April 17th is right around the corner, and everyone is talking about the new tax laws. Here are the key takeaways to help you understand the changes and maximize your return as a practicing physician.
- Small businesses are getting bigger breaks with the business income left after you pay yourself a salary. Affecting self-employed physicians, the pass-through business income qualifies for lower income taxes. Essentially, you get the lower of 20% of the business income or 50% of what you paid in salaries as a deduction. “Service businesses” (which include physicians) have this deduction limited, so lower-paid physicians (with taxable income under $157,500) are likely to see a deduction and higher paid ones will not.
- The standard deduction is being raised from $6,500 to $12,000.
- Exemptions are now gone (essentially rolled into the standard deduction above). Low-earning physicians with large families will be hurt by this change and low-earning physicians with small families and high-earning physicians will be helped.
- Don’t fret if you are a low-earning physician family with two or more kids, this next update benefits you! The credit is increased from $1,000 to $2,000 per child under 17. This makes up for the loss of exemptions.
- The biggest change is that to the ordinary income tax brackets. Essentially, your entire tax burden gets lowered by about 3% of your taxable income.
- 529 plans and the state income tax breaks that come with them can now be used for K-12 expenses including private school tuition.
- The overall effect of the marriage penalty is decreased. It maxes out now at $8K in taxes, which is good news for two physician families.
Schedule A Deductions
With the standard deduction rising to $12,000, fewer people will be itemizing in 2018. That, coupled with the fact that many Schedule A deductions were reduced or pulled, mean big changes for deductions as you know them.
- State income taxes are now combined with property taxes and limited to $10K. This will be a big decrease for most physicians.
- Sales taxes are now gone completely. This will disappoint if you live in an income tax-free state.
- Rather than being able to deduct interest on up to $1M in mortgage debt, you can only deduct up to $750,000. Old mortgages are grandfathered in. This will affect a few physicians in high cost-of-living areas.
- Home equity loan interest has been eliminated.
- You can donate up to 60% of your income to charitable causes and deduct it instead of the previous 50%.