There will be some happy purrs and angry barks in the veterinary world if these tax law changes take place.
The first batch of proposed tax legislation has been released, and the reaction has been mixed. While this legislation is only a draft, the Tax Cuts and Jobs Act does give clear details on the significant tax reform that is being proposed. (Note: This is for the President's proposed plan, with Senate and House plans also circulating.)
As with any changes to our tax law, there will be winners and losers. Some taxpayers will end up paying less; others will pay more. The changes that actually make it into the final law will boil down to which voting bloc gets the angriest-and which squawks the loudest.
Below are 10 hot button issues that will impact all walks of life in the veterinary industry-from practice owners in red states to veterinary technicians in blue states-and what the anticipated outrage will be for each.
1. The overall cost of the tax plan
Tax cuts often stimulate economic growth, and this growth can go a long way toward offsetting the hard costs of tax cuts. The Tax Foundation, an independent tax policy research organization, estimates that the total cost of the Tax Cuts and Jobs Act will be between $1.5 and $2 trillion over the next decade. They also estimate that the related economic growth will be approximately $1 trillion. The shortfall over the next decade would be added to our national debt. One's position on the national deficit will likely influence one's position on this tax cut package.
Outrage meter (deficit hawks): Three (out of five) barking dogs
2. Trimming education-related benefits
In a cost-cutting move, the American Opportunity Tax Credit, the Hope Scholarship Credit and the Lifetime Learning Credit would be combined into one credit that would provide a 100 percent tax credit on the first $2,000 of eligible higher education costs and a 25 percent credit on the next $2,000. This is a significant reduction in the credit amount, and it also trims the number of years a student would be eligible for the credit. The deduction for interest on education loans would be also repealed, as would the deduction for qualified tuition and related expenses.
Outrage meter (undergraduate and postgraduate students): Four barking dogs
3. Elimination of the alternative minimum tax
Decades ago, the alternative minimum tax (AMT) was created as a way to “capture” wealthy taxpayers who were avoiding tax through the normal tax code. Over the years, this AMT has evolved and managed to impact more middle- and upper-middle-class taxpayers, which was never the intention. In a move toward tax simplification, the current proposal opts to eliminate AMT entirely.
Outrage meter (taxpayers and CPAs alike): Two purring cats
4. Obamacare taxes untouched
For those in the upper-income brackets, two Obamacare taxes-the 0.9 percent Medicare surtax on wages or self-employment income and the 3.8 percent tax on net investment income-remain in place. These two taxes have been targeted by Republicans since the moment Trump won the presidency, but the price tag of eliminating them has been prohibitive. Given the overall cost of the Tax Cuts and Jobs Act, Republicans have opted, for now, to punt on eliminating these two surtaxes.
Outrage meter (anti-Obamacare forces): Three barking dogs
5. Limitation on mortgage interest deduction
For homes purchased after November 2, 2017, the limit on indebtedness would be reduced to $500,000 from the current $1.1 million. For mortgages already in place, no change would occur. The new legislation would also limit taxpayers to one mortgage-so no more deducting the interest on a second home.
For areas of the country where home values are north of $500,000, this change could have a significant impact on real estate prices and the pocketbooks of homeowners. Look for a possible increase on the limit of indebtedness as a compromise.
Outrage meter (homeowners in pricey neighborhoods): Three barking dogs
Outrage meter (real estate professionals): Four barking dogs
Outrage meter (renters): One purring cat
6. Tax rates on pass-through income
A portion of net income distributions from pass-through entities (S corporations, for instance) would be taxed at a maximum rate of 25 percent instead of at the individual's ordinary income tax rates (possibly 35 percent). There would be restrictions requiring owners to continue to pay themselves a certain level of wages, and passive activity income would be eligible for the 25 percent rate.
For veterinary practice owners using pass-through entities, this could be a nice bit of news. However, the benefit appears to be prohibited for specified service activities-any trade or business involving the performance of services in the fields of health, law, accounting and consulting, among others. While veterinary medicine isn't specifically listed, it could fall into this group.
Outrage meter (veterinary practice owners): Three purring cats
7. Elimination of medical expense deduction
Currently, medical expenses are an itemized deduction, and they are only deductible if they exceed 10 percent of a taxpayer's adjusted gross income. Historically, this deduction has been used predominantly by the elderly. As the over-60 crowd becomes aware of this possible change to the tax law, expect significant blowback. Republican lawmakers will likely conclude that the cost savings of eliminating this deduction isn't worth the danger of lost voters.
Outrage meter (the elderly): Four barking dogs
8. Other business-related items
There had been speculation that limitations would be placed on the deductibility of financing costs (interest) that a small business often pays when acquiring the business or related equipment. There were also worries that the section 179 expense-the ability for a business to expense qualified property acquired and placed in service-would be trimmed. Fortunately, both of these areas were left untouched for the most part.
Outrage meter (veterinary practice owners): Two purring cats
9. Elimination of adoption credit
Currently, a family adopting a child in 2017 would be eligible for an adoption credit of up to $13,570, subject to limitations on adjusted gross income. In the new proposal, this credit would be reduced to nothing. Not surprisingly, this move has sparked uproar among Republicans and Democrats alike. Look for some quick backtracking on this credit removal as the legislation gets fine-tuned.
Outrage meter (religious and pro-life groups): Five barking dogs
10. Reduction and elimination of state and property tax deduction
The new proposed legislation eliminates the itemized state income tax deduction, while also limiting the property tax deduction to $10,000. For those living in states with high income tax (California, New York) or high property taxes, this change would have a large negative impact on their taxes.
Outrage meter (upper-income taxpayers living in blue states): Three barking dogs
Outrage meter (Republican congressmen and congresswomen representing these blue states): Four barking dogs
Tom McFerson, CPA, ABV, is partner at the veterinary accounting firm Gatto McFerson in Santa Monica, California.