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The new health reform legislation is full of new tax provisions that we will be dealing with in the coming years. Some provisions are effective in 2010, while many are effective in later years. This column should help you think about planning for now. Most provisions are quite complex, and you will need to seek tax help to assure that you qualify for changes in the law.
New tax breaks in 2010
Small employer health insurance credit: Most dentists will qualify for a tax credit for health insurance paid for employees. This credit is 35% of the premiums paid for employee coverage. It applies to dentists who have no more than 25 full-time employees, with average wages of no more than $50,000 per year. The provisions are complicated and involved, with pages of regulations to come. If you currently cover employees with health insurance, you should determine how this new credit will affect your taxes.
Dependent coverage in employer health plans: Effective March 30, 2010, self-employed dentists can deduct health insurance coverage for children under the age of 27. Employer-provided health coverage arrangements will have to change the definition of “dependent” to allow for inclusion in employer-provided plans.
Generous Section 179 deductions extended through 2010: The HIRE Act extends the generous Section 179 expensing of $250,000 of dental equipment and tangible personal property used in the dental practice through 2010. Also, Section 179 expensing can be used for purchased software.
Temporary employer Social Security tax exemption: For most dental employers, wages paid to qualified new employees are exempt from the employer portion of Social Security tax. The employees still have to pay their portion, but employers are exempt. There are special definitions for which new employees qualify for this exemption, which you will need to meet. The exemption is effective for employment between March 19, 2010, and Dec. 31, 2010.
Coming tax aches in future years
Medicare surtax: A new Medicare surtax is one of the key revenue raisers in the new health reform law. There are actually two surtaxes. The first is a 0.9% tax levied on earned income (W-2 wages or self-employed earnings) when a married couple’s income is greater than $250,000. This makes the effective Medicare tax on earnings greater than the threshold 3.8% rather than the current 2.9%.
The second Medicare surtax is a special 3.8% tax on unearned income for married couples who earn more than $250,000 per year. Unearned income is defined as taxable interest income, dividends, capital gains, annuities, and passive rental income. It does not include tax-free interest or payments from IRAs or retirement plans. This surtax is not effective until 2013, but you will want to begin planning now. In effect, if Congress allows the Bush tax cuts to lapse and adopts Obama’s budget plan, capital gains rates will go from 15% currently to 20% plus the 3.8% surtax, which is 23.8% for upper income earners. Dividends also will be taxed at 39.6% plus the 3.8% surtax for a maximum rate of 43.4%.
What you should do now
For the 2010 tax breaks, you should assess the impact of health insurance coverage for employees and the potential for Social Security exemption on new employees hired. The potential increase in income taxes with the repeal of the Bush tax cuts with a new 39.6% tax rate, along with the Medicare surtax arriving in 2013, creates a new dimension to the decision to convert regular IRAs to Roth IRAs in 2010. You should add this to planning topics for your accountant.
Two major tax planning topics to be impacted in dentistry’s future will be the effects of these changes on entity selection — self-employed, S Corporation status, and C Corporation status — along with maximizing deductions to qualified retirement plans. The selection of the correct entity to practice dentistry is complicated enough due to the effects on large equipment purchases. New tax laws make the decision even more complicated and will require additional assessment. To date, retirement plans have not been affected and continue to be even more attractive with the higher tax rates.
In summary, now more than ever, tax planning will become a much more time consuming and important activity in practicing dentistry.
IRS Circular 230 Notice: This communication and any federal tax advice contained herein is not intended to be used, and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer, or to promote, market or recommend to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064, or firstname.lastname@example.org.