Regardless of whether you’ve managed to avoid the headlines completely over the final months of 2017 or not, chances are that by now you are well aware that the Tax Cuts and Jobs Act was signed into law by President Trump a few days before Christmas. The tax plan will affect taxpayers of every kind and most of the changes have already gone into effect. Just how can nurse practitioners expect to fare under the new legislation?
Although what’s to come from the new tax law will depend greatly upon each individual’s specific situation, getting a head start in understanding how the plan will affect your tax return in Spring 2019 will also help you to better plan for the future. Here’s what the new tax bill means for nurse practitioners.
A Change in Tax Rate
The Tax Cut and Jobs Act (TCJA) will still include seven tax brackets under which taxpayers will fall; however the act will lower the tax rate for six out of the seven brackets. Most nurse practitioners can expect to be taxed at the following rates, depending on their income and filing status.
Overall, most nurse practitioners will see a mild reduction in their tax rate.
Significant Changes to Deductions
Perhaps the most significant differences NPs will see when filing their returns in Spring 2019 won’t have so much to do with the decreased tax rates but rather with deductions. To summarize, taxpayers are allowed to choose between two deduction options in order to reduce their taxable income; and often choose whichever yields a greater tax return or, in some cases, a lesser amount owed to the IRS. Under the TCJA, NPs will still be able to take either the standard deduction or itemized deductions; however several notable changes have been made to both options.
Typically most taxpayers opt to use the standard deduction as it’s a larger figure than the deductions itemized and it’s generally the more simpler option of the two. NPs who normally choose the standard deduction when filing their taxes will find that the amount will nearly double for 2018 – 2025 regardless of their filing status. If you’ve opted to itemize deductions in the subsequent years, you may find that the standard deduction will be more favorable under the new legislation.
In the years prior to the TCJA, only about 30% of individuals chose to reduce their taxable income by itemizing certain deductions as it gave a higher figure than the that of the standard deduction. Under previous legislation, the list of of allowable deductions was pretty extensive; however under the new law, many of the once-available deductions have been eliminated entirely or otherwise limited and modified; making it more likely that many NPs who previously itemized will now opt for the standard deduction.
To cut straight to the chase, here’s a look at what deductions have been eliminated.
Unreimbursed employee business expenses
Moving expenses (except in the case of active military personnel)
Tax preparation fees
Investment interest expenses
Personal casualty losses (excluding certain casualty losses in federally declared disaster areas) and theft losses
Alimony for orders executed after December 31, 2018
Tuition and fees (this deduction expired under previous law and was not renewed by the TCJA)
Domestic production activities deduction
The most commonly itemized deductions such as state and local tax, unreimbursed medical expenses, and home mortgage and home equity loan interests will also still be allowed to be claimed, but there will be limitations on how much can be itemized.
State and Local Tax (SALT), which includes includes taxes for state and local income, sales, real estate or property taxes is now limited to a combined total of $10,000; whereas in subsequent years there was not a cap. This is expected to greatly impact NPs in high tax states such as New York and California.
Unreimbursed medical expense deductions will also be reduced. Under previous legislation, taxpayers with unreimbursed medical expenses that exceeded 10% of their adjusted gross income (AGI) could deduct the excess; under the TCJA, the percentage is dropped to 7.5% of the individual’s AGI.
Home mortgage and home equity loan interest will also be limited, depending on each taxpayer’s circumstances.
Although the new tax bill does eliminate and modify many of the former itemized deductions, there are fortunately several itemized deductions that will stay exactly the same as years prior such as deductions for health savings accounts (HSA) and IRAs, which will remain without any change.
Many educational benefits will also stay the same, including the deduction for student loan interest which allows nurse practitioners to itemize up to $2,500 in interest on their school loans. Current NP students can also continue to claim the American Opportunity Credit and the lifetime learning credit. Additionally, taxpayers can also continue to use savings bonds, educational assistance programs provided by employers, 529 plans and Coverdell education savings plans to further their education. Some scholarships and tuition waivers will continue to be tax free as well, provided that certain conditions are met.
Revisions for 1099 Nurse Practitioners
If you are practicing as a contracted NP under a 1099, you may be wondering how the TCJA will impact your tax return (since filing as such is quite different than it is for salaried NPs). Fortunately, itemized deductions for self employment (SE) tax, SE health insurance, SE qualified retirement plan contributions will all remain unaffected by the TCJA.
The new legislation will allow self-employed NPs to deduct up to 20% of qualified business income. For example, if a nurse practitioner has a taxable income of $90,000, he or she can has a qualified business income deduction of $18,000. NPs who are contracted should check with a tax professional to determine whether they should adjust their estimated payments for each quarter.
Understanding how the new tax law will affect your specific situation will help you to not only easily transition to the new legislation, but to eliminate any unexpected issues with your tax return.