Maximizing tax benefits from T&E expenses; How to figure a mortgage APR; A way to recoup disabled-access costs? IRA owners get an extended lease on life; Casualty insurance for a rented office; Rules on leaving assets to a noncitizen spouse; How to postpone tax on pension funds rolled over; Trading stocksheld in a trust
Q Doctors in our corporation pay their own travel and entertainment costs. The costs are deductible as miscellaneous expenses on the doctors' personal tax returns, but only to the extent that they exceed 2 percent of adjusted gross income. To get around this limitation, some doctors have offered to accept a salary reduction in return for reimbursement of these expenses by the corporation. Will that fly with the IRS?
A No; this plan has been shot down. In a 1999 ruling, the IRS did okay the idea, provided the employee accounted to the corporation for his expenses as IRS regulations require. Reimbursements totaling no more than the salary reduction were then tax-free to the employee and deductible by the corporation. Unfortunately, the IRS had second thoughts about the scheme and revoked its previous ruling last year.
However, reimbursements under accountable plans that don't involve salary reductions aren't affected. For a summary of the rules governing such plans, see Money Management, Aug. 7, 2000. Refer to IRS Publication 463, available at www.irs.gov , for full details.
QI'm paying $899 a month for a 30-year, $150,000 home mortgage with a 6 percent interest rate. After subtracting the $6,000 in costs I paid up front, the loan amount is only $144,000. The bank's truth-in-lending statement claims the annual percentage rate (APR) is 6.2, but my calculator shows a 6.4 percent rate for a $899 monthly payment on $144,000. Does it need a new battery?
A No. Federal law ("Regulation Z") requires the lender to account for all finance charges, including points the buyer pays, appraisal fees, and mortgage insurance. But the lender can exclude some up-front costs that aren't considered finance chargesfor example, title insurance premiums, notary and escrow fees, and transfer taxes. If such expenses came to, say, $3,000, the amount financed would be $147,000. At $899 a month, the bank's APR of 6.2 would be correct.
QIn my practice, I see some patients with physical disabilities. Standard equipment for diagnosis and treatment sometimes causes such patients difficulty or discomfort, so I've spent about $10,000 extra for models with features that accommodate them better. Can I claim a disabled-access credit for my additional costs?
A Your chances aren't good if you use the equipment on nondisabled patients, too, and if it wasn't specially designed for disabled persons. The credit is intended to partially compensate small businesses (including doctors with annual revenue of $1 million or less) for expenses required to comply with the Americans with Disabilities Act of 1990. In the opinion of the IRS, modifications to regular equipment that merely improve its adaptability to disabled patients don't qualify.
You can still depreciate those costs or write them off as a first-year expense. But if you do qualify for the credit, take it, since that trims your tax bill directly. To figure it, subtract $250 of your total expenses, then claim 50 percent of the rest, up to $5,000.
QI'm over 70 1/2 and must take minimum distributions from my IRA every year. I've read that a new IRS regulation will reduce required withdrawals, because it bases them on a longer life expectancy. But my accountant says the new regulation won't go into effect until next year. Is he right?
A Yes, but it allows you to use the new life-expectancy table this year, if you wish. Say you turned 71 in 2002 and own an IRA that had a year-end value of $100,000 in 2001. Using the old table to figure the distribution required by Dec. 31, 2002, you'd divide $100,000 by 25.3, getting $3,953. The new table lets you divide by 26.5 instead, so you'd need to withdraw only $3,774, or about 4.5 percent less.
QI'll soon be renting office space for my new practice and will take out a tenant's fire insurance policy to cover my equipment and furnishings. What other types of protection should it include?
A Depending on your situation, you may need coverage for the following:
Improvements and betterments. This will reimburse you for damage to items you may have added, such as paneling, partitions, or other fixtures.
Extra expense. This covers the cost of a temporary office while repairs are made to your regular office after a casualty. Be mindful that this coverage won't pay for earnings lost while you're unable to practice. To guard against that eventuality, you'd need business-interruption insurance as well.
Valuable papers. The cost of replacing patient charts may far exceed the basic policy limit for this loss. You may need special coverage to pay the difference. Also, if you don't back up your billing records and you'd be unable to fully restore them, consider an accounts receivable rider to make up any collection losses.
QI'm told that my estate won't get the marital deduction because my wife isn't an American citizen. She intends to apply for citizenship, but how can I protect her if I die before she becomes one?
A Although you can't leave your wife more than $112,000 outright free of gift or estate tax (in 2003; inflation-indexed), your will can put an unlimited amount into a "qualified domestic trust" and name her the income beneficiary. The assets in the QDOT, which must have at least one US citizen trustee, won't be subject to estate tax until your wife dies. The purpose is to prevent a surviving alien spouse from taking the assets out of the country and thereby avoiding estate tax on them altogether. The trust can allow your wife to make withdrawals from principal, but estate tax would apply to them.
Once your wife gets her citizenship, you can revise your will to eliminate the special trust.
QWhen I retire shortly, I intend to roll over my pension plan distribution into an IRA. Can I receive a check for the money and then put it into an IRA of my choice?
A Yes, assuming you complete the rollover within 60 days. However, if the check is made out to you, the plan trustee will have to withhold 20 percent of the total due to you. To avoid that, you must make a direct (trustee to trustee) transfer.
First, select the institution you want to hold your IRA. Then have the retirement plan trustee issue a check payable to the IRA trustee for your benefit. The check can be mailed, or you can deliver it personally. If you decide to split the funds among several institutions, you'll need a separate check for each.
QI'm setting up a revocable living trust, with me as trustee, to hold most of my assets. If I transfer my securities portfolio to the trust, will I still be able to trade stocks on margin and write options on them?
A Yes, if your trust includes suitable provisions. It's wise to check with your broker first, to make sure the trust's terms are worded to comply with the firm's rules for margin accounts. Also, if the trust names someone to act in your place in case you're incapacitated, you may want to restrict the substitute trustee's powers in this regard.
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 firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management. Medical Economics Dec. 9, 2002;79:123.