percent.
My defined benefit pension plan has been overfunded and, as a result, I am planning to terminate it. One option is to transfer part of the funds into a replacement retirement plan covering my employees in order to beat the IRS penalty taxes. What percentage of the funds must I put into the replacement plan in order to beat the penalty?
As a general rule, a 50 percent excise (penalty) tax applies on funds that are returned to the practice when an overfunded, defined-benefit pension plan is terminated. However, this penalty tax is reduced to only 20 percent if at least one-fourth (25 percent) of the reversion is transferred into a replacement retirement plan covering most of the staff employees.
Previously, the IRS had asserted that practices qualifying for this lower rate still had to pay the penalty tax on three-fourths of the reversion, even in cases where generous practices contributed more than 25 percent of the excess funds to the replacement plan. The IRS has now abandoned that position in Revenue Ruling 2003-85, says Jason Arnold, East Coast District Manager of PenSys, Inc. (888-440-6401).
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. Mr. 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 ($195 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.