As higher-income business owners, healthcare providers are among the groups most impacted by changes under the Tax Cuts and Jobs Act (TCJA), from both individual and business perspectives. The new 24% bracket extends all the way to $315,000 for married filing jointly (MFJ). Many physicians have taxable income in this range. Under the old system, the 33% bracket started at $233,000, and the 28% bracket at $153,000.
Now that provisions of new tax reform are in effect, it is worth noting how your individual taxes are affected by the TCJA changes, and whether you need to reevaluate your tax strategy.
Individual Alternative Minimum Tax
While the new tax law eliminated the corporate AMT, lawmakers retained the individual AMT with temporary increases in both the exemption amount and the phaseout threshold. While the individual AMT did not get eliminated completely, it will affect far fewer people. The exemption amount was increased from $55,400 to $70,300 ($86,200 to $109,400 married). It is important to note that the phaseout of that exemption doesn’t start until $500,000 ($1M married). That number used to be $123,100 ($164,100 married).
If you have always paid AMT in the past, you may not pay it in 2018. You will have to run the numbers to know for certain. Your accountant can help determine what you have to pay.
SALT Deduction Limitations
The state and local tax (SALT) deduction is limited to $10,000. That means you can deduct a maximum of $10,000 for your combined property tax, state income tax, and local income tax payments. If you live and work in Texas year-round, you can apply the full deduction toward your property taxes.
The reduced SALT limitation is an unwelcomed change by most taxpayers. However, unless you plan to itemize with an additional $14,000 or more in deductions, you wouldn’t benefit from this deduction anyway. Keep in mind, you have the option to choose the increased standard deduction of $12,000 for single filers and $24,000 for joint filers.
Expansion of Child Tax Credits
This credit helps physicians with large families. The child tax credit is now available to more practitioners thanks to an increase in the income limits to receive the credit. The new limits are $200,000 for single filers and $400,000 for joint filers. If your income is up to $40,000 above either limit, you receive a partial credit under the phase-out rules.
The credit is $2,000 per qualified child under age 17 and is designed to offset the impact of the elimination of the personal exemption.
Speaking of children, you can now use Section 529 plans for K-12 expenses. This is especially beneficial for physicians with children enrolled in private school. Now you can use those funds to pay high school tuition and get a state income tax break on it. Expenses for homeschooling are not included.
There also is a new dependent credit of $500 that includes parents and college students.
Could the estate tax be a thing of the past? Beginning in 2018, the estate- and gift-tax exemption – a combined amount that applies to an individual's gifts made during life or assets left at death – is doubled under the new tax law to nearly $11.2 million per individual or $22.4 million per married couple. Since it is unlikely that you have an estate this large, you no longer have to worry about federal estate tax concerns—for now. Congress is sure to revisit these numbers down the road.
Keep in mind, every family subject to the $14,000 per year limit on gifts, including 529 college savings plan contributions, will get some relief since the limit is part of the federal estate tax code. This change alleviates complications when it comes to tax-related estate planning.
One common myth about the new tax law is that business/practice owners will no longer be able to deduct their expenses. Only employees lose the unreimbursed business expense deduction.
If you receive a W-2 salary and have to pay travel expenses or professional fees on your own, you do lose your deduction. When considering the impact of the TCJA on your office staff, such as the loss of itemized deductions for mileage, meals, and lodging, you may want to look at ways to rework compensation packages
However, if you’re the owner of your practice, the costs of operating your practice remain deductible. This includes medical education expenses, membership dues, airfare, lodging, computers and mobile phones, office supplies, and medical equipment.
Mortgage Interest Deduction Cap
The mortgage interest deduction is now only available on up to $750,000 in mortgage debt. The change only applies to new mortgages; old mortgages continue to follow the old rules.
In addition, only mortgages or home equity loans taken to finance the purchase of a home or to refinance a loan that was originally for the purchase of a home receive a deduction. There is no longer a deduction for interest on loans taken out for home improvement or other purposes. This provision is effective immediately and does include loans made before the change in the law.
Given that the standard deduction for married physicians has increased to $24,000, you won’t benefit from making smaller donations if you are not itemizing. You can now deduct cash donations equal to up to 60% of your adjusted gross income, up from the old limit of 50%.
Student Loan Debt
For a while it looked as if the student loan interest deduction would be eliminated in the tax reform bill. However, the deduction remains in place for those whose income still qualifies for it.
Download our free e-book, “Tax Reform Implications for Medical Practitioners,” for more information. Topics include:
- Tax Brackets and Standard Deductions
- Which Entity Makes Sense for Your Practice?
- Enhancements to Section 179 and Bonus Depreciation
- How Will Tax Policy Shape the Future of the Medical Profession?
The healthcare accounting team at Goldin Peiser & Peiser will monitor IRS guidance that provides clarification around the TCJA. For more information about our healthcare services, please contact Erick Cutler at 214-635-2541.