Looks like tax changes are on the way. Below are some of the recommendations that President Biden’s team and the House Ways and Means Committee have each proposed recently that will impact the federal income taxes paid by successful healthcare professionals if enacted into law:
PROPOSED CHANGES TO PERSONAL TAXES
Restore the top tax rate to 39.6%
Both groups’ proposals would restore the top tax rate to 39.6%, up from the current top rate of 37%, for taxpayers with taxable income over $400k if single or $450k if married.
Eliminate the advantageous capital gains rates for high earners
For taxpayers earning over $1 Million, President Biden’s American Families Plan would double the tax rate on long-term capital gains by eliminating the current 20% tax rate and instead, having that income taxed as ordinary income at a rate of 39.6%. Add that most long-term capital gains for taxpayers earning over $250k are also subject to Medicare taxes (also known as the Net Investment Income Tax – NIIT) at 3.8%, and this brings the total proposed federal capital gains tax rate to 43.4%. Throw in your state’s income taxes on those gains, and the rate on realized long-term capital gains could top 50%.
The House Ways and Means Committee, meanwhile, has recommended a top federal capital gains tax rate of 25% for high income households plus the 3.8% Medicare Tax.
Limit who would qualify to defer taxes on real estate transactions
Over the years, taxpayers selling appreciated real estate could defer taxes indefinitely by purchasing more expensive real estate within 180 days of the sale of the appreciated property and by also following certain mandatory steps required for the transaction to qualify as a “like-kind exchange”. The American Families Plan would end this tax deferral strategy on realized gains exceeding $500,000.
PROPOSED CHANGES TO COMBAT NON-COMPLIANCE OF TAX RULES
Increase IRS funding to lead to better enforcement
The American Families Plan would allocate $80 billion over the next 10 years to increase IRS funding with a primary purpose of stronger enforcement towards individuals in the top tax bracket and for large corporations as well.
PROPOSED CHANGES TO BUSINESS TAXES
Raise the tax rate from 21% to 28% for C-Corps
Very few small healthcare practices operate as C-Corps these days, and with corporate tax rates potentially increasing by 33% from a current rate of 21% to a proposed rate of 28%, looks like S-Corps, LLCs, and other flow through entities will continue to be the entities of choice for practice owners.
Institute a 3.8% Medicare Tax on S-Corp Owners
Currently, S-Corp practice owners are exempt from paying the 3.8% Net Investment Income Tax (NIIT) on all non-salary income reported on the K-1. Biden’s proposal would institute this 3.8% tax on S-Corp income for practice owners with taxable income over $400k if single or $500k if married.
We’ll be keeping an eye on which tax changes are finally enacted and reach out to you on these changes and the related planning opportunities right away.