DOLLARS AND SENSE
JD, CPA, CFP, and
JOHN K. MCGILL,
JD, MBA, CPA,
provide tax and business
planning for the dental
profession and publish
the McGill Advisory
newsletter through John
K. McGill & Company Inc.,
a member of McGill & Hill
Group LLC, dentists’
one-stop resource for tax
and business planning,
practice transition, legal,
administration, CPA, and
Andrew Tucker, JD, CPA, CFP
John K. McGill, JD, MBA, CPA
3 strategies to save big on
last-minute educational funding
WHILE MANY DOCTORS have the best of intentions to save for their children’s
education, things don’t always work out that way. The problem for many doctors is
that when tuition and expense bills come due, a lot of money is immediately
required that a doctor may not have on hand.
family members may qualify for the special 0% tax rate.
Dividends and capital gains are tax-free for those in the
lowest (10% to 15%) tax brackets. This includes single individuals whose taxable income (after all itemized and
standard deductions and personal exemptions) does not
Doctors can use this strategy to help fund their college-aged children’s education costs on a tax-deductible basis.
Doctors can gift appreciated assets, such as stocks, bonds,
and real estate, to their children. The same “kiddie tax”
rules apply as they do in the above example, so children
under age 23 need to have earned income that is equal to
more than 50% of their support. This can be accomplished
by paying children for meaningful marketing tasks in the
practice that can be completed remotely. Accordingly, the
capital gains and dividends generated will be tax-free to
these low-bracket children up to the level set forth above.
They can use these tax-free proceeds to meet educational
and other personal living expenses.
REFINANCE STUDENT LOANS INTO A HOME
When a doctor is required to take out student loans for
a child, interest rates on those loans are typically very
high. Rather than being held captive to student loan
interest rates, we recommend refinancing the loans into
home mortgages, which dramatically decreases the interest rate. Additionally, where student loan interest is
typically not tax-deductible for a doctor due to the doctor’s income level, interest on a home mortgage is deductible on the itemized deductions on the doctor’s 1040
(subject to certain limitations). This allows doctors who
require a longer payoff period to dramatically decrease
the cost of borrowing compared to traditional student
Here are three options that doctors with limited educational savings can do to fund education when they don’t
have time to save. Due to the complexity of the strategies,
it is important to consult with a tax advisor before implementing any of them.
GIFT ASSETS AND SHIFT RENTAL
OR LAB INCOME
Do you not have enough cash flow to fund education as
well as handle current expenses? A doctor can transfer his
or her personally-owned office building and/or equipment
into a partnership entity, and thereafter lease the property
back to the professional corporation at the highest reasonable rental rate. Once established, the doctor can transfer
the vast majority, typically 95%, of the nonmanaging ownership interests in the LLC/FLP to his or her college-age
children in order to shift taxable income to their returns.
While the “kiddie tax” can be a factor, if the college-age
children generate at least 50% of their support (net of
scholarships received) from their own earnings, including
practice-earned wages, the “kiddie tax” does not apply.
This means that all unearned income, including the LLC/
FLP income, can also be taxed at the child’s rate, which is
at a 10% to 15% federal income tax rate or up to $37,950
of taxable income in 2017.
While most doctors will pay federal income tax at a 15%
rate (or 20% if taxable income exceeds $415,050 if single
or $466,950 if married) on capital gains and dividends, some