What Bush tax cut plan could mean to physicians

You'll likely pay less income tax, but the proposed repeal of the estate tax is uncertain.

By Julie A. Jacob, amednews staff. March 26, 2001.

If President Bush's tax cut, which was passed by the U.S. House of Representatives in March, also passes the U.S. Senate, physicians will save thousands of dollars on their income tax within five years and also may get relief on estate taxes, potentially making it easier to pass down a practice to the next generation.

Organized medicine itself has not been active in lobbying for or against Bush's plan. An American Medical Association spokesman said the organization is neutral on the plan. But many physicians are watching with interest.

For more information
See related content

Bryan Pechous, MD, an ophthalmologist in Dubuque, Iowa, favors Bush's tax plan. As a self-employed physician running a professional corporation, Dr. Pechous said he is taxed at a higher rate than large corporations. Plus, he said, his income level reduces many of his deductions.

"Any relief would be beneficial to myself and many other self-employed individuals, physicians and nonphysicians alike," Dr. Pechous said.

Brian Greenberg, MD, a pediatrician in Tarzana, Calif., isn't so supportive. "Before we go about giving back huge amounts of money, we should make sure we are running a balanced budget, that the amount of money given back is accounted for and that we have money for government programs and set aside for a rainy day," he said.

It's still too early to predict just what sort of tax cut will ultimately emerge from Congress, tax experts say. In particular, experts wonder if Bush's plan to repeal the estate tax will end up passing Congress. It wasn't included in the House bill.

"It's so hard to tell what is ultimately going to come down the pike here. Both houses of Congress are very closely divided here, and it's going to be hard for President Bush to get exactly what he wants," said Jay D. Benjamin, director of the accounting firm Katz, Sapper and Miller in Carmel, Ind.

Here's what tax experts say on how Bush's tax plan, if enacted, will affect physicians.

The centerpiece of Bush's tax plan is a reduction in the number of income tax brackets from the current five (15%, 28%, 31%, 36% and 39.6%) to four (10%, 15%, 25% and 33%). The reduction in the number of income tax brackets, if passed by the Senate, will be phased in over five years. In addition, the tax bill also cuts the tax rate from 15% to 12% on the first $6,000 earned by singles and the first $12,000 earned by couples.

People who want to know how much of a tax cut they will get, if the tax cut bill ultimately passes the Senate, can calculate their income tax reduction by using calculators available on various financial Web sites.

Share the wealth

Part of Bush's reasoning behind his proposed 10-year, $1.6 trillion tax cut is that the country is running a surplus and that government should return that extra cash to taxpayers. Delmar R. Tonge, MD, an ob-gyn in Modesto, Calif., supports that line of thinking.

Said Dr. Tonge, "When too much tax has been collected, [the government] should pay its bills and decrease the amount requested from taxpayers."

Robert Sloane, MD, a trauma surgeon in Fort Worth, Texas, and chair of the Texas Medical Assn.'s Council on Legislation, thinks the surplus money should be used for health care programs.

Said Dr. Sloane, "The actual money that is going to come back to us isn't all that great. A lot of people in the medical community think we should spend the surplus on things like funding Medicaid better, expanding the SCHIP [State Children's Health Insurance Program] and providing coverage for the uninsured."

Another aspect of Bush's tax plan on which experts say physicians should keep an eye is the proposed repeal of the estate tax. The repeal of this tax, also called the death tax, is expected to be included in another bill later this year.

The estate tax, which can run as high as 55%, is applied to estates that are worth a minimum of $675,000. That amount is scheduled to increase to $1 million by 2006. The amount of the estate is calculated by adding together the net worth of the deceased's home, business, life insurance policy, pension and so on. It affects anyone, including physicians, who leave a total estate to their family worth at least $675,000.

Experts, however, are divided on whether Congress actually will repeal the estate tax.

"The chances of the elimination of the estate tax are less than 50%," said Steven C. Camp, a certified financial planner and author of Money Rx for Physicians.

For one reason, Camp said, most people already avoid the estate tax through careful financial planning, such as putting their estates in a life insurance trust, giving the money as gifts or setting up a family limited partnership.

In addition, he said, state governments oppose a repeal of the estate tax because it generates a great deal of revenue for states. California, for example, receives about $950 million a year in estate tax revenue.

But other experts think there is a good chance that the estate tax will be repealed.

"I think it will get passed on some level," said Donna Agata, a tax manager for the accounting firm Fair, Anderson and Langerman in Las Vegas. "Republicans have been trying to get this passed for some time."

Dr. Pechous supports a repeal of the tax. "Whatever I have managed to earn and save during my lifetime should be mine to give after my death to any entity I wish without intrusion by the government."

If the estate tax is repealed, however, Congress may compensate for that loss of revenue by instituting a tax on capital gains on an estate's assets, warned the tax experts. If Congress approves a tax on an estate's capital gains, a person who inherits a house, for example, would have to pay a 20% tax on the appreciation in the home's value between the time it was bought and when it was sold.

"Capital gains affect a lot more people. ... This would affect anyone who has inherited something that has appreciated in value," Camp said.

ADDITIONAL INFORMATION:

For more information

These Web sites have calculators that help you estimate how much you'll save in taxes under President Bush's tax plan.

Republican National Committee's Bush Tax Relief Plan site (http://www.bushtaxrelief.com)
Kiplinger.com's Bush Tax Plan calculator (http://www.kiplinger.com/php/bushtax/)
Quicken.com's TurboTax Tax Estimator (http://www.quicken.com/taxes/proposals/)

For example, according to the Kiplinger calculator, tax savings for a physician making $143,970 per year, with a nonworking spouse and two children younger than 17, who sets aside $10,000 in a 401(k) and deducts $500 for charitable contributions, would be: