While unexpected, last Wednesday evening brought a deal between Senator Joe Manchin (D-WV) and Senate Majority Leader Charles E. Schumer (D-NY) on a bill touted as “Inflation Reduction Bill.” It was a surprising U-turn from Manchin, who reportedly previously vowed to block most of President Joe Biden’s bills that featured tax hikes. The new legislation looks to enact tax code reform, work against climate change, and cut healthcare costs.
If passed, it will be the largest tax increase in some time; the deal is intended to raise approximately $739 billion in accumulated taxes largely through eliminating loopholes. The revenue would be used to fund initiatives to support the goals of the bill, in addition to lowering the budget deficit. This would be processed as an investment of $400 billion over 10 years, with the remaining approximately $300 billion serving as a budget deficit reduction
So, what’s in the bill and how does it affect physicians? Let’s review some of the highlights of the bill:
- Book tax on corporations, by imposing a 15% minimum levy on companies that had previously been eligible to pay very low taxes, or none at all, because of applied credits and deductions. Rather than the usual method of using income for tax calculation, this levy will be applied to the companies’ financial statement, or “book,” earnings.
Looking at the impact of the bill on individual taxpayers, a Joint Committee on Taxation found that for those earning under $400,000, the tax increase would initially be slight. However, by 2031, the various credits and subsidies may prove to be more of a boon to higher-income individuals; at that time, over than 60% of the projected revenue could be coming from those making under $400,000 annually, according to some Republicans on the Senate Finance Committee.
- Elimination of the SALT expansion, though many Democrats had looked to continue the state and local tax (SALT) deduction. This currently allows taxpayers in higher tax states to deduct their local taxes from their federal tax returns. Unfortunately this was eliminated from the Bill. For those physicians who are self-employed, they should discuss paying state taxes from their owned corporations. This election is not automatically applied, and taxpayers must choose to do this. Not all states have these provisions, so it’s important to know what options are available currently.
- Increased IRS enforcement, with the new legislation providing $80 billion to update technology, hire and train additional auditors, and improve customer experience. This is in line with Democratic legislators’ goal of modernizing the IRS and rebuilding its efficacy after losses to budget cuts over the past ten or so years. Because of the high rate of their earnings, physicians are more likely to be audited. The new provisions will give IRS auditors the ability to request detailed transaction information while making tax arbitration nearly impossible to win due to the increased time and cost of the proceedings.
- An extension of the Affordable Care Act & Reforms to drug costs, continuing premium subsidies for insurance holders through the Act that were set to expire at the end of 2022. Instead, the subsides will extend to 2025, allowing millions of people who get their insurance through this method to pay a lower and more affordable price. The American College of Medicine applauded this provision, which will make healthcare more accessible to more people.
- Electric vehicle tax credits, up to $4000 for lower- and middle-income taxpayers for the purchase of used electric vehicles. The tax credits can be as high as $7500 for those purchasing new electric vehicles. For car companies who have shifted their attention to electric cars, this comes as a boon, as more people will look to those options when considering transportation.
- Clean energy in manufacturing, with several types of tax credits available to companies in the U.S. utilizing clean methods. There will be investment as well as production tax credits available to enhance U.S. research and production of wind turbines, solar panels, renewable batteries, and other green energy sources.
- Renewable energy for homes, with tax credits for consumers who enhance their homes with various improvements mentioned in the bill. These technologies include rooftop solar panels, electric water heaters and HVAC systems, and efficient heat pumps. For low-income taxpayers, the bill sets aside $9 billion in rebate programs for upgrades to make homes more energy efficient, with an additional $1 billion grant money for energy efficiency upgrades in affordable housing developments.
- Removal of the carried-interest tax break, which had previously been used by hedge fund and private equity managers to lower taxes. This had let the investment manager re-classify a share of income as capital gain, meaning it was taxed at a lower rate.
This is likely not the final form of the legislation, but these are the main points that the bill currently includes. Though a far cry from the initial Build Back Better proposal, it will still mean tax increases for individuals with an earned income over $400,000. The White House signaled Wednesday with a statement from President Biden that the administration fully supports this reconciliation bill, and Biden encouraged both the House and Senate to work to approve the bill before the upcoming recess.
Even before the legislation moves any further, physicians who are high-earners should prepare for potential changes and keep abreast of the situation as Congressional talks continue. To put themselves in the best position, physicians should speak to their financial advisors and CPAs to explore tax planning tools such as cost segregation, defined benefit plan establishment, and ROTH IRA conversions to lower overall taxes and be prepared to handle tax code changes in the future.
Syed Nishat is a partner, Wall Street Alliance Group. Syed has been regularly quoted in Medical Economics, Medscape, KevinMD, MedPage Today & Forbes. He can be reached on LinkedIn and on Twitter @syedmnishat.
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This article was published by our sister publication, Medical Economics.