Charles Blair, DDS and
John McGill, MBA, CPA, JD
As a result of some heavy capital gains last year from phantom income, I am facing a tax bill that is larger than the amount of cash I have on hand. Can I negotiate an installment payment arrangement with the IRS? If so, how does this work?
As a general rule, a doctor can pay on an installment basis with no questions asked if he owes less than $10,000 and intends to pay the balance within three years. In order to take advantage of this program, the doctor should set up a monthly payment arrangement by filing Form 9465 "Install-ment Agreement Request" along with a completed federal income-tax return. Doctors should not delay filing their tax returns simply because they cannot afford to pay, since this subjects them to an additional penalty for failure to file.
However, doctors should use the installment payment arrangement only as a last resort. On top of interest charges of 9 percent a year, doctors must pay a late payment fee of .5 percent per month, which makes the effective annual interest 15 percent. In addition, a $43 up-front fee must be paid.
Accordingly, if you can borrow the funds from a home equity line of credit, a relative, a low-interest credit card or through a margin loan on your investments, you are probably better off than asking Uncle Sam to be your lender.
I am an unincorporated dentist who has practiced as a sole proprietor for many years. For some years, my wife has worked in my office as a non-salaried employee. Since she had already accumulated enough credits to receive Social Security by working at various places before coming to work in my office, no effort was made to keep on paying Social Security taxes for her.
With the changes in the tax law that now separate Social Security contributions and Medicare contributions, we wonder if it is not a mistake to avoid paying into the Social Security and Medicare fund so that my wife can be assured of adequate benefits, particularly if I should die and she would try to collect on her own benefits.
For many years, the Social Security rules provided that no Social Security taxes were due on wages paid from one spouse to another for work involved in an unincorporated business. Likewise, that spouse was not eligible to receive Social Security benefits relating to such employment.
However, these rules were changed several years ago. Under current law, a spouse employed an uinincorporated dental practice must pay both Social Security and Medicare payroll taxes with respect to all amounts paid to the spouse as salary. Accordingly, you no longer have a choice in this matter. You must pay Social Security and Medicare payroll taxes on all amounts paid to your spouse.
I am 43 years old and would like to maximize the contribution to a retirement plan on my behalf, while limiting staff funding costs. Most of the plans that I have reviewed end up giving me around 60-70 percent of the total contribution with the other 30-40 percent for my staff. However, I heard recently that it may be possible for me to set up a plan through which I may be able to receive 80 percent of the contribution allocation for my account with about 20 percent allocated to my staff members, who are approximately 30 years old. How can this be done?
Since you are approximately 13 years older than the two staff members who would qualify for plan participation, you would need to investigate a plan that considers age as well as compensation in determining how plan contributions are allocated.
As a general rule, defined-benefit pension plans work best only for doctors age 50 or older. Three plan types should be reviewed: age-weighted profit-sharing plan, target benefit pension plan and cross-tested retirement plan.
Without additional information, it is impossible to determine which plan would work best for you. However, if you contact Joe Davis of Advanced Pension Systems, Inc. (704) 529-5006, his firm can prepare a customized retirement-plan analysis for a small fee.
I read your August 1996 column explaining the Americans With Disabilities Act (ADA) tax credit, as well as the Section 179 expensing election. My understanding of the ADA tax credit is that it is a one-dollar credit for each two dollars of expenditures. This would require a total outlay of $10,000 to claim the maximum $5,000 credit annually, which would leave only a $5,000 amount available for Section 179-expensing election, based upon the $15,000 equipment purchase used in your example, and not $10,000 as you indicated. Is this correct?
You are correct in pointing out that to qualify for the maximum $5,000 tax credit, a $10,000 qualifying expenditure is required. However, Section 44(d)(7) of the Tax Code, which governs the ADA tax credit, requires that the tax basis eligible for the Section 179 expensing election be reduced only by the amount of the actual credit taken ($5,000) and not by the total qualifying expenditure ($10,000).
Recently, you illustrated a method of employing re-cent dental school graduates in family/parent`s dental practices, which allowed for certain tax benefits. Are there any means of deducting the interest on dental school loans for those of us who do not have access to a family-practice arrangement?
Currently, interest paid on educational loans is not deductible for federal income- tax purposes. However, there is one method to indirectly deduct these costs. If you own a personal residence and have some equity therein, you can establish a home equity line of credit and draw down sufficient proceeeds to pay off your loan. Provided that the total loan amount does not exceed the remaining equity in your personal residence and is less than $100,000, the interest paid will be fully deductible for federal income-tax purposes.
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 ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.