The news channels and tax bloggers are buzzing as details on the Trump tax plan float about and the Unites States taxpayers await the grand finale. Although no exact date was given by the Trump administration for release of the detailed information about the tax plan, there have been hints at its arrival towards the end of February 2017.”
From what we know so far, if you are thinking about selling your chiropractic practice or transitioning your business, you are going to want to be careful about Asset Allocation as it can have a significant affect on how you are taxed. This is always the case, but to complicate things further, we are currently in the midst of a potential shakeup of the tax structure that could help you save significant taxes on your practice sale – or force to you send a bit more to Uncle Sam.
Here’s a look at the current tax brackets in effect and Trump’s proposed tax changes:
The Proposed Trump Tax Plan
Here is the Current Tax Plan
How This Affects Your Chiropractic Practice Sale
Here’s what all of this tax talk means if you are planning to sell your chiropractic practice.
There are two primary categories that create a taxable event for your practice sale: the first is those which fall into the “Ordinary Income” bracket. The second are taxed under the “Long Term Capital Gains” category.
If you look closely at the two plans above, you might note that BOTH of these categories could result in significantly different tax treatment, depending on whose tax plan is in place at the time of your sale. For example, if your sale and your yearly compensation put you in the income bracket of earning $250k, you will note that you will pay 15% on the portion treated as capital gains while landing in the 33% tax bracket for Ordinary Income (if married) under the current tax plan. Under Trump’s proposed plan, however the same $250k would land you in the same tax bracket for Ordinary Income (33%) but the Capital Gains would be taxed at 20% – so you’d effectively pay 5% more on Capital Gains.
To be fair, the two tax plans are not black and white with one producing winners and the other losers. Because if you adjust the above scenario slightly and you take $200k as your figure, a new scenario emerges. In the current tax plan, you’d be taxed at 33% for Ordinary Income & 15% Capital Gains again. But at the $200k level, Trump plan could potentially save you 8% because your Ordinary Income would only be taxed at 25%, while your Capital Gains remains steady at 15%.
How to Time Your Transition and Your Taxes
These scenarios probably cause some of you to focus on the timing of your sale, wanting to leave at just the right moment to save yourself some taxes. And while these tax changes certainly mean you should plan a visit to your tax professional ahead of time, let me encourage you to NOT focus on “playing the tax market.”
Here are a few reasons why:
- While Trump’s proposed tax changes may get passed by Congress this year, some won’t go into effect until 2018, since 2017 tax rates and brackets have already been established.
- To further complicate matters, the House Republicans also have an alternative tax plan which while also looking to cut corporate and personal taxes, and that plan differs somewhat from the proposed Trump tax plan.
- You could literally be saving pennies while risking dollars by attempting to delay your sale or transition in order to sync with the tax code. Taxes will follow you right out of practice. But if you can’t find a buyer or if you can negotiate a win-win transition, you won’t have any tax consequences to worry about in getting out, because you will be stuck in practice.
The long and short advice is here to be tax savvy, but not to fall into a tax “trance.” Instead, focus on your transition and let your tax professionals worry about your tax treatment.
Is it time for you to Sell, Switch or Slow Down? Then you’ll want to catch our upcoming FREE WEBINAR where we will discuss exactly that, along with strategies on how to Maximize the Value of Your Chiropractic Practice Sale or Transition and Minimize Costly Mistakes!