Q I am currently working as an associate in a group practice. The practice is paying me a commission (a percentage of the collections from my cases), but my compensation package includes no “fringe” benefits. How can I obtain medical insurance coverage, disability insurance coverage, medical reimbursement, child care, and other fringe benefits on a tax-free basis?
A You should try to convince your employer to initially pay out of its funds all medical insurance premiums for you and your family, disability insurance premiums, medical reimbursement expenses (for items not covered by medical insurance), as well as your dues, subscriptions, licenses, fees, continuing education, business car, travel and lodging, meals and entertainment expenses. Then, since the employer is not obligated to pay for these benefits under the terms of your employment agreement, the amounts paid on your behalf can simply be deducted from the compensation otherwise due to be paid to you — before your salary is calculated and paid.
By using this strategy, you will be able to convert all these expenses from an after-tax basis to a pre-tax basis, which is equivalent to giving you a tax deduction for them. Furthermore, this strategy also will benefit your employer, since the amount of salary otherwise paid to you will be reduced, thereby reducing your employer’s federal and state payroll tax liability.
Q Last year I cashed in a whole life insurance policy that I had owned for several years. How do I determine whether I owe any tax on the money I received?
A Any proceeds that you received from cashing in a whole life type policy that exceed your original investment in the contract must be considered as taxable income. In general, your investment in the contract equals the total premiums paid, less any rebates, reinvested dividends, or policy loans that have not been repaid. Generally, the insurance company will send you a Form 1099R, showing the total proceeds and the portion that is subject to federal income taxes. These amounts must then be reported on Lines 16a and 16b on Form 1040.
Q Recently, an acquaintance told me about some new types of trusts that would allow me to completely eliminate any federal and state income tax liability by moving my funds offshore. This would also put those assets out of the reach of my creditors. I talked with my CPA about this, but he advised against using these trusts. What do you think?
A Run, do not walk, away from this advice. The Internal Revenue Service recently placed these “abusive trusts” on its audit “hit list,” and there’s been some nationwide publicity surrounding two dentists who were prosecuted for using these types of trusts. Accordingly, you should avoid tax evasion schemes such as these.