The TCJA is in Full Effect: How Physicians Can Keep More Money
The new tax law made it easier for many doctors to pay less, but not everyone will benefit. From charity to children, here are the decisions which could affect how much income doctors retain in 2019
Doctors are frequently exhausted by their duties and find focusing on their taxes difficult – and MD Magazine highlighted just how vulnerable physicians can be when it comes to paying out come April: “Experience shows that most doctors overpay in taxes and sometimes pay in excess of $125 for every $100 they were required to pay according to the law.” Poor choices and lack of information may cost thousands of dollars in potential tax savings under the current law.
The law in question is the Tax Cuts and Jobs Act (TCJA) of 2017. It does have its critics but for the most part, the TCJA was welcomed by the majority who would pay less in taxes. Doctors are part of that crowd but on closer inspection, the TCJA wasn’t a windfall for every physician.
For example:- doctors in the highest tax states such as New York or California lost their state income tax deductions. This was a result of the State and Local Tax deductions being limited to $10,000 for joint filers. Physicians with the “wrong” zip code ended up with an increase in tax bills.
This is important since our two example states top the national rankings for the most physicians employed in America, according to the Bureau of Labor Statistics. And beyond those areas, an even greater number of physicians could benefit from sharpening their tax awareness in 2019.
Consider how much you earn vs. how you make it
The 1099 tax bracket of locum tenens trumps a W2 wage. Since W2 earnings are the highest taxed of the two, it may be in your best interests to become a free agent (this needn’t be a total career shift since you may be able to form a small business while serving with a primary employer).
There are other advantages of going your own way can bring. You may be eligible for an income pass-through deduction if your total taxable income is less than $207,500 or $415,000 if married, which could qualify you to receive a tax deduction of up to 20 percent of your business income.
You will also be able to capitalize on tax-deductibles for work; a long list that could save you plenty. Some self-employed physicians choose to employ their family members in their practice. This decision can also go some way to saving on income tax, especially if the employees are children.
Tax strategy for homeowners
Doctors may want to think twice before refinancing in 2019. The TCJA impacts deductions on mortgages obtained after Jan. 1, 2018, meaning only the interest on the first $750,000 of debt is deductible. Owning your home does offer other perks which can save on taxes, however.
Advanced tax strategy can leverage U.S. Tax Code Section 280A(g) and let you rent out all or part of your home, tax-free, for two weeks every year. The same rule allows physicians to partially or wholly rent out their property to their business, allowing for tax-free income and a business tax deduction.
How the TCJA impacts saving for children
Doctors who’ve opened a custodial account for their children as either a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) will lose out on tax. This defeats the original bonuses of such accounts. Parents who chose these would sidestep the attorney fees associated with establishing a trust, while the assets passed to the child enjoyed the lower tax rate for minors.
Opening a 529 that ensures that funds go toward your child’s future education could be a suitable alternative. It’s tax-free at the federal and state level and tax-deferred as it grows. The contributions themselves aren’t deductible, but any expenditures for qualifying educational purposes are (up to $10,000 a year for attendance, tuition, or enrollment).
How to maximize charitable donations
The standard charitable deduction is currently $24,000 for married physicians. You’re best advised not to make regular donations of smaller amounts to your favorite cause; rather, one large donation with a break in-between. Another option is donating securities from a taxable account. There’s no capital gain on the sale and the gift is tax deductible.
Your individual needs affect your strategy
You can generally assess the TCJA’s impact by using this tax calculator from the Tax Foundation which allows you to create a custom scenario to see how tax reform will affect you or your family. Mortgage, Trust, and 529 options have pros and cons dependent upon your present circumstances and future goals. This is what makes speaking to a qualified tax advisor so important.
Tax law is notoriously dense and it’s subject to changes that many individuals don’t always know about. A qualified CPA will always be abreast of revisions and use this knowledge to save you every penny they can.
Provident CPA and Business Advisors offer a wide range of services in tax planning, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.