New tax deductions for HSAs

Oct. 1, 2005
My practice has a health insurance policy with a high deductible. I read recently that we could make tax-deductible contributions to a Health Savings Account (HSA) to cover medical expenses.

My practice has a health insurance policy with a high deductible. I read recently that we could make tax-deductible contributions to a Health Savings Account (HSA) to cover medical expenses. Is this correct and, if so, what are the specifics?

Yes. Doctors who have a qualifying high deductible health insurance policy can fund tax-deductible contributions to an HSA to cover future medical expenses. Doctors can contribute and deduct an amount equal to 100 percent of the health insurance plan deductible, up to a maximum of $2,650 for a single policy and $5,250 for a family policy in 2005. In addition, doctors and spouses 55 or older can make additional tax-deductible “catch-up” contributions of $600 each in 2005.

Amounts contributed to an HSA can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-deferred. In addition, distributions from HSAs to pay for qualified medical expenses are tax-free. Doctors can claim this deduction regardless of whether or not they itemize their deductions. Doctors should complete a separate Form 8889 for each HSA account to report their contributions and withdrawals from the account.

I am planning to purchase a boat this year. I want to know if the tax law now allows me to write off the sales taxes on my personal income tax return?

Yes. The deduction for state and local sales taxes is available for doctors who itemize their deductions. Doctors can choose to deduct the greater of their sales taxes paid or the state income taxes paid.

IRS Publication 600 provides state-by-state tables of sales tax deductions allowed, based upon your income. Alternatively, go to www.irs.gov. Furthermore, doctors can add sales taxes paid on big-ticket purchases, such as a car or boat, to the amounts otherwise allowable under the IRS tables.

I am 54 and started my retirement planning at a very late age. Is there anything I can do to make up for lost time by contributing more to a retirement plan?

Yes. It is not too late to make up for the time and compounding interest that you have lost. For example, in a 401(k) profit-sharing plan, doctors 50 or older can take advantage of an extra “catch-up” contribution available. The maximum catch-up contribution is $4,000 for each doctor and employed spouse age 50 or older in 2005, and $5,000 per spouse each year thereafter. Thus, a doctor and spouse both 50 or older could defer an additional $8,000 ($4,000 each) on a tax-deductible basis in 2005, and $10,000 per year each year thereafter.

This deduction is on top of the maximum, annual contribution allocation ($42,000 in 2005, including $14,000 regular salary deferral amount) otherwise available. You will, however, need to have your current plan amended to allow for these “catch-up” contributions. Furthermore, to take advantage of the “catch-up” contributions, you must first make the maximum, regular salary deferral amounts ($14,000 in 2004; $15,000 a year thereafter).

I am a new dentist with a small staff. I am planning to set up a retirement plan this year for the first time. Are there any tax credits of which I can take advantage?

Yes. Section 45 (A) of the tax law allows a tax credit equal to 50 percent of the start-up costs paid to establish or maintain a new qualified retirement plan, with a maximum credit of $500 for the first year and each of the next two years thereafter. You will qualify as an eligible employer and can claim the credit provided you did not sponsor a qualified retirement plan during the previous three years. The credit applies to costs incurred either to establish or administer the retirement plan, or for retirement-related employee education.

We are getting ready to remodel our vacation home. We heard that Congress passed an energy bill and there might be some tax credits of which we can take advantage. What are they?

Yes. The new energy bill includes a tax credit equal to 10 percent of the cost of energy-saving skylights, outside doors, storm windows, and high-efficiency furnaces, water heaters, and central air conditioners. The credit applies to items installed in your primary residence and/or second home in 2006 and 2007. The maximum tax credit is $500, with no more than $200 attributable to new exterior windows. You also can take a tax credit equal to 30 percent of the cost of solar energy systems used to heat air or water, but not swimming pools or hot tubs.

John K. McGill is a tax attorney, CPA, and MBA, and is the editor of The McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from John K. McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Call (704) 424-9780, or visit the Web site at www.bmhgroup.com.

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