Federal tax deductions fall largely into two main categories. The first category is a choice, either a standard deduction or an itemized deduction. Itemized deductions include property tax, mortgage interest payments and a portion of charitable donations depending on your AGI. The 2017 Tax Cuts and Jobs Act* (Also known as the Trump Tax Cuts) capped state and local taxes (SALT) deductions, of which property tax is the main component, to a maximum of $10,000 and limited mortgage interest deductions to the first $750,000 of the value of a mortgage for those filing jointly. However, it also increased the value of the standard deduction. The result was to push most tax filers towards choosing the standard deduction.
Standard Deduction
The second large category of tax deductions are those contributions to 401(k), 403(b) and 457(b) retirement plans, 529 education accounts and health savings accounts. A sound understanding of the basic mechanisms of federal income taxes is essential to creating a rational and effective strategy to fund and manage your tax advantaged retirement accounts. In next month’s blog we’ll look at how these savings instruments work.
Capital Gains Tax
Profits made from the sale of capital assets (i.e., capital gains) are taxed with a completely different set of tax brackets. Capital assets include stocks, bonds, real estate and certain tangible items like cars and boats. To qualify for this tax bracket a capital gain cannot be harvested before it has been held for one year. Capital gains held for less than a year are called short term capital gains and are taxed as ordinary income. But as you can quickly see from the table below, capital gains offer significantly lower tax liabilities than ordinary income.
Capital Gains Tax Brackets
As the accompanying table shows, in 2025, for a couple filing jointly, the first $96,700 of capital gains will be taxed at 0% — that is, tax free! The same couple would only get the first $30,000 of ordinary income (the standard deduction) tax free. Additionally, as you can see, capital gains are taxed at much lower rates than ordinary income.
*The 2017 Tax Cuts and Jobs Act (TCJA) is due to expire on December 31, 2025. Congress is currently deliberating legislation called The One Big Beautiful Bill that includes language that would largely maintain and, in some cases, enhance the TCJA tax provisions. As currently written, those changes would take effect on January 1, 2026. Were this legislation not to pass and TCJA allowed to lapse, the Tax Code would revert to pre-TCJA status. When there is clarity (i.e., new legislation is passed) I will create an addendum to this blog.
Ronald Dritz, MD, FACA, practiced anesthesia for twenty-eight years in northern California. He held numerous positions of leadership including Chairman of Anesthesia, President of the Medical Staff, hospital and health system board membership and served as Finance Chair of an IPA medical group. He is happily retired and lives with his lovely wife in Emeryville, California.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.
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