Tax Reform: What Medical Professionals Need to Know

With the House and the Senate reaching an agreement on the final version of tax reform legislation, change is on the horizon. Here’s how medical professionals may be affected.

Regardless of how you feel about our current tax code or the proposed changes by the Trump administration, there are a few important details that may be of special interest to you as a medical professional.

While Tax Reform has not been signed into law, what we know is that the conference committee reached an agreement on the two separate bills passed by the House and Senate on December 15th. Now, one last vote is needed before a final bill can be presented to the President to sign into law. This is scheduled to happen by Christmas.

The Washington Post offers a comprehensive look at the Final GOP Tax Bill and What’s in It. Here’s an overview of what’s included that may be of particular interest to you:

The Positives

Let’s first start with the potential good news.

• Repeal of Obamacare tax on those without health insurance.  This can lead to more professionals opting to self-insure.

• Child Tax Credit Increase. The current plan increases the child tax credit from $1,000 to $2,000 ($1,400 refundable) and would allow more medical professionals to claim it by also increasing the income level from $110,000 to $400,000 for married filers. 

• 529 savings plan changes. Under the proposed legislation, parents will now be able to use up to $10,000 per year from tax-advantage 529 savings accounts for tuition at private and religious K-12 schools. These funds can also be used to cover homeschool cost or expenses associated with apprenticeship programs.

• Drop in pass-through income tax rate. Right now, whether you are a doctor with your own practice or a business owner, your pass-through income (income that flows through your business to you) is taxed at your ordinary income rate. Under the proposed tax reform bill, partnerships, LLCs, and corporations that have taken the S-corp election will now have a 20 percent standard deduction on income. This benefit would phase out starting at $315,000 for couples ($157,000 for singles).

• Corporate tax rate reduction. The maximum corporate tax rate will be reduced from 35 percent to 21 percent. This substantial cut may cause more business owners to reconsider forming traditional personal service corporations (PSCs).

• Change to the AMT income threshold. The AMT will now kick in at $500,000 for individuals and $1 million for married couples. This is a huge change from the current threshold of $120,700 for individuals and $160,000 for married couples.

The Negatives

Here’s the potential bad news.

• New income brackets could hurt, not help some. Under the proposed tax plan, the seven income brackets would be retained, but at lower rates and adjustable income ranges. It’s too soon to say, but this could mean higher income taxes for single filers with taxable income in excess of $160,000 ($320,000 for married filers).

• Elimination of the personal exemptions. Currently, taxpayers can subtract $4,050 from income for each person claimed on their tax return. This may result in families with multiple children paying higher taxes despite the increased standard deductions.

• Elimination or reduction of certain itemized deductions. These changes, when combined with the increased standard deduction ($12,000 for singles and $24,000 for married filers), may result in higher taxes as fewer individuals will qualify to itemize their deductions. Notable changes include: 

  • State and Local Tax deduction and the deduction for Property Taxes will be capped at $10,000 combined.

  • Mortgage interest expenses can be deduced, but it will be limited to the first $750,000 of borrowing on new mortgages. Existing home mortgages are not affected.

  • Interest on home equity loans could also be eliminated or capped at loans of $100,000.

• Individual tax cuts are limited and scheduled to go away after 2025 as lawmakers opted to make tax cuts for families temporary and reductions for businesses permanent.

Key Takeaway

While you will not see the effects of tax reform until you file your 2018 taxes, doctors, dentists, and other medical professionals can take a proactive approach by understanding the potential changes. You can start by using this interactive tool to see how you might be affected.

But keep in mind, tax planning is just one component of your overall financial strategy. You really can’t do anything until new legislation is passed. But once it is, you can (and probably should) get with a CPA, tax professional, and/or CERTIFIED FINANCIAL PLANNER^TM to reassess your tax strategy. From there, you can adjust your financial strategy accordingly to take advantage of the new tax landscape.

Have a question? Contact Charles Adi at cadi@htk.com or sign up for this mailing list to received his latest commentary here.