What Docs Ought to Know About Biden’s Tax Proposals

March 11, 2021

5 min read

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Bhatia, Foos and Mandell do not report any relevant financial information.

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With the Democrats in control of both Houses of Congress, President Joe Biden’s tax proposals are likely to pass this year.

To understand what new tax laws might look like, we can examine what has been proposed, what Biden talked about during the campaign, and what ideas have been brought up since the campaign.

While we cannot know what actual tax law will be passed, it is helpful for doctors to at least know what has been discussed when contacting counselors to prepare 2020 tax returns and look at tax planning for 2021.

Income tax

In terms of income tax rates, Biden has proposed a return to the highest individual tax rate from the current 37% to 39.6%. This would affect those with taxable income greater than $ 400,000.

Sanjeev Bhatia, MD

Sanjeev Bhatia

David B. Mandell, JD, MBA

David B. Mandell

There are many questions about what this means exactly: Is the $ 400,000 threshold for a single taxpayer or a married taxpayer (MFJ)? Would there still be a difference in maximum rate for these two classes of taxpayers?

It is important to note that under current law, the highest individual tax rate should decrease to 39.6% as early as 2026, as the individual parts of the tax law that were passed at the end of 2017 were temporary changes.

Carol Foos, CPA

Carol Foos

Biden’s proposal would also increase the tax rate for C companies from the current 21% to a tax rate of 28%. This is still well below the 35% rate at which many medical practices have been taxed as a personal services corporation in the past, but that would be an increase from where it is today.

Social security taxes

A major change for many doctors would be Biden’s proposal to set social security tax on wages above $ 400,000. Under current law for 2021, workers will pay 6.2% and employers will pay an additional 6.2% on the first $ 142,800 in wages for each worker. Biden’s proposal would revalue the same tax – 6.2% for employees, 6.2% for employers – once wages exceed $ 400,000. This would create a $ 142,800 to $ 399,999 wage gap with no social security taxes on wages. Once an employee reaches $ 400,000, social security taxes would be charged again. Remember, this tax is on top of the 2.9% to 3.8% Medicare taxes already paid on an unlimited amount of wages.

The ramifications of this proposal, if it becomes law, include an increasing importance in the tax structure of medical practices and the way in which they pay compensation to doctor owners.

For example, if a practice is taxed as an S corporation, it is even more important for the physician owners to determine how to minimize the amount of compensation as wages – while remaining “reasonable” as needed – and maximize the amount of the owner Distributions.

C corporate practices, which typically seek to eliminate their net taxable income at the corporate level by paying bonuses to owners in the form of W2 wages, can become even more tax problematic when this proposal becomes law.

We would not be surprised if many doctors tried to convert C-companies into S-companies as part of their analysis under a new tax law.

Capital gains, qualified dividends

If passed, the segment of Biden’s tax proposal in terms of capital gains and qualified dividends would represent a significant change from the status quo for the highest income doctors. His proposal includes taxing capital gains and qualifying dividends at normal income tax rates for taxpayers earning more than $ 1 million. Currently, the tax rate on long-term capital gains and dividends for taxpayers in the highest tax bracket is 20% plus 3.8% of the Affordable Care Act’s net capital gains tax, making a total of 23.8%.

This proposal would bring capital gains taxes to the rate of 39.6% for those earning more than $ 1 million, presumably still with the 3.8% surcharge. If this proposal becomes law, these earners will need to focus heavily on managing capital gains, reaping losses against gains, and raising awareness of the tax burden on investing.

For doctors selling or merging their practices, installment sales can add value by requiring income to be earned over a period of more than a year, thereby attempting to keep the doctor’s income below the $ 1 million threshold to keep.

Single prints

Biden has proposed limiting the value of the individual deductions for those in the upper tax bracket to 28%. For example, with a 39.6% tax rate deducting mortgage interest, a doctor would receive a benefit of only 28 cents for every dollar of deduction, instead of 39.6 cents for the dollar. In other words, these deductions would be of less value to a high income taxpayer as they are able to reduce taxable income.

Biden has also proposed restoring pease restrictions for those with taxable income greater than $ 400,000. The pease restrictions, which essentially reduce individual deductions for high-income taxpayers, have been removed by the Tax Cut and Jobs Act of 2017.

There is good news, especially for doctors in states with high state and local income taxes, or high property taxes. It has been reported that Biden, along with House Speaker Nancy Pelosi (D-Calif.) And Senate Majority Leader Charles E. Schumer, is in favor of lifting the current state and local Tax Withholding Restrictions (SALT) that impose them A taxpayer crosses limits up to a maximum total deduction of $ 10,000 for all state and local income taxes and property taxes. If the SALT restrictions are lifted, taxpayers could again be able to deduct all of their state, local, and property taxes from their federal tax returns.

Childcare credit

For physicians paying for child care, current law limits child expenses and dependent care credit to $ 3,000 per child per year, or $ 6,000 for multiple children. For those with adjusted gross income greater than $ 43,000, credit is capped at only 20% of those expenses.

Biden’s proposal is to increase eligible expenses to $ 8,000 for one child and $ 16,000 for multiple children, with credit of up to 50% of that expense available to taxpayers earning up to $ 125,000.

Estate / gift taxes

Under Biden’s proposal, inheritance tax exemption would be reduced to 2009 levels, implying an individual inheritance tax exemption of $ 3.5 million and a gift tax exemption of $ 1 million. Currently, estate and gift exemptions are each over $ 11 million per person.

Timed coordination

Not only do we not know which tax proposals will become law, but we also do not know when a new tax law would come into force. A new tax law can apply retrospectively as of January 1st of the year or come into force on January 1st of the following year.

In other cases, the new tax law could partially come into effect for the year of transition (i.e. 2021), with some aspects taking effect in 2021 and other aspects not taking effect until 2022.

While it is important for doctors to prioritize forward-looking tax planning each year, this is all the more true this year as the possibility of significant tax changes is in sight. Doctors should commit to keeping abreast of existing proposals that could become part of a new tax system and consider planning options that may help mitigate the adverse effects of a new law.

Reference:

Wealth Planning for the Modern Doctor and Wealth Management Made Easy are available free of charge in print or e-book formats by sending HEALIO to 47177 or at www.ojmbookstore.com. Enter the code HEALIO at checkout.

For more informations:

Sanjeev Bhatia, MD, is an orthopedic sports physician with Northwestern Medicine in Warrenville, Illinois. He can be reached at sanjeevbhatia1@gmail.com.

Carole C. Foos is CPA and partner in the OJM Group, www.ojmgroup.com. She can be reached at carole@ojmgroup.com or 877-656-4362.

David B. Mandell, JD, MBA, is a lawyer and founder of the asset management company OJM Group, www.ojmgroup.com. He can be reached at mandell@ojmgroup.com or (877) 656-4362.

You should seek professional tax and legal advice before implementing any of the strategies described here.

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