New Tax Law for Salaried Doctors

[ellenb]

I just read the news yesterday (was busy with other matters) and realized my taxes are going up as a salaried doctor due to placement a higher tax bracket. As salaried doctors, we cannot form an LLC and have pass-through(?) benefits.

How are other salaried doctors approaching the prospect of higher taxes?

Have there been any good threads on this topic for salaried employees?

Thank you for any insights.

[Peds]

not much you can do.

sell the house, have more kids, make less money.

[TheHappyPhilosopher]

The amount your taxes are going to go up should be a rounding error to your total income. Shelter what you can don't worry about things not in your control.

[ticker]

For starters, make sure you understand the bill (forgive me if you already do).  I have been surprised by the number of friends/coworkers who read an article somewhere and came away with a terribly inaccurate understanding of how their taxes would change (uniformly more pessimistic than the reality).

If you are in a higher tax bracket, you must be single.  So, getting married is one option.  Moving to a low/no income tax state is another.  Powering through the requisite Kubler-Ross stages and not worrying about it, a la The Happy Philosopher, is a third.

 

[The White Coat Investor]

ellenb wrote:

I just read the news yesterday (was busy with other matters) and realized my taxes are going up as a salaried doctor due to placement a higher tax bracket. As salaried doctors, we cannot form an LLC and have pass-through(?) benefits.

How are other salaried doctors approaching the prospect of higher taxes?

Have there been any good threads on this topic for salaried employees?

Thank you for any insights.

Click to expand...

Why would you be in a higher tax bracket when all 7 tax brackets have been lowered 3% or so? At most, your taxes should be about the same, and that only applies to those with very high state income and property tax deductions that they'll be losing.

I think you need to calculate your taxes and stop reading articles written by people who either don't understand the tax code or have a political ax to grind.

I would expect about 50% of this site's readers to have significantly lower taxes, about 45% to have about the same tax burden, and 5% to have a little bit higher taxes. That 5% pretty much all lives in California or the Northeast.

[q-school]

according to calculators i'm going to pay less by a significant amount.

 

[ticker]

The White Coat Investor wrote:

ellenb wrote:

I just read the news yesterday (was busy with other matters) and realized my taxes are going up as a salaried doctor due to placement a higher tax bracket. As salaried doctors, we cannot form an LLC and have pass-through(?) benefits.

How are other salaried doctors approaching the prospect of higher taxes?

Have there been any good threads on this topic for salaried employees?

Thank you for any insights.

Click to expand…

Why would you be in a higher tax bracket when all 7 tax brackets have been lowered 3% or so? At most, your taxes should be about the same, and that only applies to those with very high state income and property tax deductions that they’ll be losing.

I think you need to calculate your taxes and stop reading articles written by people who either don’t understand the tax code or have a political ax to grind.

I would expect about 50% of this site’s readers to have significantly lower taxes, about 45% to have about the same tax burden, and 5% to have a little bit higher taxes. That 5% pretty much all lives in California or the Northeast.

Click to expand...

The brackets have been lowered but the ranges of those brackets have been changed.  As such, a single person with taxable income of $175k used to be in the 28% bracket but is now in the 32% bracket.  So, while I agree that almost every doctor/midlevel I've talked to has misunderstood how their taxes would change, it is possible that the OP is correct and is now in a higher marginal bracket.

[The White Coat Investor]

Let's drag those brackets in here so we can all see what we're talking about. I just finished them for my upcoming post.



Yup, you're right. If EllenB is single and has a taxable income of $175K, her marginal bracket has gone up from 28% to 32%. However, the first $157,500 of her income has been taxed at a rate that is mostly 3-4% lower, which should more than even out the effect of the last $17,500 being taxed at 4% more, unless she is losing substantial income/property tax deductions. She may be one of the few whose taxes are indeed going up. But probably not. Especially with the AMT changes.

[The White Coat Investor]

At any rate, Ellen's question that there is some "thing" to do to somehow lower your taxes reflects a lack of understanding of how taxes work. Whatever thing that she should do now she probably should have done last year and the slight possible increase in her taxes doesn't really change anything. I mean, who is going to get married, have a kid, buy a house, give to charity, save for retirement etc in order to knock a couple thousand off their tax bill? They were either going to do that before or they weren't. The tax bill shouldn't change that.

You can fiddle around the edges like I am bunching charitable contributions into 2017, but temporary fixes like that probably aren't what she's looking for.

The main tax break a salaried employee can take is maxing out retirement accounts. If you haven't done that yet Ellen, I recommend you do.

[ellenb]

Yup, single, salary @$230K, high state & local income taxes. I used to be in 33% and am now in 35% bracket. I think this law will punish single salaried doctors who make $200-$400K the most.

[ticker]

Edit- misread your most recent post the first time through.

As WCI noted, your marginal tax rate will go up, but your effective federal tax will be about $7k/year less before wading into local taxes, itemized deductions, mortgage, etc.  It sounds like you've already accounted for this.  Short of moving to Florida, marrying, and having a bunch of kids, I'm not sure there's much you can do.

I'm a salaried employee.  I'm coming out ahead in the new tax plan.  I'm not doing anything to minimize taxes that I wasn't planning on before this new law (including the structure of my charitable giving).

Except, I've been debating trying to talk my wife into 8 more kids to make it an even $20k/year in child tax credit...

[Lithium]

Were you in the AMT last year?  If so, you had a completely different marginal rate.  You were probably really paying a marginal rate of 35% (28% + surtax of 7% as exemption phases out).  Not many people get this.

I'm guessing you won't be paying AMT under this new plan, and if you exit AMT purgatory your marginal rate doesn't change.

[Bmac]

ellenb wrote:

Yup, single, salary @$230K, high state & local income taxes. I used to be in 33% and am now in 35% bracket. I think this law will punish single salaried doctors who make $200-$400K the most.

Click to expand...

Have you used one of the calculators? Plugging in 230k, single, CA and itemizes deductions shows a negative $288 compared to current tax law. So you are probably going to pay somewhat more taxes in 2018, but perhaps "punished" is a bit strong of a word. Try this one:

http://taxplancalculator.com

[janettebournes]

ellenb wrote:

I just read the news yesterday (was busy with other matters) and realized my taxes are going up as a salaried doctor due to placement a higher tax bracket. As salaried doctors, we cannot form an LLC and have pass-through(?) benefits.

How are other salaried doctors approaching the prospect of higher taxes?

Have there been any good threads on this topic for salaried employees?

Thank you for any insights.

Click to expand...

1) Is incorporating as a C corp an option for salaried physicians?

I know there have been a lot of posts about the “Qualified Business Income” 20% Deduction For Pass-Through Entities and its phase out limits but haven't seen a lot of talk about going the C corp route.

2) Even if incorporating as a C corp is an option, at what level income does it make sense?

As I'm running the numbers using WCI's example from a previous article (https://www.whitecoatinvestor.com/incorporating-to-reduce-liability-and-to-save-taxes/), it looks like even at $1M, we haven't reached the point yet where a C corp wins out even with the lower 21% corporate rate.

Consider a physician that makes her business a C corporation and earns $1,000,000. First, she pays $210,000 in corporate tax. Then, she distributes the money to herself as a dividend. This is then taxed at 15%, the dividend rate, for another $118,500 in taxes ((1000000-210000) * 0.15). If she hadn’t been structured as a C Corp, her tax bill would have only been $309,379 in taxes (MFJ), instead of $328,500.

[amphora]

Just tried using the tax plan calculator for the given numbers. The problem is that you didn't include property tax in calculations (not sure if applicable to OP). If you include property tax, because of the SALT cap, it raises taxes by a few thousand, depending on the exact property tax bill.