PRI was founded to support the private practice of medicine. In most cases, that means highlighting and seeking reforms to the abusive practices of insurers and Pharmacy Benefit Managers (PBMs). Readers of this website are advised of legislative, regulatory and policy changes which affect physicians in their daily practice. Moreover, PRI regularly intervenes in state regulatory and enforcement proceedings to promote the interests of physicians.
This post, however, seeks to advise physicians and member State Medical Societies of substantial tax savings that can accrue if the physician derives substantial income from a Subchapter S Corporation, certain LLCs or a partnership (hereafter PTEs).
The 2017 tax changes at the Federal level capped the deductibility of state and local taxes (SALT taxes) on a physician’s personal Federal return to $10,000. Thus a physician who paid $20,000 in SALT taxes lost deductibility of $10,000 which had been allowed prior to the 2017 change.
This change was particularly harmful to physicians who lived in states with high SALT taxes as is the case in Maryland where PRI is incorporated. However, there is a way to gain full deductibility of the $20,000. The trick is to have your PTE pay these taxes before they are distributed to you.
Here is what needs to be done to take advantage of this tax savings.
One: This will work if you derive income in the form of profit or distributions from your PTE. The following PTEs qualify: All Subchapter S Corporations no matter how many shareholders, LLCs with 2 or more members, and partnerships.
Two: Your state law needs to be amended to allow for this. State legislators will not object because the state loses no revenue. The revenue loss is suffered solely by the Federal government.
Three: You need to consult with your accountant to ensure that you were doing this properly.
A number of states (Maryland, Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, and New Jersey) have adopted the required state law. You can review a copy of the Maryland law here.
Of the 10 states with the highest income tax rates only two (New Jersey and Wisconsin) have passed the necessary state law. For a listing of all state SALT taxes click here.
In Maryland, MedChi, the Maryland State Medical Society, reports that many of its members will save $5,000 or more annually on their Federal taxes.
In addition, one can still take advantage of the $10,000 SALT deduction on his or her individual return with respect to local real estate taxes or state income taxes paid as an employee of your PTE.