First and foremost, the Inflation Tax Act is unlikely to negatively impact private practices. However, there is a high probability it will impact doctors working in hospitals. The reason for this is due to the corporate minimum tax in the new bill. Previously, corporate giants (like Amazon) did not pay a significant amount in taxes. Under the Inflation Reduction Act however, the IRS will enforce a 15% minimum corporate tax on companies whose revenue exceeds $1 billion. This is also why, in regards to physicians, it’s unlikely a private practice is going to feel the effects of this act. Meanwhile, this can lead hospitals to slow-roll their hiring — with taxes/budgets in mind. And it could lead to limited bonuses for existing staff. Bonuses are also likely to be one of the first ways hospitals limit their taxes.
This is far from gloom and doom for physicians however. Part of the tax act’s legislation includes extending the Affordable Care Act (ACA) through 2025. Had this not passed, insurance would’ve seen a significant increase and it’s widely speculated this would’ve caused many to drop insurance coverage altogether. With this act however, many are retaining their appointments, procedures, and prescriptions.
This is far from the first time, medical professionals have seen a change in how they fill out their taxes and it’s less of an overhaul from the Tax Cuts and Jobs Act of 2017.
Tax Cuts and Jobs Act and Physicians
The Tax Cuts and Jobs Act of 2017 (TCJA) ushered in the most sweeping changes to the United States’ tax code in three decades. While the TCJA reduced individual tax rates (with virtually all businesses qualifying for a 20% deduction on their annual income), many of these provisions sunset after 2025.
To help mitigate this volatility, Congress has made several permanent adjustments to how individuals and businesses can plan their taxes. As a result, medical professionals will need to understand the potential impact of these changes on their finances and how they may account for them when advising clients or employees about investing in education, retirement, or other significant financial planning decisions.
Higher Standard Deductions for Everyone
The TCJA nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. Since this deduction is subtracted from your gross income before any other taxes are calculated, it reduces your overall tax liability. This is good news for physicians and other high-income taxpayers who now have a higher standard deduction than last year.
The increased deduction may mean the difference between itemizing deductions and claiming the standard deduction. However, the higher standard deduction also means fewer taxpayers benefit from itemizing. Itemizing allows taxpayers to deduct expenses like mortgage interest, property taxes, and other outlays that exceed the standard deduction.
Individual Mandate is Gone, But You May Still Pay a Tax
The tax law repeals the Affordable Care Act’s (ACA) individual mandate. The mandate taxed individuals who couldn’t prove their health insurance coverage. The mandate had two purposes:
- First, it helped to stabilize the ACA’s insurance markets by incentivizing younger, healthier individuals to purchase health coverage.
- Second, it ensured that everyone paid their “fair share” for coverage by making the purchase of health insurance mandatory. The latter purpose is now gone.
However, removing the mandate reduces federal revenues by an estimated $19 billion over ten years. To offset this decline in revenue, the tax law increases the ACA’s alternative minimum tax (AMT) on high-income taxpayers. The AMT is a parallel tax system that disallows many itemized deductions and imposes a higher tax rate on ordinary income. With the mandate gone, the AMT now reaches a broader range of taxpayers.
You Can Still Deduct Medical Costs
The TCJA doesn’t change the rules for deducting out-of-pocket medical costs. You can still deduct your medical expenses if they exceed 10% of your adjusted gross income (AGI). However, keep in mind that the TCJA also increases the standard deduction. Those with high medical expenses may be more likely to exceed the standard deduction, which means they’ll also exceed the AGI threshold necessary to deduct medical costs.
Child Tax Credit Changes and Other Family Provisions to Be Aware of
The TCJA expands the Child Tax Credit (CTC) to $2,000 per qualifying child under the age of 17. The credit is now refundable up to $1,400, meaning taxpayers can receive the credit even if they don’t owe taxes. However, the distinction isn’t adjusted for inflation. As a result, the CTC will lose about 9% of its value over the next ten years. Additionally, the TCJA makes the CTC available to more taxpayers. Single filers with up to $400,000 in AGI and joint filers with up to $800,000 in AGI are now eligible to claim the credit.
The Tax Cuts and Jobs Act is the most sweeping tax reform since 1986. Although the new tax law is a massive change from the previous code, most taxpayers will see lower taxes. The tax law also includes several important provisions for medical professionals. As a result, physicians, dentists, and other health care providers can expect lower taxes in the short term and more stable finances in a long time. Unfortunately, the TCJA also contains some provisions that may negatively affect the health care industry. Chief among them is the alternative minimum tax (AMT) expansion. With the new rules in place, all medical professionals need to understand how the Tax Cuts and Jobs Act affects their finances and how they can plan for their taxes.