After a year of deadlocked negotiations and much waiting and questioning, Congress passed the Inflation Reduction Act (IRA). As President Joe Biden is about to sign the bill, you may be wondering what impact the IRA will have on doctors’ lives and pocketbooks. Some effects will be indirect, others will be felt directly, and other elements of the ERI 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.
Corporate minimum tax
One of the most important features of the IRA is the new minimum corporate tax of 15% for companies with revenues over $1 billion. Physicians, medical system executives – and most investors for that matter – could very well be indirectly affected 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% minimum corporate tax is likely to impact employees of companies with revenues over $1 billion – possibly with slower wage growth (fewer increases and bonuses, etc.). It can also slow down hiring. So, with respect to physicians, those in private practice would not feel these effects directly since their practice revenue would not be $1 billion, but those working for large hospital systems could very well be affected. It is possible, of course, that physician groups will negotiate not to have salary/bonus structures reduced by the new minimum corporate tax, but the potential is certainly there.
Tax credits for electric vehicles and home renovations
You’ve probably heard of the extended electric car tax credits included in the IRA ($7,500 tax credit for new electric vehicles and $4,000 for a used vehicle). But eligibility for these tax credits is determined by income level. Physicians, medical system executives and others with incomes over $150,000 individually or $300,000 jointly will not be eligible for electric car tax credits. Tax credits enacted for home renovations (i.e. solar panels, better insulation and heat pumps) have similar income caps.
One element of the Inflation Reduction Act that has been widely reported, which not affect doctors and leaders of the medical system, is what some headlines have mistakenly called “the wealthy focus loophole.” The loophole has been preserved in the IRA after many back and forths. While it is true that deferred interest will continue to receive preferential tax treatment and those who earn deferred interest are generally high net worth individuals, closing the loophole would only apply to those who manage investments. and receive a performance fee, such as hedge fund managers, private equity fund managers and real estate fund managers. Thus, neither physicians nor medical system executives, nor most other wealthy individuals, would have benefited from the preservation of the interest loophole.
Additional IRA Items Worth Mentioning
One element of the law that has been widely publicized is the $2,000 cap on annual drug expenses for Medicare beneficiaries. Those who have private insurance do not have this ceiling.
The new legislation extends the Affordable Care Act (ACA) health insurance premium assistance by three years, through 2025. If ACA premium assistance had not been extended, costs would have increased and some patients might have dropped their insurance coverage altogether. As a result, they may have canceled or postponed medical appointments and procedures.
Application of IRS
In addition, the IRA will strengthen IRS enforcement by funding the hiring of more officers to conduct audits of high earners. This could impact doctors if not for any reason other than the hassle factor. I’m still skeptical that more audits will correlate with the increases in government revenue expected from such an app. It would be better if the IRS hired more agents to answer their phones or open correspondence, including returns that have been filed.
Thus, physicians in private practice will experience very little benefit or harm as a result of the Inflation Reduction Act. Those who work for larger healthcare systems are at greater risk of being negatively affected by the 15% minimum corporate tax. And both groups — those in private practice as well as those working for larger health systems — should be sure to dot the i’s and cross the t’s when filing their tax returns. Employing a trusted CPA to file next year’s 2022 tax returns would likely be a smart move.
Michael Joyce, CFA, CFP®, is founder and president of Agili, a registered investment adviser and trustee in Richmond, VA and Bethlehem, PA. He is responsible for overall investment strategy, investment portfolio management and financial planning services. He can be contacted at [email protected]