The Tax Cuts and Jobs Act was one of the most influential and game-changing tax reforms in recent memory. Some taxpayers claim that the changes improved things drastically, while others felt the hardships.
Doctors are one type of career path that has had to face new challenges since the enactment of the Tax Cuts and Jobs Act.
What are the top four tax filing issues for doctors?
#1 Tax Confusion
The problem for doctors, and many taxpayers who had to deal with the Tax Cuts and Jobs Act for the first time in 2018, was who exactly would benefit and who would suffer. In fact, healthcare seems to be like a lot of industries where some doctors are benefiting while others are not seeing the same breaks.
While it’s true that most doctors should pay fewer taxes through the Tax Cuts and Jobs Act, it is not true for physicians who operate in certain states. Why? Since the state and local income tax deduction, or SALT deduction, is limited to $10,000 for joint filers, doctors in high tax states like California and New York are suffering from the tax reform. All in all, they are losing state income tax deductions, which are contributing to higher overall tax bills.
#2 Private Practice vs. Other Physicians
It feels like the vast majority of the new tax code related to doctors is that physicians with their own practices benefit the most. Self-employed doctors are able to claim a number of deductions for business expenses like travel, lodging, medical equipment, board exam fees, licensing fees, and other related expenses.
What do you do if you don’t own your own practice? Doctors should consider negotiating reimbursement for the same expenses private practice physicians deduct since you do not get the same tax break.
One suggestion to resolve the issue is to become a sole proprietorship. Then you can receive income from your “locum tenens” work as well as payments received from drug companies and medical device manufacturers in exchange for research, teaching, and other services.
#3 Pass-Through Income Deduction
Individuals who received good news through the Tax Cuts and Jobs Act include certain pass-through entities. Pass-through entities are organizations like S corporations, partnerships, and limited liability companies.
Several physician and dental practices are structured as pass-through entities. In addition to the benefit of not getting taxed twice (like a C corp), pass-through entities are receiving even more benefits through the new tax reform.
Owners of pass-through entities can receive a 20 percent deduction on “qualified business income”. The new deduction could have effectively reduced the maximum tax rate from 39.6 percent in 2017, to 29.6 percent in 2018.
The problem with the new deduction is it doesn’t benefit everyone equally. Higher-earning doctors or two-physician households may not qualify for the benefit. Consequently, determining if you qualify is not always straightforward.
Regardless, the new benefit may influence you to restructure your private practice to a pass-through entity in order to reap the benefits of the tax deduction. Of course, this is going to take some time and effort on your part, yet may be worth it come tax season.
It is always advisable to speak with a tax professional before you make any changes to your business structure or tax election status.
#4 Changes in Business Income
In 2019, the new tax law will repeal the Affordable Care Act’s individual mandate, which requires Americans to carry health insurance or a tax penalty is imposed. How will the reversal on the mandate affect doctors?
The repeal of the individual mandate will increase the number of uninsured Americans by four million. The number of uninsured Americans is projected to reach 13 million by 2027.
Who will pay the burden? Will private practices see fewer people in the waiting room? Physicians will surely need to adapt to handling less insured patients.
Tax Support from Levy & Associates
Doctors are in the grey area, along with the healthcare industry, when it comes to whether or not they are benefiting from tax reform. The repeal of the ACA individual mandate and pass-through income deduction will affect the vast majority of medical practices.
In order to get more tax advice specific to doctors and the healthcare industry, contact Levy & Associates. We have more than two decades of experience in the industry and can help you find solutions. Contact us at 800-TAX-LEVY or visit www.levytaxhelp.com.