When do I claim the deduction?

April 1, 2003
I have been using an airlines credit card to pay for my routine monthly business expenses, including lab, supplies, etc.

Charles Blair, DDS & John McGill, MBA, CPA, JD

I have been using an airlines credit card to pay for my routine monthly business expenses, including lab, supplies, etc. I charged a significant amount of supply expenses in December to take advantage of some volume-purchasing discounts. If I pay the credit card bill in January, in what year do I claim the tax deduction?

Since you incurred a fixed liability for the expenses in December when the credit card charge was incurred, the deduction should be claimed for that year, even though the credit card bill is not actually paid until the next year.

I have a vacation home at the beach that I have not rented out, but have used only for personal purposes. This year, I am considering renting the home for some time period. At a recent seminar, I heard that rental income on a vacation home can be tax-free in some cases. Is this correct?

Yes. Under Section 280A(g) of the tax law, a doctor may receive up to 14 days of income from the rental of a first or second residence, without the income being taxable. In addition, the mortgage interest and property taxes would continue to be fully deductible.

Doctors should note that the ability to receive 14 days of tax-free income is available even if the doctor does not own a second home. For example, if the doctor rents his personal residence to his corporation for business meetings (board of director/shareholder meetings, staff retreat and training, staff meetings, etc.), the rental income received for up to 14 days of use will be tax-free.

I had a student loan that I began repaying in May 1996 upon my graduation from dental school. I understood that the interest on the loan would be deductible for only the first 60 months. Recently, I read that the new tax law had changed this rule and that all student-loan interest is now fully deductible. Is this correct?

Yes. Thanks to a recent tax law change, student-loan interest paid is now deductible over the entire life of the loan. However, this deduction is still subject to an income limitation. Interest is fully deductible as long as the doctor's adjusted gross income does not exceed $100,000 on a joint return or $50,000 on a single return.

Recently, I received my year-end mutual fund statement, notifying me that the fund had allocated $500 in foreign taxes paid on dividends distributed to me. How do I deduct this amount on my 2002 income tax return?

You have two choices: You can elect to claim the $500 in taxes paid as an itemized deduction on Schedule A on Form 1040, or À A better choice would be to claim a tax credit (dollar-for-dollar reduction in your tax liability) on the second page of Form 1040.

Since the stock market decline, I have decided to invest more of my funds in real estate. Specifically, I would like to purchase some apartment buildings for $500,000 and borrow $300,000 of that amount from my retirement plan. Does this sound like a nifty idea?

Not unless you enjoy paying extra taxes! A loan from your retirement plan would count as taxable income to you, to the extent that it exceeds $50,000. Moreover, this also may constitute a prohibited transaction, subjecting you to significant penalties as well. If you choose to invest in real estate, you should borrow the funds from a bank rather than your retirement plan.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. 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.

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