Trying to power up car write-offs, Choosing a trust for charitable gifts, How much you can put into a proft-sharing plan
QI've heard that bigger depreciation allowances can be claimed for an electric car than for one that uses gas. If I buy a Toyota Prius or a Honda Insight, how much more can I deduct?
A Your deduction probably won't increase. The regulations define an electric car as a vehicle "powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current." The models you mention are hybrids with a power train that incorporates both a gasoline engine and an electric motor.
The depreciation limit on a gas-driven car placed in service in 2001 is $3,060 this year, $4,900 for 2002, $2,950 the next year, and $1,775 thereafter. So if you pay, say, $30,000 for one, it will take 14 years to fully depreciate the cost, assuming 100 percent business use throughout the period. For a true electric vehicle, those ceilings are roughly tripled, and you can also claim a 10 percent tax credit up to $4,000. This would let you write off a $30,000 tab in three years. But you risk a dispute with the IRS if you try that with a hybrid.
QI'm setting up a 15 percent profit-sharing plan for my unincorporated practice this year. I expect to net around $200,000, but I understand that no more than $170,000 of compensation counts in figuring the contribution for myself. (None of my employees will be eligible to participate this year.) Does that mean I can put in $25,50015 percent of $170,000?
A No. To determine your contribution, you must take other factors into account. Start with your actual net for 2001. Assuming that's $200,000, your self-employment tax will be $15,326. Since you get a tax deduction for half of that, subtract $7,663 from your income, leaving $192,337. Also, because you're an owner employee, you can contribute only 13.0435 percent of that (not 15 percent), so the amount you can put into the plan for yourself is $25,087.
What if your practice net turns out to be $210,000, say, instead of $200,000? Then according to the first part of the calculation, your contribution would come to $26,374. However, you'd actually be allowed to contribute no more than $25,500 (15 percent of $170,000).
The new tax law allows more liberal plan contributions starting in 2002. See "Make the most of the new tax law," Sept. 17, 2001.
QA recent article in Medical Economics described the estate-planning advantages of a "unitrust" when trust income goes to some beneficiaries and principal goes to others. Would this arrangement also work with a charitable remainder trust, where a family member gets the income and a charity later receives the principal?
A Yes. Instead of paying a fixed income annually, based on the value of the assets when they're donated, a charitable remainder unitrust pays a set percentage of the assets' updated value each year. This affords the income beneficiary a measure of inflation protection, assuming the trust investments rise in value over time. Minimum payouts can be specified for periods of temporary decline, though the difference between those and the specified percentage must be made up in later years.
Because annual revaluation increases the accounting expense, a unitrust costs more to maintain than an annuity trust, but it also offers more flexibility. Unlike an annuity trust, a unitrust can receive additional contributions after it's set up. Which type of trust will result in higher charitable deductions depends on the terms of the trusts and other factors. Your accountant can prepare estimates for comparison, using actuarial tables in IRS Publications 1457 and 1458.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to email@example.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management.
Dec. 3, 2001;78:84.