Charles Blair, DDS

John McGill, MBA, CPA, JD

I had my best year ever in 1998, as my practice net income exceeded $300,000. I always understood that I got a full deduction for my itemized deductions, such as charitable contributions, state income taxes, home-mortgage interest, etc., as well as for personal exemptions for myself, my wife, and our two children. When I filed my 1998 tax return, I paid more taxes than ever, and my CPA told me that these items no longer were fully deductible. What gives?

Congress has restricted high-income doctors` ability to fully deduct their itemized deduction as well as personal exemptions. This has resulted in many doctors paying a much higher effective tax rate than the 36 percent top rate outlined in the tax law. In fact, many high-income doctors now are in a combined federal and state income-tax bracket of 50 percent or more. Thanks to high-income doctors, just like you, the Treasury is reporting record tax receipts.

While each exemption normally provides a $2,700 deduction, or $10,800 for a family of four, the tax law reduces your exemptions by 2 percent for each $2,500 (or fraction thereof) of adjusted gross income over $186,800. Accordingly, assuming a $300,000 adjusted gross income, you would lose a total of $2,264 of your personal exemptions.

Moreover, Congress also trimmed itemized deductions by an amount equal to 3 percent of the excess of your adjusted gross income above the $124,500 threshold for 1998. Accordingly, based on a $300,000 adjusted gross income, you also would lose $5,265 of your itemized deductions, resulting in higher federal income taxes.

I did not make a Roth IRA contribution in 1998, because I thought my adjusted gross income would exceed the $150,000 limit. However, my practice was off a bit in December, and I came in just under the wire. What is the deadline for making a $2,000 Roth IRA contribution for me and my spouse for 1998?

Under current tax law, you have until April 15, 1999, to contribute up to $2,000 to an IRA. We strongly recommend contributing the maximum to a 1998 Roth IRA for both you and your spouse. While the contributions are not tax-deductible, the earnings grow tax-deferred and can be withdrawn tax-free after age 591/2 or five years, whichever is later.

Unfortunately, gaining an extension of time (until Aug. 15, 1999) to file your 1998 tax return does not automatically extend your time for contributing to an IRA account. The deadline still is April 15, 1999.

In 1997, I bought several smaller pieces of equipment, each costing less than $1,000. Rather than setting them up on my depreciation schedule, I ran them through as "dental supplies." Unfortunately, the IRS soon audited my practice for an earlier year, and requested a review of my 1997 return as well.

During the course of their audit, they disallowed these items as an expense, forcing me to depreciate them over a seven-year period. My accountant argued that, since I did not purchase any other items of equipment during the year, the Section 179 expensing election should allow an immediate write-off anyway. The agent has refused to accept that position. Does this seem unreasonable?

Recently, the United States Tax Court ruled that, to utilize the Section 179 expensing election, doctors must complete Form 4562 and elect to expense these items. Absent the proper election on Form 4562, filed on a timely basis with the remainder of the doctor`s practice tax return, the court reasoned that no immediate expensing election was available and the items must be depreciated.

Dr. Blair (left) 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 ($149 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.