Trump tax plan - What does it mean for IC EM Physicians?

Started by EM Junkie
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EM Junkie

EM Junkie

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Physician
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So the tax plan is out. Any thoughts on what it means for those of us paid as independent contractors?

Rate of 20% (25% for "personal service corporations"). I tried reading the bill text and it looks like, as written, it includes S-Corp and sole proprietors as well.

I'll take it if it passes, any thoughts on what this might do to our profession?
 
I am still trying to find this in the bill, but this interpretation from Vox doesn't sound favorable for physicians with pass-through income:

"the law would assume that 100 percent of earnings from professional services firms, like law firms and accounting firms, is wages, not pass-through income. For other businesses, people actively involved in the business as more than passive investors would see 70 percent of their income classified as wages and taxed normally, and 30 percent taxed at the pass-through rate."
The House Republican tax bill, explained

I would really like to hear from folks who have better knowledge and more experience with this kind of stuff...

HH
 
Hamhock said:
I am still trying to find this in the bill, but this interpretation from Vox doesn't sound favorable for physicians with pass-through income:

"the law would assume that 100 percent of earnings from professional services firms, like law firms and accounting firms, is wages, not pass-through income. For other businesses, people actively involved in the business as more than passive investors would see 70 percent of their income classified as wages and taxed normally, and 30 percent taxed at the pass-through rate."
The House Republican tax bill, explained

I would really like to hear from folks who have better knowledge and more experience with this kind of stuff...

HH
Click to expand...

Yep, that's about the gist of it. If you're sipping champagne on a yacht in Monaco with a 100% stake in a passively managed Contract Management company, you get that sweet, sweet 25% upper bracket on income generated by that company. If on the other hand you and your buddy form a smaller version of an otherwise identical business but instead of passively rent-seeking like a true parasite you bust your a$$es working shifts to generate the revenue for that company, then you are serfs and will get taxed at the maximum personal income bracket for your trouble.

We love our speaker Paul Ryan, don't we folks? Sure would be such a shame if anything happened to him in the primaries +pissed+
 
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Where it might get tricky is the portion you pay yourself. I only pay myself the "average" Emergency Physician salary of $240K per year. The rest I distribute out to myself as K-1. The real question is whether or not that K-1 income will be in the 25% bracket or the 39%. Right now I only save on the payroll taxes, as the K-1 is taxed at regular income, I just don't pay payroll taxes on it.
 
I'm concerned that those of us that live in a high tax state will get burned. Doubling the standard deduction does nothing for contractors with high deductions. Federal tax rates are likely to not change much, but loss of the local and state tax deduction will mean a big hit for some of us. Not good...
 
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I think you should still be able to deduct these as business expenses, but of course nobody knows for sure until the final plan is passed.

This plan affects personal deductions more than business deductions. You won't qualify as a passthrough corporation for the 25% tax bracket ("service" companies like lawyers, physicians, consultants are specifically excluded).
 
southerndoc said:
I think you should still be able to deduct these as business expenses
Click to expand...
Right, but overall deductions will still decrease since one can no longer deduct state and local taxes. Total tax burden will increase. So while 80+% of Americans are getting a tax cut, many ER docs will be in the 20% or so that are getting a tax increase overall. Hence republican tax plan = bad for many ER physicians.
 
old_boy said:
Right, but overall deductions will still decrease since one can no longer deduct state and local taxes. Total tax burden will increase. So while 80+% of Americans are getting a tax cut, many ER docs will be in the 20% or so that are getting a tax increase overall. Hence republican tax plan = bad for many ER physicians.
Click to expand...

The public will have no sympathy on an emergency physician. I live in a state with taxes and I will be losing $25-30,000 in deductions each year.
 
Yup. I'm a w2. Make 360, pay 120k tax 22k state... Thus is gonna hurt without the state deduction.

Sent from my Pixel 2 using Tapatalk
 
Brahnold Bloodaxe said:
How is your effective tax rate 40% on $360k of income?😱
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Yup, this seems high. Even in the highest tax states (NJ, NY, CA), effect tax rate of both state and local taxes should be ~30% if contributing maximum to pretax retirement accounts and optimizing deductions. Marginal tax rate will be higher of course, well above 40% 😱. Oh, to live in a high-tax state!! Makes Texas look more and more attractive.
 
old_boy said:
Yup, this seems high. Even in the highest tax states (NJ, NY, CA), effect tax rate of both state and local taxes should be ~30% if contributing maximum to pretax retirement accounts and optimizing deductions. Marginal tax rate will be higher of course, well above 40% 😱. Oh, to live in a high-tax state!! Makes Texas look more and more attractive.
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120 includes state and federal. It's 33%. Max contributions hsa 403b 457.

Sent from my Pixel 2 using Tapatalk
 
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This still has to get hashed out and reconciled with the House version. I also don't believe all the details are out yet, so a little premature to determine who's getting what.
 
bravotwozero said:
This still has to get hashed out and reconciled with the House version. I also don't believe all the details are out yet, so a little premature to determine who's getting what.
Click to expand...

Although the Senate Bill keeps the 39% rate, it is for couples making over $1,000,000. My calculation is that my income taxes would go from approximately 32% under the current plan to 27%, which is a big savings. Depending on how the pass-through gets treated, that could drop even further.

Interestingly pass-throughs are not included for professional services (lawyers, doctors) UNLESS your married taxable income is $500,000. I'm still not sure what the implications are, but theoretically you would actually have a cost savings if you kept your taxable income at 500K or less, which would include most EPs.
 
What is the $500k exemption for passthrough incomes? If you're less than 500k and married, you can take the lower 25% passthrough rate? :O

The way I've read everything my tax rate will go up because of limited SALT deduction ($10k, which my property tax eats up a lot of and then state taxes far surpass that).
 
southerndoc said:
What is the $500k exemption for passthrough incomes? If you're less than 500k and married, you can take the lower 25% passthrough rate? :O

The way I've read everything my tax rate will go up because of limited SALT deduction ($10k, which my property tax eats up a lot of and then state taxes far surpass that).
Click to expand...

The 500K rule was my interpretation as well, but I haven't read anything detailing it in depth as to how it would work. I would suspect it would be making sure more of your income stays in the passthrough company, and as long as you make less than $500K it is taxed at the lower rate. Generally you have to pay yourself a "reasonable" wage. I pay myself the "national average" of $240K from the company and everything else is distributed as K1. In the future, if there is a lower rate on the passthrough, I would leave this in the company account and not pay myself out the K1.

It will be interesting meeting with my accountant once this gets settled to figure out the strategy for next year.

Southerndoc, you might actually win, since the tax brackets are being changed, and more of your income will be taxed in a lower bracket than today. As with all big pieced of legislation (like Obamacare) there are winners and loser. There is no way to craft legislation whereby everyone wins. If you are concerned about the state income tax deduction, might I suggest you move to TX, FL or NV?
 
southerndoc said:
What is the $500k exemption for passthrough incomes? If you're less than 500k and married, you can take the lower 25% passthrough rate? :O
Click to expand...

Can someone define what is meant by "passthrough" as it applies to this bill (if it is known). Does it apply to sole proprietors or just things like LLCs that elect to be taxed as S-corps? As someone who started their first attending job as an IC and are on the cusp of having an LLC taxed as an S-corp financially advantageous (income ~375K) this would have a potentially big impact on my decision making.
 
To my knowledge it includes all LLCs, S corps, and C corps.


Sent from my iPhone using Tapatalk
 
Although I love that rates are going down, I live in a state with what I would consider a moderately high state income tax rate (not as high as CA, NY, NJ) and I too am concerned that losing that deduction will wipe out any rate cut I get and possibly even result in a tax increase. I don't work as an IC.

So, I asked my tax accountant based on these tax bills being discussed, whether my taxes are going up, down or staying the same next year, and the best he could even do at this point, with all the complexity and changing variables was to say, “I think you might come out ahead, but it’s too early to tell. Stay tuned.”

They’ve smartly made it complicated enough, no one really knows how it’ll affect them.

Regardless, when it’s all said and done, I’m going to use this as an excuse to blast my state politicians to lower our income tax in response to this. If property tax remains deductible and income taxes don’t, I wouldn’t be surprised if we see plenty of state reforms follow, shifting away from income tax, to property taxes.
 
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Birdstrike said:
Although I love that rates are going down, I live in a state with what I would consider a moderately high state income tax rate (not as high as CA, NY, NJ) and I too am concerned that losing that deduction will wipe out any rate cut I get and possibly even result in a tax increase. I don't work as an IC.

So, I asked my tax accountant based on these tax bills being discussed, whether my taxes are going up, down or staying the same next year, and the best he could even do at this point, with all the complexity and changing variables was to say, “I think you might come out ahead, but it’s too early to tell. Stay tuned.”

They’ve smartly made it complicated enough, no one really knows how it’ll affect them.

Regardless, when it’s all said and done, I’m going to use this as an excuse to blast my state politicians to lower our income tax in response to this. If property tax remains deductible and income taxes don’t, I wouldn’t be surprised if we see plenty of state reforms follow, shifting away from income tax, to property taxes.
Click to expand...

Really. We'll have to pass the bill to know what is in it........
 
I'm confused about the pass through income language and how it will effect physicians. For 1099 independent contractor physicians, I understand that $157,500 for individuals and $315,000 for married couples is the limit on which independent contractors can deduct 20% of earnings. But for those making more than this amount, can we still deduct the 20% on earnings up to this amount or are we excluded from the 20% deduction completely??? I potentially very large distinction I have not been able to figure out based on the bill's language.
 
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old_boy said:
I'm confused about the pass through income language and how it will effect physicians. For 1099 independent contractor physicians, I understand that $157,500 for individuals and $315,000 for married couples is the limit on which independent contractors can deduct 20% of earnings. But for those making more than this amount, can we still deduct the 20% on earnings up to this amount or are we excluded from the 20% deduction completely??? I potentially very large distinction I have not been able to figure out based on the bill's language.
Click to expand...

You're not alone, a lot of people, including my accountant, are trying to figure this out. We still have to yet to see the actual verbiage of the final bill. Also, as I said on another thread that was discussing the same topic, the pass through figure of 20% is not a tax rate, but a 20% DEDUCTION. It is a deduction on your TAXABLE INCOME, which is not necessarily going to be your income before taxes. So, what if you maxed out your retirement plans, and got your taxable income down to 315k married? Do you qualify then? This I think is going to be possible for docs in our field...
 
My interpretation (and discussing with an accountant at a hedge fund that I consult for):

- If you can get your business expenses/income down to below the 315k married level, then you are likely able to qualify for the 20% deduction. So if you made 400k and deducted 59k for SEP-IRA, another 20k for health insurance, etc. as business expenses, then you are below the 315k limit.

- He said the language read a "phase out" if he remembered correctly. That means above a certain level, you will not be able to deduct anything. It's like the phase out for a Roth IRA. You can contribute, but after a certain amount, your contribution limit is reduced. After a certain amount, you cannot contribute. (Yes, I know there are backdoor ways, but work with me here.) The same phaseout will apply for deductions for business income for contracted individuals.

- He foresees litigation from lawyers, who these phaseouts apply to.

- Nobody will know what you can do until the IRS makes its interpretations of the law. That is when what we are allowed to do will go into effect. If they think point A means no deductions at all, then that's what it will be until it is challenged. We likely won't have their interpretations until late January at the earliest.
 
I think they will have no choice but to allow the 20% deduction for everyone up to 315K, regardless if you make more than that. Having a law where if you make $316K you pay a lot more taxes than if you make $315K makes no sense logically, or fiscally. It will lead to tons of people gaming the system, and companies finding other ways to compensate employees to keep them below the $315K. It will lead to a lot of tax avoidance behavior, which was what this bill was supposed to reduce.
 
xaelia said:
This very carefully-written bill made great strides in making our federal income taxes simple and predictable.
Click to expand...

I'm all for the lower tax rates, but in an effort to try and please everyone, and not piss off any particular constituency they've done little to simplify the tax code. I guess it's better than a tax increase we would have seen under a Hillary/Pelosi regime. Certainly an improvement over the egregious tax increases of the Obama era.
 
Can we deduct the cost of construction of fall out shelters and potassium iodide pills? MAGA!
 
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