Taxes Could Be Rising: What can physicians do about it?

Biden’s American Jobs Plan could disproportionately affect high earners.

This past spring, President Biden unveiled the American Jobs Plan—a $2.7 trillion infrastructure proposal designed to reinforce the post-pandemic economy. The scale of this bill is so expansive that it will take roughly fifteen years of increased corporate and individual taxes to pay for the eight years of proposed spending.

Of course, which tenets of the proposed legislation will actually pass into law (and when) are anyone’s best guess, but the signs appear to be irrefutable: tax hikes are coming in some form or another, and they coulddisproportionately affect high earners, like physicians, more than others.

How can physicians prepare for these potential tax hikes?

Below we outline some of the major changes proposed by the Biden administration and explain how high-income earners can begin protecting against a higher tax liability today.

IF: The top ordinary income tax rate for income over $400,000 is increased to 39.6%.

THEN: For those on the cusp of this $400,000 threshold, finding ways to reduce income will be essential. Strategies could include funding retirement plans, bunching deductions, opening defined benefit or profit-sharing plans, and of course, charitable giving. Some physicians may even want to consider decreasing dividend or other income-producing investments by diverting them to retirement accounts.

IF: Deductions for contributions to IRAs, 401(k)s, and similar retirement accounts are replaced with a flat 26% credit.

THEN: Lower income Americans will be incentivized to contribute to retirement accounts, but high-earners will lose the their full deduction. High-earning individuals, then, may want to heavily consider the benefits of Roth conversions.

IF: Long-term capital gains rates for those with income $1,000,000 and over are increased from 20% to 39.6%.

THEN: Find ways to reduce the size of the capital gains budget, limiting it to 23.8% versus the potential 43.4% top rate. This can be accomplished by:

  • Accelerating gains into this year
  • Tax-loss harvesting
  • Gifting highly appreciated assets to charity
  • Increasing business expenses
  • Increasing retirement contributions

The goal will be to level income to avoid falling into the highest tax bracket the following year and avoid exceeding the $1 million capital gains threshold.

IF: The step-up in basis at death is eliminated.

THEN: Consider “basis management” as an ongoing strategy to reduce portfolio gains that might be transferred at death. This can be done with annual re-balancing that keeps a keen eye on moving stocks that you predict will appreciate into retirement accounts, gifting and giving, or transferring low-basis stocks to family members while you are still alive.

IF: Tax-deferred exchanges for real estate performed under IRC 1031 are eliminated.

THEN: Consider performing like-kind exchanges in the current year in order to defer gains. This is similar to exchanging one annuity for another without triggering the recognition of gain (via an IRC 1035 exchange) and is allowed when property is exchanged for a business or investment.

No Such Thing As “Too Soon”

Where there is a slim chance that all the provisions of this bill will pass in their entirety, it’s best to begin strategizing for a higher liability now. Doing too little too late from a tax standpoint will do no more than erode the income you’ve worked hard to be able to earn. Remember, tax planning is wealth planning at its core, and should always be considered when making retirement and/or investment decisions.

About the Author
Julianne F. Andrews, MBA, CFP®, AIF® began her career in financial planning in 1988 and co-founded Atlanta Financial Associates in 1992, merging into Mercer Advisors in 2020. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. Julie can be reached at jandrews@merceradvisors.com.
All expressions of opinion reflect the judgment of the author, are as of the date of publication, and are subject to change. The information discussed is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Due to various factors, including changing applicable laws, the content may no longer be reflective of current opinions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Mercer Advisors. Mercer Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.