THE MILLIONAIRE DENTIST PODCAST

EPISODE 18 TRANSCRIPTION

Announcer:

Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work. Now here's your host, Alan Berry.

Alan Berry:

Hello, and welcome back to another episode of the Millionaire Dentists podcast. Today, we will be talking about the Tax Cuts and Jobs Act of 2017, which went into effect in the year of 2018. Major elements of the changes, including reducing taxes for business and individuals, a personal tax simplification by increasing the standard deduction and family tax credits, but eliminating personal exemptions and making it less beneficial to itemize deductions. I have with me today two of the best accountants we have at Four Quadrants Advisory to help us figure out how this new tax law may affect you, and what to do about it. Colt, Ryan, thanks for joining me today.

Colt:

Hey, thanks for having us, Alan.

Ryan:

Great to be here.

Alan Berry:

I know today that both of your schedules are really tight, you got a lot of paperwork on your desk to tend to, so let's get going. So it's my understanding that one of the biggest changes with this new tax law is the changing of tax brackets. I guess my question is, did all the tax practice change or was it just-

Ryan:

Every single one of the brackets have changed. For an example, the highest tax bracket dropped from 39.6% down to 37, so almost a 3% change for you. All of them have changed a little bit, basically, to the same tune as the highest level, but the highest level is where the biggest tax break is coming from.

Alan Berry:

So the tax brackets are based on your gross revenues. Before taxes are taken out, if I've made $50,000 last year, that's what tax bracket I fall in. Is dental revenues figured into that, like practice revenues? Is that part of it too?

Ryan:

As long as you're S-corp, absolutely.

Alan Berry:

Okay, what if you're not an S-corp? What if you're a proprietorship?

Ryan:

If you're a proprietorship, S-corp, all that will run through your personal return. If you are a C-corp, that is where it is a separate return and you're taxed on only that income.

Alan Berry:

Not only have tax brackets changed, but also there's going to be some type of new deductions, is that right? And what are those?

Colt:

For instance, there's a new qualified business income deduction. This is for all specified service businesses, which dentist, orthodontist, periodontist all fall under. For example, it's about a 20% deduction based on your taxable income. And married filing jointly, the threshold is 415, 415,000. So if your income is over 415,000, you're not going to be able to get this deduction. But if it falls underneath that, you will get some sort of deduction from it, which makes tax planning even more important.

Alan Berry:

So if you're making 415 or less, you get to do this deduction.

Ryan:

Correct.

Alan Berry:

And that deduction is how much?

Ryan:

20% of your service income.

Alan Berry:

Right, so at 415 it tops out. So if you were at 200,000, you get 20% taken off, right? That's the deduction. So what you're saying is, is that hey, if you're sitting around at 450 right now, it might be wiser to give away some of that money, because at 450 you're going to be taxed at a higher rate than what you would if you just gave the money away and got below the 415.

Ryan:

Exactly, yeah.

Colt:

And keep in mind that this 20% deduction, it's not a true 20% deduction. The 20% deduction on your tax return, but it depends on what your effective tax rate is to really see what your "tax savings" are for that deduction. So if your effective rate is 20% on your tax return, and you get that 20% deduction, it's really 20% of that 20% deduction.

Alan Berry:

You know what, I'm just going to agree with you because I have no idea for sure what you're saying. But I think that that point is well taken, because myself, this is all foreign to me. And I got to believe some of our listeners, it's the same thing with them. Save the best money is really to get with some type of professional accounting company or firm, somebody to take a look at this and really give you great advice. What we're talking about here today is just more general, hey, here's some things to think about.

Alan Berry:

Okay, so Colt, what's another way I can lower my taxable income?

Colt:

Another way to decrease your taxable income other than charitable contributions is through an HSA, which you have to have a high deductible health plan for that. And the threshold for deduction did go up this year for the HSA. It went from 6,750 to 6,900, so we're talking a $150 increase, but it's helpful. So if you don't have an HSA and you qualify for one, that's something you can get with your financial advisors and accountants to see if it's worth it to get it. If you're going to use that money anyway, you might as well get some sort of deduction from it.

Alan Berry:

So I have a savings account of let's say a thousand dollars, a HSA of a thousand dollars. What can I do today that I couldn't do in 2017 with it?

Ryan:

It's the same as 2017. Just the amount you can contribute has been increased. The main thing is making sure that your plan is eligible for an HSA. As long as you're eligible for one, everybody's going to have medical expenses. And even if you don't use it, it'll eventually turn into an IRA. So it not a great saving strategy, but still another strategy that if the medical funds aren't used, you still have some money there that you can use for retirement.

Alan Berry:

And the biggest benefit of the HSA, I think, is that when you add to your HSA that's tax deferred, is that correct? Or are you paying taxes on that money that you're putting in that bank account?

Colt:

That is tax-deferred right. And basically what that would do, that would decrease your gross wages on your tax return, which in turn decreases your income.

Alan Berry:

All right, that's pretty good HSA insight. Ryan, what else do you have on your list for us?

Ryan:

Another major change that doesn't seem like a lot of people are getting that advice from their accountants, the change in the way meals and entertainment are being handled. Used to be that anything where the employer was doing something for their staff, let's say just a company meeting, whatever, and they provided food, it would be a full 100% deduction as a employee meeting that was a benefit to the employees. Now all of those are considered 50% deductions, just as a normal meals and entertainment.

Colt:

Basically they've eliminated the 100% deduction for staff meetings, unless it is holiday party related. If you have a staff meeting, you go out for a Christmas dinner, that is 100% deducted.

Alan Berry:

So when you say holidays though, what about our Jewish friends out there?

Colt:

That works as well. Hanukkah, Kwanzaa, if it's holiday party related.

Alan Berry:

So you mean any holiday? So I'm sitting there with my taxes, and I'm looking at all these holiday parties we had. And I had one on Easter, had one on Saint Patrick's day, had one on July 4th, are all those covered?

Colt:

That is not 100% defined yet. Obviously you would probably err on the side of no. I think one or two times a year is something that the IRS is looking for. That way it doesn't get too out of control with, hey, it's Valentine's Day, let's have a Valentine's day party. Memorial Day, 4th of July, I mean you can have two or three, Taco Day on Tuesday or something, you make up a holiday. It doesn't really work like that. It has to be, in our eyes from what we've been reading, a major holiday and it can't be taken advantage of too much. It has to be a once or twice type of year thing.

Ryan:

Yeah, there's been some explanations that make it seem as though you're limited to one a year.

Alan Berry:

But the IRS has not spelled out the exact terminology of this yet, as far as how many you can have. So if you do have multiple parties throughout the year, you may be raising some red flags that you don't want to raise. So that's why you-

Colt:

I think that's a gray area, and it's something that you definitely don't want to push towards too much. I think you want to kind of err on the side of conservatives.

Alan Berry:

And what do you think the thought process is with the IRS of saying, you know what, we're going to leave this a little ambiguous right now as opposed to completing this sentence and putting a period to the end of this plan and actually having actual information? Why do you think they do that? There has to be some reason why they do that, right?

Ryan:

Well, initially the tax law changes are made by Congress and the House. And so the IRS is not... They may have suggestions for what gets put into the tax bills, but they don't get the tax bill until it's passed. And then they have to make sense of all the changes that were made, and come out with the regs regarding those.

Alan Berry:

So the IRS doesn't even really write the tax bill?

Ryan:

They definitely have a hand in it, but they aren't the absolute power in that.

Alan Berry:

So the reason why the holidays aren't specific, as to which ones you can take and how many you could take, could be a Congressman or Senator that has put that in there for some reason that we have no idea why that is.

Colt:

And that's why you see all these political advertisements, you see everybody with their tax plans. This is how you save taxes. This is how this candidate is making you pay more in tax. They're trying to push their own tax reform on every tax bill every year to appease their constituents. So that's why you see that all the time, is they're the ones that are pushing for that. And then once it passes through the House and the Senate, that's where the IRS comes into play.

Ryan:

The argument right now is that it's also a benefit to the employer and to their personal benefit, not to the business benefit. So that's why they want it to be the 50% deduction as a normal meals and entertainment.

Alan Berry:

You mean because they get to eat the hot dog too at the company lunch?

Ryan:

Right, correct.

Alan Berry:

So couldn't they just say, eh, I'm not going to eat anything, this is just for my employees? Because think about it this way, in a smaller company, yeah, the boss is going to be there. But in bigger companies, the owner's not there. So what happens in those situations, where it's just managers that are spending the boss's money? Is it 50% then still?

Ryan:

Correct. Normally you see this whenever there's a major tax law change. They give money back in certain areas and take it away in others. I think this is just one of the bargaining chips that they use to try and get some money back into the IRS' pocket. The government still needs to get a certain amount of money, and so a lot of times it's just moving it from pot A to pot B, and they're pulling it from somewhere else. So the net change that the government gets on a yearly basis is usually not terribly different.

Alan Berry:

Now Colt, before we started recording today, you and I were talking about, or you were telling me, that we're losing some type of deduction from the state, or we're not going to be able to write off our state taxes anymore. I know I'm messing this up, but please tell us what's going on.

Colt:

The state and local tax deductions, which is on your 1040, those are now limited to $10,000. Those are any state and local tax withholdings on your paycheck and your real estate taxes you pay for your home. But there are nine states that this won't affect very much, because there aren't state or local income tax in those states. And that's Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, and little old New Hampshire. If you're in one of those nine states, this won't hurt you very much. But for people who are in the other states, this $10,000 deduction will seem scary. But as we've talked about some of the other deductions that you get and the tax rate drops, all in all the new tax reform does help the dental specific industry.

Alan Berry:

So typically you deduct a certain percentage of your state taxes on the federal taxes. Is that what you're saying?

Colt:

If your state local taxes are more than your standard deduction, which if you're married filing jointly now is 24,000. Last year, it was 12,700. So the standard deduction has basically doubled as well. Even if you don't itemize your deductions. If you don't itemize, the state and local tax deduction is not going to hurt you anyway. But for most dental specific clients, they are going to itemize their deductions. And so this does affect them. But again, as we've talked about, the tax rates have dropped. You've gotten even child tax credits now that you weren't able to get before. The phase outs for your income threshold for your child tax credits have now increased.

Ryan:

Long as you are itemizing your deductions. So when you file your federal return, you can file with your standard deduction or with an itemized deduction. Itemized deductions also allows you to deduct all state taxes that you've paid. So that includes your real estate, any withholdings that are on your paycheck, and any quarterly estimates you would have made to the state as well. Starting in 2018, that has been limited to $10,000. So in the past, that was unlimited. So if you paid $90,000 in state taxes, you got to deduct every dime of that. Now that's limited to 10, so you would lose out on anything above 10. With the dental industry, it is a big hit for most clients that aren't in one of the nine states that don't have a state income tax.

Alan Berry:

But it's kind of your guys' opinion that the other new parts of the tax law kind of offsets this negative part of it?

Ryan:

And that's where they get the child tax credit, now this year with the threshold on that has been increased significantly.

Alan Berry:

What's it been increased to?

Ryan:

That has been increased to, that was 400,000. And with that, now you get some of that money back for all the money you spend on your kid.

Alan Berry:

So what you're saying is that typically a dentist makes more than the average person, on average, so they're going to have more than $10,000 in taxes going to the state level. So instead of they used to, maybe last year, they had 20,000 on the taxes, they would write all that off. Now they can only go to 10,000.

Ryan:

That's correct.

Alan Berry:

All right, guys, looking at the clock looks like we have time for maybe one more. What do you two think is the big takeaway here for any dentist professional that's listening? What's the number one thing they should be thinking about? Or what's the mistake that they should be trying to avoid?

Ryan:

Biggest mistake we see out there is a lack of planning. They get to year end or file the tax return, and all of a sudden you find out you owe $50,000. The best thing you can do is get with your accountant multiple times a year, get with your team multiple times a year, make sure everybody's on the same page. And know exactly where you stand, where your income is going to be. And if you do project that you're going to own 50,000 come tax time, have a plan in place to be able to get that paid so when you come to your taxes, you owe very little or none.

Colt:

We see plenty of clients come in here that have never had tax planning. And so we provide that, at minimum, quarterly tax planning. But we do a monthly accounting to where if we do see something that's out of the ordinary, or something that's going to flip their tax situation, we can basically plan for that before the quarterly tax estimates come. So that way their situation is constantly changing, we're constantly monitoring it. And that's something that dentists should be taking advantage of. And if they're not, they need to probably find somebody new to do their accounting and their finances.

Alan Berry:

All right, guys, that was a lot of good information. I really appreciate you stopping by. I think I'm more confused than I was before, but that's okay because I have a hired professional to help me with my taxes so I'm not too worried about it. Thanks for stopping by, guys.

Colt:

Thanks for having us, Alan.

Ryan:

Been a pleasure.

Announcer:

That's all the time we have today. Thank you to our guests for their insight, and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.