New rules and regulations that could impact your tax filings in April.
Now that we’re a month into the new year and you’re thinking about filing last year’s tax return, it’s a good idea to anticipate what’s coming this year, especially because of major revisions to the tax code passed at the end of 2017.
Here is a summary of some of the new rules that I think are most pertinent to physicians. Realize that due to the convoluted nature of tax laws and many exceptions (and exceptions to exceptions) to the general rules, you’ll need to sit down with your accountant and run the numbers to determine how these rules may or may not benefit you.
1. TAX BRACKETS
Seven different tax brackets remain, but the tax rates for each bracket and the thresholds to meet each bracket are different: 10%, 12%, 22%, 24%, 32%, 35% and 37%. You will likely see your tax bracket down a few points, but don’t get too excited – read below.
2. STANDARD DEDUCTION AND PERSONAL EXEMPTIONS
If you do not itemize your deductions, the standard deduction has doubled to $12,000 (single) or $24,000 (joint). Personal exemptions (another way of reducing your taxable income) have been eliminated completely. What this means for many taxpayers is that unless you have a large amount of itemized deductions (see further comments below), you’ll likely end up using the standard deduction. And the fact that the personal exemptions have been effectively “rolled in” to the standard deduction means that some taxpayers may get a smaller deduction than before.
3. ITEMIZED DEDUCTIONS
The biggest change here is that previously you could deduct your entire state income taxes and real estate taxes (though some of those were phased out as your income went up). Now you’re capped at a $10,000 deduction. This can be especially problematic if you live in high state income tax states such as California, New Jersey, or New York.
It is possible that while you may be in a lower tax bracket than before, the cap on the deduction of state income and real estate taxes could negate the benefit of the lower tax brackets. You can continue to deduct mortgage interest on your home, though that is capped based on your first $750,000 of mortgage debt.
Charitable contributions can still be deducted and has expanded to 60% of your income, up from 50%. If you’re an employee, you can no longer deduct unreimbursed employee expenses. If you’ve hired a financial advisor, you cannot deduct financial advisors’ fees anymore. However, you should talk to your advisor about deducting some of the advisory fee from tax deferred accounts to get a tax benefit – that is still allowed.
4. CAPITAL GAINS AND DIVIDEND TAX RATES
Unfortunately, the new tax law did not change the taxation of dividends and capital gains. So, if you have a taxable brokerage account and you sell a security for a long term gain or if you receive qualified dividends, then you’ll either be taxed at 0%, 15%, or 20%, depending on your income level. The investment tax that was passed under the Obama administration also remains if you have high enough income. That tax is 3.8%.
5. ESTATE TAXES
The new law doubles the estate tax exemption to $11.2 million (single) or $22.4 million (couples). In other words, your estate would need to be valued at those amounts or higher when you die to be subject to estate taxes. It’s unlikely many physicians will get there. This doesn’t mean you should not have an estate plan. It just means that the focus of your estate plan may no longer be to reduce estate taxes.
6. PASS THROUGH ENTITIES
If you’re an independent contractor, you might benefit from a new 20% deduction on your tax return for “qualified business income.” Essentially this is income that is passed through to you after paying yourself a salary or “reasonable compensation.” This particular part of the law has created a large amount of confusion. So, before you go out and switch jobs from being an employee to being an independent contractor, realize that there are restrictions placed on certain types of service businesses (such as physicians) from getting this deduction. If you’re an independent contractor, you might benefit from forming your own corporation and being taxed at the corporate level because the corporate tax rate has been reduced.
7. 529 COLLEGE SAVINGS PLANS
If you send your kids to private school, you can now withdraw money from 529 plans to pay for it, up to a limit of $10,000 annually per student. Personally, I don’t think this is a very good idea because of the much larger financial obligation for college in the future, but it does give some more flexibility to 529 plan withdrawals.
Lastly, realize that a number of these provisions are due to “sunset” after the year 2025, at which point they will revert back to pre-2018.