Charles Blair, DDS and John McGill, MBA, CPA, JD
Recently, I read about the newly expanded Section 179 expensing election that allows doctors to write off up to $100,000 of equipment purchases in a single tax year. I further understood that this tax break was available for the purchase of new or used sport-utility vehicles weighing 6,000 pounds or more. Recently I was car shopping, and the dealer told me that this tax break was available only for the purchase of new vehicles. Is this correct?
No. Section 179 of the tax law allows doctors to "expense" (immediately deduct) the cost of either new or used depreciable equipment. Accordingly, the newly increased allowance allows doctors to write off up to $100,000 of the cost of a new or used SUV, truck, or van used for business purposes in 2004.
You are correct that the vehicle must weigh more than 6,000 pounds to qualify for this deduction. In addition, doctors can claim a tax break only if they use the vehicle more than 50 percent of the time for business purposes. Finally, the allowance is based on the percentage of business use. For example, if you use the business automobile 65 percent of the time for business, you can claim a Section 179 write-off for 65 percent of the SUV costs.
In reviewing my tax return, I noticed that I have been paying taxes on a lot of interest income from Certificates of Deposit and corporate bonds that I own personally. Most of my stock investments have been in my retirement plan to maximize its growth potential. Recently, I heard a speaker indicate that doctors might be better off changing where their investment assets are held to minimize federal income taxes. What did he mean by this?
Most doctors need to make changes in their ownership of investment assets to minimize federal income taxes under the new tax law, says Bob Sytz, CPA, CFP, and president of Select Consulting, Inc., an investment advisory firm specializing in assisting high-net-worth dentists nationwide — (866) 727-6100. Sytz recommends that doctors first determine an overall asset allocation (percentage mix of stocks and bonds), based upon their age and risk tolerance.
Once this has been determined, doctors should move most of their fixed-income investments (bonds) into retirement plan and IRA accounts. This will eliminate current federal and state income taxes on the interest income that is generated, allowing these funds to grow and compound on a tax-deferred basis.
On the other hand, most stock investments (individual stocks and mutual funds) should be held personally to take advantage of the 15 percent maximum tax rate on dividends and capital gains. This also allows doctors to harvest tax losses to offset capital gain income generated from other investments, and to make gifts of appreciated securities for charitable-contribution purposes, further increasing their tax savings.
Recently, I read that the tax law now allows doctors who are behind on retirement plan contributions to "catch-up" by making additional contributions to a 401(k) plan. I have overlooked this tax-deduction until now, and want to make sure I take full advantage of it. What are the rules?
The tax law does allow additional "catch-up" salary deferrals into 401(k) profit-sharing plans by doctors, but only if they are age 50 or older and are already making the maximum regular 401(k) salary deferrals.
For example, in 2004, doctors 50 or older can make "catch-up" salary deferrals of $3,000 into their 401(k) plan, in addition to the regular, elective salary-deferral limit of up to $13,000. These elective salary-deferral limits increase to $4,000 in 2005 and to $5,000 beginning in 2006.
For more information on ways to increase tax-deductible retirement funding, send a self-addressed stamped ($0.60) envelope to Blair/McGill & Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, and request "Retirement Plan Contribution Limits Increasing."
Dr. Blair is a nationally known practice-profitability consultant 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.
