The Tax Cuts and Jobs Act has ushered in changes across the board for almost all Americans. But how does it affect the healthcare tax reform?
We’ve found that the new laws don’t impact the industry as a whole as much as they do individual physicians and practices. From personal returns to practice structure, here’s a rundown of the aspects that are most likely to affect you.
The most publicized healthcare tax reform introduced by the new law is the new set of withholding rates. There are now seven tax brackets (as opposed to six) for individuals. Most of these percentages are either the same or slightly lower as those in the existing tax code, so your withholdings will likely go down. A breakdown of the income levels for filing joint or individual returns:
The new tax bracket structure, however, isn’t the only healthcare tax reform worth noting. There are also changes regarding deductions that can impact your return depending upon your lifestyle and how you file. While standard deductions have been nearly doubled for all filers, many individual deductions have been severely curtailed or limited altogether. If you routinely itemize on your return, this can have a big effect on your tax picture.
For example, state and local tax and property tax deductions are now capped at $10,000 per year. Additionally, the mortgage interest deduction maximum has dropped to $750,000 if your home was purchased after Dec. 15, 2017 (homes bought on or before that date remain eligible for the previous $1 million limit). These reductions are particularly notable if you live in a high-tax state or own an expensive home or property.
There are also changes to deductions taken on the interest of home equity loans. These loans are generally divided into two categories: acquisition indebtedness (purchases used for “acquiring, constructing, or substantially improving any qualified residence”) and home equity indebtedness (purchases that don’t qualify under acquisition indebtedness). Under the new law, the interest on home equity indebtedness is no longer deductible on your return.
Some deductions have been eliminated entirely, including investment expenses such as portions of the fees paid to your broker. Alimony payments are also no longer deductible for divorce and separation agreements signed after Dec. 31, 2018 (they are also no longer listed in the recipient’s gross income).
Keep in mind that all of these changes—from the new brackets to the deductions—are temporary and will expire after 2025.
New Pass-Through Income Deduction
Under new health care tax reform, physician-owners can now deduct up to 20% of qualified pass-through income generated by their practice. The deduction is subject to a number of limitations and qualifications. It also phases out as total income increases, beginning with $315,000/year and disappearing entirely at $415,000/year. This deduction also expires after 2025.
Lowered Corporate Income Tax
The C corporation income tax has been changed to a flat 21% for C corporations (as opposed to the graduated system previously in place). Unlike the new brackets and deduction changes, this lowered and simplified corporate rate is permanent. Also keep in mind that a c corporation cannot be a pass-through entity and therefore would not benefit from the pass-through income deduction. In addition, dividends distributed by a c corporation are taxable income to recipient. Thus, if c corporations distribute all of their profits, they are essentially subject to as much as a 44% income tax rate.
Increased Expensing Limits
In some cases, you may be able to deduct the cost of property or assets purchased for use in the activity involved with running your practice (for example, new diagnostic imaging equipment). Expensing allows you to recover these costs immediately instead of over a period of time via depreciation deductions.
The new legislation doubles the maximum amount you can expense on these purchases under IRC Sec. 179 from $500,000 to $1 million. The investment limitation has also been increased from $2 million to $2.5 million.
You can also now take a 100% first-year deduction for depreciation for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 (or Jan. 1, 2024, for certain property with longer production periods). Under the previous law, this deduction was only at 50% of the cost of new property. There are also different stipulations for specific types of assets and productions.
The allowable bonus depreciation percentage goes down in future years as follows (and sunsets entirely after 2026):
- 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
- 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
- 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
- 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.
Originally designed to help consumers set money aside for higher education purposes, the use of a 529 has been expanded. With the new law, up to $10,000 per year from these accounts can now also be used for public, private and religious-based elementary and secondary schools.
As with most tax laws, many aspects of the Tax Cuts and Jobs Act include exceptions, caveats and stipulations. And every personal tax picture and medical practice is unique. It’s best to consult with your CPA, who will be familiar not only with these details but your unique situation as well.
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