Finance32: Dental School’s Missing Curriculum
Finance32: Dental School’s Missing Curriculum
Great clinical skills simply are not enough for dentists to achieve financial success. Let Buckingham Strategic Wealth's Practice Integration Advisors share what else you need to know to realize your lifetime goals and obtain financial peace of mind.
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Coffee Talk: Federal Income Tax Myths and Facts

Coffee Talk: Federal Income Tax Myths and Facts

10/9/2019 8:00:00 AM   |   Comments: 0   |   Views: 24

Mike McAninch is a Practice Integration Advisor with Buckingham Strategic Wealth, where he specializes in helping dentists connect their money and their values to realize their most important financial goals.

I am often surprised by the income tax “facts” that dentists sometimes share with me. Unfortunately, in many cases, these “facts” are at best myths and at worst just plain wrong. I thought I would address some of these more persistent myths because what the tax code actually requires is enormously important for dental practitioners to know and understand, especially as planning efforts kick into high gear around this time of year.

Myth: You have the option to pay estimated taxes in a lump sum at the end of the year.

Oh, if it were only true! This common assumption, unfortunately, is completely incorrect.

Fact: You must make estimated tax payments, unless you expect to owe less than $1,000 in income tax this year after applying your federal income tax withholding amount.

Often, dentists do not withhold enough income taxes from their W-2 wages. If this is true for you, then you must pay estimated taxes in the same proportion as you would if you received a paycheck. If you earn your income equally over the year, then you must make estimated tax payments every quarter at a rate equal to 25% of your expected tax liability. There are some exceptions to this rule, and it is best to consult with your accountant to make sure you pay your estimated taxes on a timely basis. Underpaying your income taxes will result in a tax penalty for 2019 of 6% of the tax underpayment.

Myth: By holding patient payments until January, you can delay recognizing them as income until the next year rolls around.

Again, this is totally false, and in a big way.

Fact: Cash-basis taxpayers (like most dentists) must recognize fee income when it is received.

Taking possession of checks, cash and credit card payments requires taxpayers to recognize that income in the current year – not the year they finally get around to depositing it in their bank accounts. It is best not to play games with your practice collections, because for starters it may cost you in additional taxes, penalties and interest if you get caught. As a practical matter, a good practice is to deposit all collections at the end of the workday to safeguard that revenue from theft.

Myth: Prepaying next year’s practice expenses is a great way to hold down practice profit and lower income taxes.

Fact: Tax law dictates that each tax year have 12 months’ worth of business revenue and expenses.

I’ve known dentists to buy extra dental supplies or prepay building and equipment rents to lower practice profitability. While this may work initially, you need to understand that in the event of an IRS or state revenue audit, you may be required to reverse some of these prepaid expenses. From an operational standpoint, using this strategy to increase business expenses in the current year results in lower expenses the next year, unless you continue to prepay these expenses every year. At some point, you likely will have more than enough dental supplies.

Myth: Always extend your income tax returns and file them on the latest possible date. By doing so, you lower your risk of federal and state audits.

This is a popular belief among some dentists, but also utterly untrue.

Fact: As the Washington Post’s Thomas Heath reported last year, “Taxpayers with incomes of more than $1 million have a 1-in-25 chance of getting audited these days. That’s better odds than 2011, when their chances were 1 in 8. The further down the income ladder, the less likely it is that the IRS will come snooping. For example, if you earn $200,000 or more, your chances of getting audited are 1 in 80. Those odds are better than 2011, when the odds were 1 in 25. Individuals, all totaled, had less than a 1-in-160 chance of being audited. That’s way down from 1 in 90 for 2011.”

One other fact to consider: The IRS has six years from the date you file your return to audit it. Waiting to file does not reduce the time limit for the IRS.

I suggest filing your tax returns when you are ready to file. Extending a return to avoid an audit is a waste of your time and money.

Still have questions? Please reach out to any of Buckingham’s Practice Integration Advisors. We are here to help! Also, stay tuned for our next post, from my colleague Katie Collins, on 2019 tax-planning items to start on now.

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