January 1997 Bulletin

New tax law on retirement plans

by Joel M. Blau

Joel M. Blau is president of MEDICUS Asset Advisors, Inc., an affiliate of AMA Investment Advisers.

President Clinton signed into law four pieces of legislation with many tax changes. Of greatest interest to retired physicians is the moratorium Congress granted to retirement plan distributions that were subject to the 15 percent excise tax.

Beginning in 1997 and continuing through 1999, the $155,000 annual withdrawal limitation will be waived, thus allowing unlimited excise tax-free distributions. The distributions will be income taxable and the 10 percent early withdrawal penalty for participants under 59 ½ still applies. The main disadvantages associated with higher than normal distributions is that funds withdrawn no longer grow on a tax deferred basis. Older physicians with very large IRA accounts should consult with their accountants to determine if they should take advantage of this limited opportunity.

Medical practices or clinics with 100 employees or less and without a qualified retirement plan will be permitted to establish a SIMPLE retirement plan beginning in 1997. The plan can be set up as a salary reduction 401K plan or as Individual Retirement Accounts. Employees' voluntary salary reduction contributions will be expressed as a percentage of their compensation with a $6,000 a year cap. The employer must meet one of two matching contributions formulas. Taxation of distributions is similar to the IRA rules except that there will be a 25 percent penalty for distributions taken in the first two years. A simple employee enrollment procedure and simple government reporting procedure should make these plans very popular in 1997.

As an incentive to individuals to buy their own long-term care insurance, the government is going to give a tax break to those who purchase coverage. Premiums paid will become deductible within certain limits. The tax treatment will be the same as health insurance premiums. Employer-paid premiums for an employee will be deducted and excluded from the employees' income.

If you are charitably inclined, you can take advantage of the liberalized rules regarding gifting of stocks. The expired provision allowing an individual to deduct the fair market value of stocks gifted to a private foundation has been restored but only for gifts made between July 1, 1996 and May 31, 1997. On the non-charitable side, the automobile luxury tax will be reduced. The 10 percent tax on expensive automobiles will be gradually phased down 1 percent a year, with a full phase-out after year 2002.

This is only a brief highlight of the more than 600 changes in the Internal Revenue Code caused by the 1996 tax bills which were signed into law. Make sure to have your accountant detail any change that may impact your tax planning strategies.


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