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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
Start making plans now to overcome any shortfalls from 2018.
Every dentist has a story to tell about their federal and state income taxes from 2018. The worry about what is going to happen in 2019 has occurred from the prior year’s result and has not yet gone away. Many of the changes in the tax law were unclear before the preparation of the 2018 taxes. Hopefully there has been a learning curve and dental CPAs will be listened to more carefully by their dental clients during 2019.
As we approach 2019 taxes, you should start to dig into what has been occurring during 2019 and make plans to overcome any shortfalls. There are some major opportunities to assist middle and higher-income dentists now that will greatly enhance the potential for a huge tax reduction in 2019.
The following paragraphs present the possibility for material changes in the lives of dentists who fall into middle and higher-income tax brackets. The main point to consider is the implementation of an employer sponsored qualified retirement plan for the dental practice. If a “flow through,” business entity such as almost anything other than a corporation is the organizational structure of the dental business, a positive result will occur when the concept is addressed and ultimately becomes part of the dental practice operations.
Let’s concentrate on these middle and high-income dentists.
Federal tax brackets have changed to lower percentages of taxable income. However, the loss of and limitations to, certain previously allowed personal tax deductions, such as real estate taxes and mortgage interest, have increased the taxable incomes of many dentists. In high personal state income tax areas such as New Jersey, New York and California when the state tax is added to the federal tax rate, as well as the doubling of self-employment taxes, many dentists are at, or above 50 percent in combined taxes. This is the same as, or more than, before the tax law changed.
The first approach for tax reduction has to be a lessening of the taxable income that “flows through,” from the dental practice to the individual dentist. Once that income has been substantially reduced, those lost deductions like mortgage interest and real estate taxes won’t hurt as much and the result in 2019 will be better than 2018.The following examples allow extraordinary deductions to the dental practice. These write offs then reduce the taxable income flowing through to the personal federal and state tax returns.
Defined benefit plan adoptions by the dental practice.
In the event a dentist has been able to attain a consistent fairly high or middle-income level, the adoption of defined benefit plan is something to explore with your dental CPA. If no drastic changes are expected for the foreseeable future, the implementation of a defined benefit plan is a must for that dentist. The cost of lowering the personal federal and state taxable income with high mortgage amounts, high interest payments, high real estate taxes and the corresponding high income to afford those items are gone. Because of the new tax law, if one is tax oriented, other ideas must be substituted for these losses in itemized deductions. The out of pocket cost for the non-owner employees compared to prior to the new tax law have decreased based on the loss of these personal deductions.
The effective tax rate without a new concept to overcome the loss of interest and real estate tax deductions actually rises. Also, the amount allocated to the high and middle earning dentist who may be about 50 years of age or older is a large deductible retirement plan dollar figure. The personal federal and state income tax savings net of costs have become better. The amounts of deductible contribution are in the range of over $125,000 to $150,000 per year for an owner under certain conditions. Those amounts should easily take the place of the lost mortgage interest and real estate tax deductions. For more information about this concept, your dental CPA should be consulted. If he or she does not understand these ramifications, an advisor who does, should be retained.