Last Thursday Congress’ long-awaited tax proposal was released to the public. Here is a quick summary on how, if passed, this legislation could impact our physicians and dentists.
Pros/new rules that could reduce your taxes:
- The number of tax brackets will shrink from seven to four: 12%, 25%, 35% and 39.6%.
- Shift in what part of your income falls into the various brackets. This is where a lot of our doctors and dentists will save on taxes. For example, the new 25% bracket would be $200,000 (single) and $260,000 (married) combining the previous 25%, 28% and a small part of the 33% bracket.
- The new 35% bracket will extend all the way to $500,000 (single) and $1,000,000 (married) combining the previous 33%, 35% and part of the 39.6% bracket.
- The complexity of the returns will be reduced greatly. However, not to originally stated goal of simple enough to do your taxes on a form the size of a postcard. If the code is simplified, fewer of our doctors will need to hire an accountant each year to prepare their taxes.
- The dreaded Alternative Minimum Tax (AMT) would be repealed. This taxed impacted many of you and made your taxes much more complicated.
- Estate taxes would be phased out, which will increase the amount our clients’ children (or beneficiaries) will inherit. It should also make estate planning easier.
- The standard deduction will be doubled to $12,000 for individuals and $24,000 for families. This results in less of your income being taxed.
- The back-door Roth strategy should remain available.
- Existing deductions for 401ks/403bs would remain, eliminating the fear of many that these would be reduced as has been discussed in the media in recent weeks.
- The corporate tax rate is slashed from 35% to 20%. For doctors working for “for profit” clinics or hospitals, this could increase your profitability bonuses. Doctors and Dentists who own their own practices may benefit from this depending on how they file.
Cons/new rules that could increase your taxes:
- Home mortgage deductions remain, but only for mortgages under $500,000, down from the current $1,000,000 limit. There may be some grandfathering for existing mortgages.
- Capital gains and qualified dividends will remain the same. It was expected the Net Investment Income Tax of 3.8% may be eliminated.
- Property taxes will still be deductible but subject to a limit of $10,000.
- State income taxes will no longer be deductible. This will be particularly difficult for our clients living in states like California, Minnesota, and New York, which have very high state taxes.
- The top bracket of 39.6% starts at $1,000,000 (single) and $1,200,000 (married). This will be a tax savings for some of our doctors who previously in the top bracket starting at $418,400 (single) and $470,700 (married) who will now be in the 35% bracket. However, income earners between $1,000,000 to $1,207,000 (single) and $1,200,000 to $1,6140,000 (married) will pay an extra 6% surcharge making a stealth top federal bracket of 45.6% at these levels. After these income levels the top tax rate drops back down to 39.6%.
My takeaway: if you are a primary care doctor, in most states, you will probably be paying less in taxes. If you are an orthopedic surgeon, radiologist, orthodontist or oral surgeon making more than $1,000,000 per year, you are likely to be paying more in taxes, particularly if you live in one of the highest taxed states.
Remember this is just a proposal. It is not even at the “bill” stage. There will be a lot of negotiation and no doubt changes before any of these can be made into law.
What to do now: unfortunately, other than reaching out to your Congress person, there is not much you can do, but sit back and wait. Know that we are keeping an eye on these new developments and will update your financial plan as necessary. In the meantime, feel free to reach out to us if you have any questions or we can help you in any way.
© Katherine Vessenes, JD, CFP®, RFC is a nationally known attorney, popular platform speaker and the author of three books. She is a four-time winner of the coveted Medical Economics Top Advisor for Physicians Award. In addition, she was recently selected to be a “Top Woman in Finance” and has been selected as a 5-Star Advisor four times. She served on the Certified Financial Planner Board of Ethics and created an ethics program for American Express Financial Advisors. As the President of MD Financial, she and her skilled team are the personal CFO for busy physicians.