What orthopedic surgeons ought to find out about Biden’s tax proposals

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April 19, 2021

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With the Democrats in control of both Houses of Congress, President Joe Biden’s tax proposals are likely to pass this year.

To understand what new tax laws might look like, we can examine what has been proposed, what Biden talked about during the campaign, and what ideas have been brought up since the campaign. While we cannot know which tax law will be passed, it is helpful for orthopedic surgeons to at least know what has been discussed when contacting counselors to prepare tax returns for 2020 and look at tax planning for 2021.

Income tax

On income tax rates, Biden has proposed a return to the highest individual tax rate to 39.6%, up from the current 37%. This would affect those with annual taxable income greater than $ 400,000. There are many questions about what that means. Is the $ 400,000 threshold for both individual taxpayers and taxpayers who are married and file together? Will there still be a difference in maximum rate for these two classes of taxpayers?

Doctor's name, MD

Sanjeev Bhatia

David B. Mandell

David B. Mandell

Note that according to current law, the highest individual tax rate should rise again to 39.6% by 2026, as the individual parts of the tax law that were passed at the end of 2017 were only temporary.

Biden’s tax proposal would also increase the tax rate for C companies from the current 21% to 28%. This is still well below the 35% rate many medical practices have been taxed at as personal services companies in the past, but that would be an increase from where it is today.

Social security taxes

A significant change for many orthopedic surgeons would be Biden’s proposal to set the social security tax on wages above $ 400,000. Under current law for 2021, workers will pay 6.2% and employers will pay an additional 6.2% on the first $ 142,800 in wages per worker. Biden’s proposal is that the same tax – 6.2% for employees, 6.2% for employers – will be rescheduled once wages exceed $ 400,000. This would result in a wage gap of $ 142,800 to $ 399,999 with no social security taxes on wages. However, once a worker’s wages reach $ 400,000, social security taxes will be levied again. Remember, this tax is on top of the 2.9% to 3.8% Medicare taxes already paid on an unlimited amount of wages.

The ramifications of this proposal, if it becomes law, are increased attention to how orthopedic practices are structured for tax purposes and how they pay compensation to the doctor’s owners. For example, if an orthopedic practice is taxed as an S-corporation, it is even more important for the doctor owners to determine how to minimize the amount of compensation as wages while remaining “reasonable” when necessary and also maximizing the amount of owner distributions.

Corporate practices, which typically seek to eliminate net taxable income at the corporate level by paying rewards to owners in the form of W2 wages, can become even more tax problematic when this proposal becomes law. We would not be surprised if many orthopedic surgeons tried to convert C companies into S companies as part of their strategy under a new tax law.

Capital gains, qualified dividends

If passed, the segment of Biden’s tax proposal, which affects capital gains and qualified dividends, would represent a significant change from the status quo for the highest-income orthopedists. His proposal includes taxing capital gains and qualifying dividends at normal income tax rates for taxpayers earning more than $ 1 million. Currently, the tax rate for long-term capital gains and dividends for taxpayers in the highest tax bracket is 20% plus 3.8% of net capital gains tax under the ACA for a total of 23.8%.

This proposal would bring capital gains taxes to the rate of 39.6% for those earning more than $ 1 million, presumably still with the 3.8% surcharge. If this proposal becomes law, these earners will need to focus heavily on managing capital gains and harvesting losses for profits, as well as increasing awareness of the tax burden on investments.

For orthopedic surgeons selling or merging their practices, installment sales can become more valuable by requiring income to be earned over a period of more than a year, thereby attempting to keep the doctor’s income below the $ 1 million threshold to keep.

Single prints

Biden has proposed limiting the value of the individual deductions for those in the upper tax bracket to 28%. For example, with a 39.6% tax rate deducting mortgage interest, a doctor would receive a benefit of only 28 cents for every dollar of the deduction instead of 39.6 cents for the dollar. In other words, these deductions would be of less value to a high income taxpayer as they are able to reduce taxable income.

Biden has also proposed restoring the pease restriction to those with taxable income greater than $ 400,000. The pease restriction, which essentially reduces individual deductions for high-income taxpayers, has been removed by the Tax Cuts and Jobs Act of 2017.

There is good news, especially for orthopedic surgeons in states with high state and local income taxes or high property taxes. It has been reported that Biden, along with House Speaker Nancy Pelosi, D-Calif., And Senate Majority Leader Charles E. Schumer, is in favor of lifting current state and local tax deduction (SALT) restrictions that a Taxpayers up to a maximum total deduction of $ 10,000 for all state and local income taxes and property taxes. If the SALT restrictions are lifted, taxpayers could again be able to deduct all of their state, local, and property taxes from their federal tax returns.

Childcare credit

For orthopedic surgeons paying for childcare, current law limits childcare expenses and dependent care credits to $ 3,000 per child per year, or $ 6,000 for multiple children. For taxpayers with gross annual adjusted income greater than $ 43,000, credit is limited to 20% of that expense. Biden’s proposal is to increase eligible expenses to $ 8,000 for one child and $ 16,000 for multiple children with credit of up to 50% of expenses for taxpayers earning up to $ 125,000.

Estate / gift taxes

Biden’s proposal would reduce inheritance tax exemptions to 2009 levels, which include an individual inheritance tax exemption of $ 3.5 million and a gift tax exemption of $ 1 million. Currently, the estate and gift exemptions are each more than $ 11 million per person.

Not only do we not know which tax proposals will become law, but we also do not know when a new tax law would come into force. A new tax law can apply retrospectively as of January 1st of the year or come into force on January 1st of the following year. In other cases, the new tax law could partially apply for the year of transition (i.e. 2021), with some aspects taking effect in 2021 and others not until 2022.

Conclusion

While it is important for doctors to prioritize forward-looking tax planning each year, this is all the more true this year as the possibility of significant tax changes is in sight. Orthopedic surgeons should commit to keeping abreast of these proposals that could become part of a new tax system and consider planning options that may help mitigate the adverse effects of a new law.

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