2018 was the first year that incorporated the majority of the tax law changes resulting from the Tax Cuts and Jobs Act of 2017 (TCJA) enacted just prior to the end of 2017. While many taxpayers were very concerned with the loss of certain tax deductions that had benefited them over the past tax years, the TCJA did attempt to offset such lost deductions by lowering the tax rates for taxpayers as well as by enhancing certain tax credits.
As a result of the TCJA, we actually saw that most of our clients paid a lower federal tax on their 2018 tax returns as compared to their 2017 tax returns. We?re pleased to share with you the following metrics highlighting how our healthcare professional clients were impacted by the TCJA.
Lower tax rates
The TCJA lowered the bracketed income tax rates for individual taxpayers. In comparing the average tax per tax return (total income tax as a percentage of adjusted gross income), we observed a decrease in the average federal tax rate paid by our clients by 1.4%. In 2018, the average tax rate for our clients base of mostly physicians, dentists, and psychologists ran at 24.6% as compared to an average rate of 26.0% in 2017.
The number of our clients that received a federal tax refund in 2018 was consistent with the number of our clients that received a refund in 2017. 38% of our clients received refunds each year.
Federal income taxes owed
Similarly, the number of our clients owing additional federal income taxes when their tax returns were completed was consistent for 2018 and 2017. However, we noted an increase in the average amount of taxes due with those clients that owed money to the IRS. For these clients, their federal balance due on average increased by almost one-third: from $6,700 per tax return in 2017 to $8,600 in 2018.
State and local tax (SALT) limitation
One of the major concerns of most taxpayers was the limitation on the SALT deduction, now being capped at $10,000. As a result of this change, the average SALT deduction for our clients nose-dived by $22,423 to $8,181 from the 2017 amount of $30,604.
The new tax law increased the standard deduction to $24k for married couples and $12k for single individuals. With the new limitation on certain itemized tax deductions as noted above coupled with the increased standard deduction amounts, 36% of our clients claimed the standard deduction on their tax return in 2018 whereas only 10% of prepared tax returns in our office claimed the standard deduction on their 2017 tax return.
Alternative Minimum Tax (AMT)
One huge sigh of relief for many healthcare professionals resulting from the TCJA was the virtual disappearance of the AMT for nearly all our clients. The AMT was assessed on 47.5% of the tax returns prepared in our office in 2017. That amount dropped to less than 1% in 2018,with only 7 tax returns in our office paying any amount of AMT in 2018.
Child Tax Credit
Changes to the Child Tax Credit rules is another tax break that was greatly expanded by the TCJA. The dollar amount of the tax credit increased in amount from 2017 to 2018. Additionally, the income limitation where taxpayers no longer qualified for the tax credit significantly increased as well. As a result, the number of our clients that claimed the credit increased by 742. This tax credit was claimed on 818 of our clients? tax returns in 2018 compared to only 76 of our clients? tax returns in 2017. The average Child Tax Credit reported per tax return claiming this tax credit increased from $1,114 in 2017 to $3,093 in 2018, a jump of $1,979 per tax return qualifying for this enhanced tax credit.
Qualified Plug-in Electric Drive Motor Vehicle Credit
One final item we noted (and not a result of the TCJA) was an increase in our clients that purchased automobiles qualifying for the Qualified Plug-in Electric Drive Motor Vehicle Credit. The number of tax returns for our clients reporting this tax credit on a From 8936 increased by 30 from 2017 to 2018. In 2018 the tax credit was reported on 46 tax returns compared to being reported on only 16 tax returns in 2017. It seems that the Tesla is the auto of choice regarding this tax credit. In 2017 five tax returns in our office claimed the purchase of a new Tesla. In 2018 the number of tax returns reporting a new Tesla purchase increased to 31. With the new Tesla Model 3 being priced at the more affordable MSRP of $35,000 and becoming available only later in the 2017 tax year, our clients? tax returns reported a total of 18 Model 3 purchases in 2018. A second reason for the spike in Tesla purchases being reported on tax returns is the knowledge by taxpayers that the tax credit was becoming limited to only $3,750 for a Tesla purchased beginning January 2019. Prior to 2019, taxpayers qualified for a $7,500 tax credit for Tesla purchases.