Should I Purchase the Real Estate When I Buy My Practice?
Providing children or grandchildren with an excellent education is often a top financial priority for many families. Fortunately, tax deferred and tax free savings plans can help parents and grandparents send children to school and realize tax benefits. With the cost of education rising rapidly, you may wish to consider some of these concepts.
IRA’s for Teens
One of the best ways to get children to save is to create IRAs for them. While their retirement if far away, they will reap the reward of saving because they will have many years to let their accounts grow tax deferred or even tax free.
The 2016 contribution limit is the lesser of $5,500 or 100% of earned income. A teen’s traditional IRA contributions are deductible and distributions will be taxable. Roth IRA contributions are not deductible and qualified distributions will be tax free.
Choosing a Roth IRA is generally a no-brainer if the teen doesn’t earn income that exceeds the standard deduction: $6,300 for 2016 for single taxpayers. This is because they will not likely gain any benefit from the ability to deduct a traditional IRA contribution. Even above this amount, the teen probably is taxed at a very low rate. It is beneficial to pay a small amount of tax today for potentially decades of tax free accumulation.
Section 529 Plans
These plans provide another tax advantaged savings opportunity. You can choose a prepaid tuition plan to secure tuition rates or a tax advantaged savings plan to fund expenses. Some of the benefits include:
• Although contributions aren’t deductible for Federal purposes, assets can grow tax deferred. Some states offer tax incentives in the form of deductions or credits.
• The plans usually offer high contribution limits, and there are no income limits for contributing.
• There’s generally no beneficiary age limit for contributions or distributions.
• You can maintain control over the account, even after the child is of legal age.
• You can make tax free rollovers to another qualifying family member.
Whether a prepaid tuition plan or a savings plan is better depends on your individual situation and goals.
Coverdell Education Savings Accounts (ESAs) are similar to 529 savings plans in that contributions aren’t deductible for Federal purposes, but plan assets can grow tax deferred and distributions used to pay for qualified education expenses are income tax free.
ESAs are desirable if you want to fund elementary or secondary education expenses. The $2,000 contribution limit is low, and it’s phased out based on income. Also, amounts left in an ESA when the beneficiary turns 30 generally must be distributed within 30 days.
American Opportunity Credit
When your child enters college, you may not qualify for the American Opportunity Credit because your income exceeds the limits, but your child might. The maximum credit is $2,500 per student per year for the first four years of post-secondary education. If your dependent child claims the credit, you must forego your dependency exemption for the child.
Gifts and the “Kiddie Tax”
If you wish to help fund a college education but you don’t want to be subject to the limitations of a 529 plan or an ESA, you can transfer cash or securities to a Uniform Gift to Minors Act (UGMA/UTMA) account.
Although the transfer is irrevocable, you maintain control over the assets until the beneficiary reaches a certain age, 18 or 21 in most states. To avoid gift taxes you must either limit the gift to the $14,000 annual exclusion or use your lifetime gift tax exemption. A special break for 529 plans allows you to front load five years of annual exclusions and contribute up to $70,000 ($140,000 if you split the gift with your spouse).
UGMA/UTMA accounts are less attractive from an income tax perspective than they once were. When the “kiddie tax” applied only to those under age 14, the tax savings was more significant than today’s limits. Today the “kiddie tax” applies to children under age 19 and to full time students under age 24, unless the students provide more than half of their own support from earned income.
For children subject to the “kiddie tax”, any unearned income beyond a specified amount is taxed at their parents’ marginal rate, if higher, rather than their own typically low rate.
Each individual’s tax circumstances are unique. You should seek advice from your tax advisor on how best to plan for your own financial situation.
Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.
He can be reached at email@example.com
There is a big difference between “traffic” and “life traffic” when it comes to demographics and choosing a practice location. Here are some of the most important things to know.
“Traffic” should be clearly understood that we mean how many cars pass in front of a site. That is a reasonable statistic to track, particularly for primary-care providers like dentists. Obviously, there is no minimum threshold we should have to consider. Nevertheless, when we are contrasting particular locations, this will matter as a factor in comparison. And, yes, commute numbers count.
Think of “Life Traffic” as what people do for errands. It does not usually include commute patterns. This might be considered as those places one travels every day while running errands. Demographers would consider them “daily destinations” even though they are run either alone or in conjunction with other locations that people go. To illustrate, let’s talk about shopping. The most common “life traffic” destination would be a grocery store. Most people shop for groceries between one and five times per week. Other examples include taking the children to school, going to the laundry, post office, or ATM. The idea is to consider that these little destinations are places that people travel on a daily or near-daily basis.
Having a practice near a life-traffic center is desirable primarily for primary care providers (general dentists) or consumer based professional services. If one is using the services of a cardiologist due to heart-issues, it may be necessary to see them every month or more, which puts them in the category of a life-traffic hub. Different people will use professional services at different times of the year (tax preparation or allergist) or at different times of life (gerontologists or gynecologist). It is frequent use of these offices and practices that make them part of one’s personal life-traffic.
It is necessary to consider locations for practices that have strong life-traffic flow. Practitioners who work with children and adolescents will want to put their practices somewhere near the appropriate life-traffic destination – such as schools. The “block” that houses a school may have four sides (like a square), but these sides are not equally desirable. Usually the side that is used to drop-off and pick-up children is going to be more desirable than the other three for a practice to be placed upon. There is frequently a second side that will provide a good secondary access point to the school. Therefore, while simple proximity to the school is desirable, it may not be the best option. This is true of assisted living facilities, shopping centers, post offices, and other life-traffic sites.
It is also true that not all life-traffic sites are equally desirable. Some stores are decidedly more upscale than others – but that doesn’t necessarily make them bad choices, because a large number of patrons may still visit these stores. It is the busyness of the site rather than the demographic character of the patrons that has to be a primary consideration. Certainly, this character should not be ignored, but the number of shoppers or patrons will tend to trump their patron’s demographic character.
There is a concept most professionals never consider that can have a great impact on the desirability of a location, especially for practices that are primary care providers. The term is “leakage.”
In an ideal world, residents in an area will not have to go outside of their life-traffic hub to get the goods and services they need and want. When there is an “unsatisfied demand” within the shopping area (or practice boundaries), people have to go elsewhere to shop. Imagine a very small town that does not offer many goods and services, therefore people have to drive to another town to get what they need. This is referred to as “retail leakage.” A dental office located in a town like this will likely suffer due to the leakage; people will just go elsewhere to shop. That is why there has been such a move to welcome big-box stores like Walmart, K-Mart, and Target – these stores tend to staunch leakage.
As one who provides market research in every part of the United States, leakage is still a big factor to consider. A real-life example was Sacramento, CA. Its politicians decided they would not stand for a Walmart or Ikea in the downtown area. The City Council and Mayor’s Office were decidedly against these retailers. Ironically, the little (and poor) town of West Sacramento just across the river had no such pretenses. Therefore, they welcomed the new Walmart (and its regional distribution center) and Ikea with open arms. The retail leakage of Sacramento has never been entirely resolved, even years after their decision. West Sacramento has been enjoying the sales and property tax windfall ever since – and so have the practices nearby.
Indeed, it helps professional practices to look at the trends regarding if and how income exists in a local economy rather than staying within it (in other words, to track leakage). It is just common sense that some communities will have a more favorable or business-friendly attitude than others. Some areas can be downright hostile. In the name of fairness, some states and counties have raised the minimum wage by doubling the Federal minimum wage rate. This is not a decision made by market forces.
Normally, wages increase as jobs become more plentiful and employers are nearly forced to increase wages to retain workers and get quality employees. But in an environment in which labor participation rates are low (meaning there are many potential employees sitting on the side lines) or unemployment is high (meaning that there are few jobs out there), increasing the minimum wage will have a negative influence on the entire job-market. The local effect will be to raise the price of nearly everything, particularly those things that are touched by many workers. But the bigger effect will be leakage from one state or county to another. That is why economists are predicting that economic conditions will greatly improve in some places and be challenged in others. This is a message that should not be lost on professional practice owners.
Scott McDonald owns Doctor Demographics, LLC. His company provides demographic site analysis, searches for desirable sites, and offers strategic marketing recommendations. Look for his podcast “The Perfect Place to Put a Practice” on iTunes.
Call (800) 424-6222 or visit www.DoctorDemographics.com for more information.