Monday, January 1, 2018

The Best Pass Through Corporate Tax Law Explanation I've Read

The recently passed tax reform law is confusing to say the least. Rather than minimizing the reporting requirements to a single postcard as many Republicans claimed they were after, the new law maintains seven tax brackets and myriads of new and expired tax deductions.

Some of the most befuddling new rules are the deductions for pass through companies such as subchapter S or C corporations. What made it even more difficult to understand was that initially its new lower deductions didn't apply to service professionals like physicians, attorneys, accountants, or essentially anybody running a service business. The favorable tax treatments only apply to manufacturers. Luckily that unfair treatment seemed to have changed somewhat after the House and Senate reconciled the differences in their bills. Now professionals also get a low corporate deduction, but only up to a point.

I spent many days searching through the internet trying to find a simple explanation for how tax reform will affect S corporation professionals like myself. I believe I've found it. It's written by Passive Income MD and it gives great examples of how different income levels are treated differently by the tax laws.

Conveniently for me, PIMD uses a hypothetical situation that is very similar to mine: married couple with children, lives in a high tax state like California, uses an S corporation with about half salary and half distribution, and a fairly large mortgage (this is coastal California after all). Just scroll down through the article to see how the taxes change for incomes ranging from $400,000 to $700,000.

The good news is that for the average anesthesiologist income as reported by Medscape, we should do very well with tax reform. After accounting for all the deductions, we should wind up in a lower tax bracket and have more take home pocket money.

For higher paid specialties like orthopedic surgery or interventional cardiology, the picture doesn't look so rosy. The pass through deduction of 20% starts phasing out at $315,000 adjusted gross income and is completely gone by $415,000. Essentially fifty cents of every dollar earned over $415,000 will be paid to the government in taxes.

The only relief from high tax payments will be to maximize my 401K contributions each year and thank my lucky stars that I purchased a nice expensive home in Los Angeles with large mortgage interest payments that have been grandfathered into the new law. Other than that many of my old deductions like my high state, local, and property taxes will only get a minuscule $10,000 in deductions from now on.

Thank you Passive Income MD for this easy to understand explanation of the tax reform law and how it will affect high income professionals like us physicians. I'm going to put a link to his site on my home page since I believe his informative articles will be of great interest to my readers.

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