The Inflation Reduction Act and your finances

After a year of deadlocked negotiations and a great deal of waiting and wondering, President Joe Biden has signed the Inflation Reduction Act (IRA) into law. You may be wondering how the IRA will affect the lives and wallets of physicians. Some effects will be indirect, some will be direct and other elements of the IRA will not be felt at all. Let’s look at the tax planning and financial planning implications of the legislation for doctors.

Corporate minimum tax

One of the most significant features of the IRA is the new corporate minimum tax of 15% for businesses with revenues greater than $1 billion. Doctors — and most investors, for that matter — are likely to be indirectly affected by the corporate minimum tax. This new tax expenditure has the potential to reduce corporate dividends, and, therefore, the retirement savings of investors.

More directly, the 15% corporate minimum tax is likely to affect employees of businesses with more than $1 billion in revenue — possibly with slower wage growth (smaller raises and bonuses, etc.) It also may slow hiring. When it comes to physicians, those in private practices would not feel these effects directly because their practices’ revenues would not be $1 billion, but those who work for large hospital systems could very well be affected. It’s possible, of course, that doctor groups could negotiate not having salary/bonus structures reduced by the new corporate minimum tax.

Tax credits for electric vehicles, home upgrades

You have likely read about the extension of tax credits on electric cars included in the IRA ($7,500 tax credit for new electric vehicles and $4,000 for a used one). But eligibility for these tax credits is determined by income level. Physicians and others with incomes above $150,000 individually or $300,000 jointly will not be eligible for the electric car tax credits. The tax credits enacted for home upgrades (e.g., solar panels, better insulation and heat pumps) have similar income limits.

Carried interest loophole

One piece of the Inflation Reduction Act that has been widely reported on that will not affect doctors has been misleadingly referred to as the “carried interest loophole for wealthy people.” The loophole was preserved in the IRA after a great deal of back and forth. Although carried interest will continue to receive preferential tax treatment and those who earn carried interest are generally wealthy people, closing the loophole would have applied only to those who manage investments and earn a performance fee, such as hedge fund managers, private equity fund managers and real estate fund managers. So neither doctors nor most other wealthy individuals benefit from the preservation of the carried interest loophole.

Additional elements of the IRA worth mentioning

One element of the IRA that has been widely publicized is the $2,000 cap on Medicare beneficiaries’ annual out-of-pocket drug expenses. Those with private insurance have no such cap.

The new legislation extends Affordable Care Act (ACA) health insurance premium assistance for three years, through 2025. Had the ACA premium assistance not been extended, the costs would have escalated and some patients may have given up insurance coverage altogether. As a result, they may have cancelled or postponed medical appointments and procedures.

IRS enforcement

In addition, the IRA will increase IRS enforcement with the funding of hiring more agents to conduct audits of higher wage earners. This could affect doctors if for no other reason than the hassle factor. I am always skeptical that more audits will correlate to the increases in government revenue projected by such enforcement. It would be better if the IRS hired more agents to answer their phones or open correspondence, including returns that have been filed.

Physicians in private practice will experience very little upside or downside as a result of the IRA. Those working for larger health systems are at greater risk of being impacted affected by the 15% corporate minimum tax. And both groups should be careful to dot their i’s and cross their t’s when filing their tax returns. Employing a trusted CPA to file next year’s 2022 tax returns would be a smart move.

Michael Joyce, CFA, CFP, is founder and president of Agili, a registered investment adviser and fiduciary in Richmond, Virginia, and Bethlehem, Pennsylvania.