Tax legislation will be a hot topic for entities and individuals in the healthcare industry during the upcoming election. While future legislation may be unpredictable, here is what we do know.
On December 31, 2025, several provisions relating to the Tax Cuts and Jobs Act (TCJA) will sunset unless those provisions are extended or made permanent by legislation. TCJA was passed in December 2017 as a major overhaul of the tax code. Still, many of the TCJA changes were not made permanent and are set to expire. Below, we will highlight three of the major expiring provisions impacting healthcare providers, so you are better prepared.
Expiring Provisions
The marginal tax rates for individual income taxes will go from 10%, 12%, 22%, 24%, 32%, 35%, and 37% to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax brackets will be adjusted annually for inflation. Although, if the 2024 tax brackets are applied to the increased rates, a single physician filer with taxable income of $1 million could pay approximately $17,000 more in taxes. In addition, note that the tax rates are higher in the lower tax bracket, so the middle class will feel these tax rate increases along with those in the top tax brackets.
Qualified business income deduction (QBI) allows for a deduction of up to 20% of qualified business income that is passed through an individual from a partnership or S corporation. This deduction is set to expire on December 31, 2025. Many healthcare organizations are structured as pass-through entities, and their owners have benefited from the QBI deduction since the enactment of TCJA. Assuming the same tax brackets apply, an owner (single filer) of a pass-through entity with only pass-through income totaling $191,950 could expect to pay approximately $15,500 more in taxes after the QBI deduction expires. A married owner filing a joint return with only pass-through entity income totaling $383,900 could expect to pay approximately $18,400 more in taxes.
While tax rates are lower and the QBI deduction still applies, taxpayers should consider the timing of their income and deductions. Healthcare organizations structured as pass-through entities may consider electing out of bonus depreciation on new asset purchases in order to increase the QBI deduction in 2024 and 2025 while pushing the depreciation deductions into 2026 and subsequent years. Individuals may consider converting traditional IRAs to Roth IRAs to take advantage of the lower individual tax rates in 2024 and 2025 while reducing the future taxability of traditional IRA-required minimum distributions.
In addition to income tax consequences, expiring provisions also impact gift and estate taxes. Often, we see retired physicians navigating issues related to the transfer of wealth. The lifetime estate exemption for 2024 is $13,610,000, thereby providing a significant estate planning opportunity. This amount will be indexed for inflation, though it will be roughly half the current lifetime exemption amount beginning in 2026. The IRS has confirmed that there will not be a clawback of gifts made during the higher lifetime exemption period from 2018–2025. Based on the reduction in the lifetime estate exemption, individuals and families with projected taxable estates should consider making gifts before the end of 2025 to utilize the higher exemption amount.
Additional Changes
Other items will revert to pre-TCJA amounts in 2026 as well. Here are items that will increase taxes:
- The standard deduction will be approximately cut in half. The 2024 standard deduction is $14,600 for single and $29,200 for married filing jointly.
- The maximum child tax credit will drop from $2,000 to $1,000, while the maximum additional child tax credit will drop from $1,700 in 2024 to $1,000 in 2026.
- The alternative minimum tax exemption and exemption phase-out will revert to inflation-adjusted pre-TCJA levels.
The tax-saving items that will return are the following:
- The state and local tax deduction cap of $10,000 will be removed.
- The mortgage interest deduction limitation will move back to indebtedness of $1 million or less.
- The expenses subject to the 2% floor, e.g., tax preparation fees, investment expenses, unreimbursed employee business expenses, etc., will be itemized deductions again.
- The excess business loss limitations will be removed (expires after 2028).
TCJA did make some items permanent, including the lower corporate tax rate of 21%, the limitation of business interest expense deductions under Section 163(j), the limitation of net operating losses (NOL) carryforwards to only offset 80% of taxable income in subsequent years, and the repeal of the Corporation Alternative Minimum Tax.
The sunsetting items listed are believed to have the greatest potential impact on healthcare professionals since many healthcare practices are owned via pass-through entities and the change in tax rate will affect most taxpayers. With 2024 being an election year, these points will likely be a topic of discussion and continue to be imperative to 2026 tax returns. However, absent any legislative changes, the above items will cause additional complexity to 2026 tax returns, so contact your tax advisor to plan accordingly.
For more information and assistance with tax advisory plans, reach out to a professional at Forvis Mazars.