How Trump's Tax Plan Could Affect Doctors

Karen Riccio

Disclosures

November 10, 2017

In This Article

A Change That Many Have Wanted

Repeal of the Alternative Minimum Tax

Many taxpayers with a large income have probably paid the Alternative Minimum Tax (AMT) over the years, and to see it go away would make more professionals than doctors jump for joy.

"This one needs more air time! Over half of our physician clients pay this," Fox Turner pointed out. "It would be a really big deal if we could see it go away."

This particular tax went into effect in 1969 when it became public knowledge that 155 well-to-do taxpayers were using legal deductions to avoid paying their fair share. They all earned $200,000 or so per year, equivalent to about $2.3 million today.[3]

So, while the AMT successfully targeted high-income earners initially, that no longer holds true. Exemptions and brackets weren't tied to inflation for many years, making more and more lower-income households subject to the higher AMT. The tax preparation can be time-consuming and costly.

According to the Tax Policy Center,[2] AMT rules require that the estimated 5.2 million middle- to high-income taxpayers who earned at least $129,700 (single filers) and $160,900 (married filers) in 2017 calculate their taxes twice: once with deductions under the regular income tax rules and once without those breaks. They must pay the higher of the two, with the first $186,300 of AMT taxable income paid at a rate of 26% and any amount above $186,300 taxed at 28%, reports eFile.com.[3]

This applies to individuals, C-corporations, estates, and trusts. Partnerships and S-corporations are generally not subject to income or AMT taxes; instead, they pass-through the income (see above) and itemized deductions to their partners and shareholders.

"This would make a ton of docs happy, as physicians are frequently in that income range ($150K-$400K) where the AMT takes a bite," says Dr Dahle.

However, even if the AMT were repealed, high-paying doctors wouldn't be able to take advantage of the proposed doubling of the standard deduction or increase in personal exemptions because they're phased out at certain income levels.

In 2016, those adjusted gross incomes[4] beginning at $259,400 (single), $285,400 (head of household), $155,650 (married filing separately), and $311,300 (married filing jointly) did not qualify for either.

Proposed Deductions, Reductions, Eliminations

While a repeal of the AMT would benefit most doctors, the plan's proposed reduction in the amount of mortgage interest (from $1 million to $500,000) and property taxes (capped at $10,000) that you can claim on your taxes will not.

"Today, taxpayers can deduct interest only on the first $1 million used to buy, construct, or improve a new home, but the new bill reduces that to $500,000," says Dr Dahle. "In Kentucky, that rarely comes into play. In California, New York, and even Texas, borrowing that much for a home is pretty routine.

"Another impact is the proposed $100K cap on home equity loans. It's not unusual for a doctor to use a home equity loan to pay off student loans because the mortgage interest is deductible and student loan interest isn't. I'd like to see this simplified out of the code," says Dr Dahle.

By far, the proposed elimination of state and local tax (SALT) deductions from federal tax bills is causing the most stir among the upper class. A study conducted by the Government Finance Officers Association, using the latest IRS data, found that 76% of those making between $100,000 and $200,000 (13.9 million households) used the deduction in 2015.[5]

Wealthier Americans who live in high-taxed states represent about one third of all beneficiaries. According to the same study, the average deductions in California, New York, and New Jersey are all more than $17,000. An average taxpayer in New York who currently itemizes SALT, assuming a 25% marginal tax rate, would face a tax increase of almost $5500 should the government pull the plug on SALT. About 46% of 2015 tax returns filed in Maryland, the state with the highest share in the country, used the provision and averaged almost $13,000 each in deductions.

The elimination of SALT therefore, could be a big blow to any professional who pays a large amount to the state every year.

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