The Tax Cuts and Jobs Act (TCJA) that was signed into law in the closing days of 2017, contains a number of tax breaks. The majority of middle class taxpayers will receive a significant tax cut as a result of the law, though a few readers may find themselves with little or no tax break.
Tax Benefits for Independent Doctors
Independent doctors get a nice break thanks to a provision that got little notice in the mainstream financial press: If you are an owner of certain kinds of pass-through entities (e.g., S-corporations, partnerships you may be eligible for a new deduction of up to 20 percent on taxable income from your business.
I say “may,” because there are a few limitations for owners of professional services business: The benefit begins to phase out if your income is $157,000 or more ($315,000 for married couples). It phases out completely when your income reaches $207,500 for single filers, or $415,000 per year for married couples filing jointly.
Note that the deduction doesn’t apply to the income that you draw as a salary. The deduction applies to dividends, rather than salary.
However, for the salary portion of your income, you’re also getting the benefit of a near doubling of the standard deduction, and a reduction in the marginal tax rates to which your income above the standard deduction is subject.
You lose the benefit of personal exemptions, however. This means that exemptions for children go away. But the child tax credit (credits are more valuable than deductions) doubles from $1,000 to $2,000, so it will be roughly a wash for most readers with children.
Changes in Homeownership and Mortgages
Lots of doctors put a lot of money into their homes. The home mortgage interest deduction remains intact for existing mortgages. Going forward, though, the new law reduces the cap on mortgage balances qualifying for the deduction from $1 million to $750,000. Home equity loans will no longer be deductible. You will still get a capital gains exemption of $250,000 ($500,000 for married couples) for your personal residence when you sell it, though. Just be sure you’ve lived in the home for at least two out of the last five years in order to qualify. Otherwise you’ll have to pay capital gains taxes on the entire amount of gain over basis.
Interest on investment property mortgages remains deductible.
This Business Insider piece took a look at the effect of personal income tax cuts at a variety of income levels typical of physicians, and assuming single filers with no children. They found that pediatricians who have an average salary of $184,240 per year would probably receive a tax cut of about 11.5 percent. Anesthesiologists, however, who earn an average salary of about $269,600, would receive a more modest tax cut of about 4.4 percent, using Business Insider’s methodology.
Section 179 limits are increased from $500,000 to $5 million and increases the phase-out threshold from $2 million to $20 million. The new law allows you to take a full write-off for short-lived capital investments in equipment and machinery. Speak with your tax professional for more details on how to take advantage of these rules – especially if you are contemplating making major capital investments in 2018 or 2019. Prior rules required you to depreciate this equipment over a longer period of time. The new rules may help you recover your investment faster, and boost your practice’s cash flow.
Education and Estate Tax Reforms
Section 529 college savings plan benefits are expanded. You can now use Section 529 to pay for K-12 education and even homeschooling expenses. Previously, you could only use Section 529 to pay for post-secondary expenses.
The estate tax exemption is increased to $10 million and ties that exemption to inflation going forward.
Tax Cuts and Jobs Act Impact and Fiscal Considerations
A few readers may see their income taxes increase as a result of the tax law. You are more likely to pay more in income tax if all or most of these conditions apply to you:
- You plan to buy a home significantly more than $750,000.
- You have a large number of children.
- Your income is very high.
- You live in a high-tax jurisdiction and pay a lot in state and local income taxes.
Other effects of the tax bill that may affect our readers include:
A $10,000 limit on federal deductions for state and local taxes (SALT).
The corporate tax rate is reduced from 35 to 20 percent.
Most consumers will benefit from the tax cuts in the short run. But unless Congress can reign in spending to account for lower expected revenues, the law is expected to cost the Treasury $1.5 trillion in foregone revenues.
Sure, those foregone revenues translate into more money in the hands of Americans who earned it. But Congress will still need to do some belt-tightening (fat chance) or the cost of the bill is collectivized among all taxpayers, with interest, over time.