How will new federal law affect lives and wallets of physicians?
After a year of deadlocked negotiations and a great deal of waiting and wondering, Congress has passed the Inflation Reduction Act (IRA). With President Joe Biden set to sign the bill, you may be wondering how the IRA will impact the lives and wallets of physicians. Some effects will be indirect, some will be felt directly, and other elements of the IRA will not be felt at all. Let’s look at the tax planning and financial planning implications of the legislation for doctors and medical system executives.
One of the most significant features of the IRA is the new corporate minimum tax of 15% for businesses with revenues greater than $1 billion. Doctors, medical system executives – and most investors for that matter – may very well be indirectly impacted by the corporate minimum tax since this new tax expenditure has the potential to reduce corporate dividends, and, therefore, the retirement savings of investors.
More directly, the 15% corporate minimum tax is likely to impact employees of businesses with more than $1 billion in revenue – possibly with slower wage growth (smaller raises and bonuses, etc.) It may also slow hiring. So, when it comes to physicians, those in private practices would not feel these effects directly since their practices’ revenues would not be $1 billion, but those who work for large hospital systems could very well be affected. It’s possible, of course, that doctor groups could negotiate not having salary/bonus structures reduced by the new corporate minimum tax, but the potential is certainly there.
You have likely read about the extension of tax credits on electric cars included in the IRA ($7,500 tax credit for new electric vehicles and $4,000 for a used one). But eligibility for these tax credits is determined by income level. Doctors, medical system executives, and others with incomes above $150,000 individually or $300,000 jointly will not be eligible for the electric car tax credits. The tax credits enacted for home upgrades (i.e., solar panels, better insulation, and heat pumps) have similar income limits.
One piece of the Inflation Reduction Act that has been widely reported on, that will not affect doctors and medical system executives, is what some headlines have misleadingly referred to as the “carried interest loophole for wealthy people.” The loophole was preserved in the IRA after a great deal of back and forth. While it is accurate that carried interest will continue to receive preferential tax treatment and that those who earn carried interest are generally wealthy people, closing the loophole would have only applied to those who manage investments and earn a performance fee, such as hedge fund managers, private equity fund managers and real estate fund managers. So, neither doctors nor medical system executives, nor most other wealthy individuals, would have benefited from the preservation of the carried interest loophole.
One element of the Act that has been widely publicized is the $2,000 cap on Medicare beneficiaries’ annual out-of-pocket drug expenses. Those with private insurance have no such cap.
The new legislation extends Affordable Care Act (ACA) health insurance premium assistance for three years, through 2025. Had the ACA premium assistance not been extended, the costs would have escalated and some patients may have given up insurance coverage altogether. As a result, they may have cancelled or postponed medical appointments and procedures.
In addition, the IRA will increase IRS enforcement with the funding of hiring more agents to conduct audits of higher wage earners. This could impact doctors if for no other reason than the hassle factor. I am always skeptical that more audits will correlate to the increases in government revenue projected by such enforcement. It would be better if the IRS hired more agents to answer their phones or open correspondence, including returns that have been filed.
So, doctors in private practice will experience very little upside or downside as a result of the Inflation Reduction Act. Those working for larger health systems are at greater risk of being impacted negatively by the 15% corporate minimum tax. And both groups – those in private practice as well as those working for larger health systems – should be careful to dot their i’s and cross their t’s when filing their tax returns. Employing a trusted CPA to file next year’s 2022 tax returns would probably be a smart move.
Michael Joyce, CFA, CFP®, is founder and president of Agili, a Registered Investment Adviser and fiduciary in Richmond, VA and Bethlehem, PA. He is responsible for overall investment strategy, management of investment portfolios and financial planning services. He can be reached at MJoyce@AgiliPersonalCFO.com.