What the New Tax Laws Mean for Dentists

Robert J. Creamer, C.P.A.
January 12, 2013

As a result of the President recently signing into law the American Taxpayer Relief Act and his previously passed Health Care Reform legislation, dentists have a host of new tax laws to deal with starting in 2013.

A few of the many provisions that could have a significant impact upon dentists, both good and bad, are highlighted as follows:

•Individual tax rates will increase with a new higher rate from last year’s 35% to a new rate of 39.6%. The higher rate will apply at the $450,000 income level for married filing jointly; $425,000 if filing head of household; $400,000 for single filers and $225,000 for married taxpayers filing separately.

•The last several years allowed for reduced payroll taxes, called the Payroll Tax Holiday. For 2013 the holiday is over. FICA and Medicare taxes now rise back to the 7.65%. This means an immediate decrease in net pay for your paycheck as well as your employees, if you have employees.

•We now have permanent alternative minimum tax (AMT) relief. The new law increased exemption amounts to $78,750 for joint filers; $50,600 for unmarried filers and $39,375 for married persons filing separately. Without the increased exemption amount, which is retroactive for 2012, many dentists would have paid thousands of additional AMT taxes for 2012 and 2013.

•The top tax rate for capital gains and dividends will rise to 20% (up from 15%) for dentists with incomes exceeding $450,000 for joint filers and $400,000 for single filers. In some instances, the tax can rise even further by an additional 3.8% (explained later in this recap).
For dentists with income below the $450,000/$400,000 level, the capital gains and dividend tax rate can go down to 18.8%. For lower levels of income, this rate can go all the way down to 0%.

•The personal exemption deduction is also being phased out based upon the dentist’s income. The phase out will impact those making $300,000 and filing married filing jointly; $275,000 for head of house hold filing; $250,000 for single filers and $150,000 for married filing separately. The total amount of exemptions that can be claimed by the dentist subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the dentist’s adjusted gross income exceeds the above figures.

•The dentist’s itemized deductions (home mortgage interest, property taxes, charitable contributions, sales tax, and state taxes) will be limited for higher incomes. The limitation of the full deduction is for those making $300,000 for married filing jointly; $275,000 for head of household filers; $250,000 for single filers and $150,000 for married filing separately. Itemized deductions will be reduced by 3% of the amount that the dentist’s income exceeds the above amounts. The reduction will not exceed 80% of the itemized deductions.

•The new law prevents steep increases in estate, gift and generation‐skipping transfer tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (indexed for inflation). The top estate and gift tax rate is increased from 35% to 40%.

•The employee portion of the hospital insurance tax part of FICA, normally 1.45% of wages, is increased by 0.9% on wages that exceed $250,000 in the case of a joint tax return; $125,000 for married filing separately and $200,000 in any other case.
For self‐employed dentists, the same additional tax applies on self‐employment income in excess of the above amounts.

•Dentists have a new Medicare tax of 3.8% on investment income. Investment income includes income from interest, dividends, annuities, royalties, rents and net gain from disposition of certain property. In making the calculation of tax, certain deductions will be allowed. The new tax will apply to those with income of $250,000 for joint filers and surviving spouses, $125,000 for those filing separately and $200,000 for other individuals. This new tax can be in addition to the increased capital gains and dividend tax mentioned above.

•Good news for dentists is that the tax deduction they can take when they purchase equipment and technology for their dental practices has significantly increased. Under Code Section 179, the scheduled deduction was to have dropped from $139,000 in 2012 to just $25,000 for 2013. However, the Section 179 deduction was increased to $500,000 for both last year, 2012, and for 2013. There is a limitation of $2,000,000 in purchases that applies to the $500,000 deduction before a phase out applies. However, even if purchases exceeded the total phase out ($2,500,000), the dentist would still get regular depreciation of the full amount over the applicable number of years. Section 179 applies to both used and new equipment and technology.

•More good news for dentists is that Bonus depreciation, which was to be reduced to zero in 2013, is only reduced to 50%. There is no limit on how much the dentist can purchase and take this deduction. But, this deduction is only good for brand new equipment and technology.

There is even better news applicable to Bonus depreciation as it applies to leasehold improvements. If the dental space is at least three years old and the landlord is an unrelated third party, the dentist can fully deduct 50% of qualifying leasehold improvements completed in 2013. No need to incur the expense of performing a Cost Segregation Study to get this special deduction in 2013. There is no limit to the amount that can be expensed under this 50% provision.

Only a few of the new tax laws have been discussed above. To make sure that you fully understand the applicability of all the new laws to your situation, you should meet with your tax advisor and properly plan for dealing with them. Some new laws are not good and some are great. But each one needs to be dealt with. Effective tax planning is the best way to see that you pay only the taxes that the law requires you to pay and not a penny more.

About the Author
Robert J. Creamer, C.P.A., is the President of Creamer & Associates, P.C., an accounting firm in Salem, Oregon. For 36 years his firm has emphasized financial and retirement planning, dental transitions, practice enhancement, tax savings and all services needed to maintain an efficient and profitable dental practice. Bob can be reached at Creamer & Associates, 800‐248‐1120 or at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

About Goetze Dental

Goetze Dental is a full‐service distributor of dental equipment and supplies. Since 1884, Goetze Dental has served dental practices with totally transparent pricing and an unbeatable selection of dental supplies and equipment, matched with excellent service. Goetze Dental offers free quotes on equipment and design projects. Goetze Dental can be reached at 800‐629‐0804 or at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 

 
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