Monday, December 11, 2017

Many Doctors Could Face A 100% Marginal Tax Rate

This is a truly terrifying finding in the Senate tax reform bill. Though this is only the Senate version and the final tax bill after reconciliation with the House plan could turn out to be very different, it's worth reading the fine print now.

According to analysis of the Senate bill, small business owners and people who make good money but are not the super rich could be on the hook for a marginal tax rate of greater than 100% on their income. What does that mean? It means that for every dollar you make over a certain tax threshold, you will owe more than one dollar to the government. That is literally the definition of a confiscatory tax rate.

How does something like that happen? It's rather complex and I haven't quite wrapped my head around it yet. That's why I have a CPA doing my taxes. First you have to be in a business that uses a pass through structure, like an S corporation, the way many small companies and physicians have their corporations set up. The special 23% rate for these corporations currently in the Senate bill slowly phases out after reaching an income of $624,000. Thus the corporation will face the full force of the top personal income tax bracket of 39%. Then if you live in a high tax state like the blue states on both coasts, the deduction for state and local taxes are going to be eliminated. Here in California the top tax bracket is 13.3%. After that various tax credits like the $2000 per child tax credits also phase out for high income earners. And don't forget to add the payroll tax such as Medicare. Voila. Pretty soon the most productive members of our profession are getting hit with taxes close to or greater than 100%.

While the majority of physicians don't make more than $625,000 per year, thousands of them do. The Senate bill is similar to the House version, which is biased against doctors with its refusal to grant a pass through tax cut for physicians. The House-Senate Joint Committee will be meeting this week to bring the two separate bills into agreement. They're hoping the final bill will be signed by President Trump before Christmas. It may be a very unmerry Christmas for many MDs this year.
I want pay more taxes.

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