The Tax Cuts and Jobs Act (TCJA) of 2017 included various taxpayer friendly provisions. Now, as some key provisions are set to expire in December 2025, physicians and healthcare entities are facing a potential shift in their tax landscape.
Understanding the Changes
Pass-through Qualified Business Income Deduction
One major change introduced by the TCJA was the pass-through qualified business income deduction, also known as Section 199A, which allows owners of some businesses to deduct up to 20% of qualified business income.
This deduction offered a tax break to owners of businesses structured as pass-through entities, a common structure for many healthcare businesses. However, this benefit is set to expire in 2025. Physicians who operate under pass-through structures will likely see their effective tax rates increase starting in 2026.
Marginal Tax Rates
The reduced marginal income tax rates provision of the TCJA is also set to expire at the end of 2025. Starting in 2026, individuals effective tax rates will be higher due to tax brackets going from 10%, 12%, 22%, 24%, 32%, 35%, and 37% to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The changes affect individuals at various levels of income, which means most, if not all, individuals working in healthcare will have a higher tax bill for the same amount of income in 2026 and beyond.
Looking Ahead
The expiration of the pass-through deduction, combined with the increased marginal income tax rates, creates an increased tax burden on the healthcare industry. While this could impact take-home pay for business owners, there are opportunities for tax planning strategies to minimize the increased tax costs. Monitoring legislative developments and seeking professional financial advice can help physicians and healthcare organizations make informed decisions to minimize the impact on their finances. Contact one of our tax professionals to work on strategizing plans for the future.
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