From a personal tax planning perspective, there are several reasons for physicians to be thankful for the TCJA. Between the new top marginal tax bracket of 37% and the higher exemption and phaseout thresholds for the alternative minimum tax (AMT), the overall impact of the TCJA is likely to be positive for many physicians. However, as always, the devil is in the details.
Following are a few opportunities that you still have time to discuss with your tax advisor and implement before the end of the year:
- Maximize retirement contributions. One of the tried-and-true tax-planning strategies is to max-out contributions tax-advantaged retirement accounts. The 2018 contribution limit to a 401(k) or 403(b) is $18,500. If you’re 50 or older, you can contribute an additional $6,000. Total contributions to traditional and ROTH IRAs can total $5,500 ($6,500 if you’re 50 or older).
- Offset capital gains with losses. It's certainly been a volatile year in the stock markets, and recent weeks have not been kind to investors. However, if you divested your shares at the right time then you might have realized some significant capital gains. Consult with your investment and tax advisors to discuss the pros and cons of selling some capital assets at a loss to offset those capital gains. Even if you don’t have gains to offset, up to $3,000 in taxable ordinary income can be offset with these losses.
- Optimize charitable giving. The higher standard deduction ($24,000 for married taxpayers) means that fewer people will be itemizing this year. In fact, the Joint Committee on Taxation estimates that about 88% of taxpaying households will take the standard deduction in 2018. Many taxpayers are considering “bunching” their itemized deductions to optimize their tax impact. Take the time now to calculate your deductions for 2018. If the total is close to $24,000, consider making a large donation before the end of the year. Also note that the TCJA increased the limitation on charitable deductions from 50% of adjusted gross income to 60% (through 2025) and retained the tax-free transfer of up to $100,000 from an IRA to a qualified charity for individuals who are 70 ½ or older.
- Consider your state and local tax annual limit. Under the TCJA, the itemized deduction for state and local taxes is capped at $10,000. State and local taxes include state income tax, such as state withholding from your salary, sales tax and property taxes. Property taxes include both real estate taxes and annual car tag payments. Many taxpayers would “bunch” not only their charitable contributions, but also their real estate tax payments by paying previous year real estate taxes in January and current year in December. However, unlike charitable contributions, this may not be the best option, particularly in states with personal income tax.
- Hold off on refinancing that large home mortgage. Beginning in 2018, the home mortgage interest deduction is limited to $750,000 on qualified residence loans for the sum of the taxpayer’s main home and second home. Interest on a home equity line of credit also is now only deductible if the funds are used to buy, build or improve a home. That means that physicians who might have considered locking in a lower interest rate through a refinancing or HELOC now are thinking twice.
Corporate Tax Planning
From a corporate tax-planning perspective, healthcare professionals had hoped to find a way to take advantage of the 20 percent deduction for pass-through business income by splitting patient care and administrative functions into separate businesses. But on August 8, the IRS dashed these hopes with its proposed regulations that specifically prohibits this approach.
There are certain circumstances in which physicians can benefit from the 20 percent deduction — such as physicians with taxable income under the SSTB limits of $315,000 for married taxpayers filing jointly ($157,500 for single filers). Physicians who receive rental income from real estate (other than their own medical office building) also might qualify, unless that rental income is deemed an investment.
For physicians that are considering a large purchase of tangible property, the good news is that the TCJA increased the dollar limit for accelerated depreciation to $1 million and allows immediate expensing of most fixed assets. However, certain “qualified improvement property” now must be depreciated over 39 years. For more on these and other provisions of the TCJA that apply to physician practices, read our series of blogs.
Give your HORNE tax advisors a call to discuss what you can do to maximize the positive impact of tax reform in 2018 and beyond.