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AUTHORIZED REPRESENTATIVE

The high tax burden faced by medical specialists.

  • Aug 27, 2025
  • 6 min read

Physicians constantly face high marginal rates and complex rules. Particularly in Puerto Rico, qualified physicians under a current decree can pay 4% of eligible income tax, which is a notable contrast to typical federal brackets, but it requires strict compliance and is no substitute for a comprehensive strategy (legal structure, compensation design, and estate planning).


In fact, there are three realities in which it is necessary to act now:


A. Annual adjustments (inflation/brackets) and inheritance thresholds that alter the wealth transfer model.

When medical professionals discuss the high tax burden, they often refer to how annual inflation adjustments, changes in tax brackets, and inheritance thresholds affect the transfer of their wealth. These factors can significantly alter long-term financial planning. Inflation adjustments are corrections applied to tax brackets and deductions to prevent inflation from pushing taxpayers into a higher tax bracket, a phenomenon known as "bracket creep." If these adjustments don't keep pace with actual inflation, medical professionals could end up paying a higher percentage of taxes on income that doesn't actually have greater purchasing power.


Tax brackets determine the percentage of taxes a person must pay based on their income level. When a medical specialist's income increases, it's common for them to move into a higher tax bracket, resulting in a higher tax burden. These brackets are adjusted annually to reflect inflation, but the way these adjustments are made is crucial. An insufficient adjustment means the medical specialist could be paying a higher effective tax rate on their earnings.


Succession Thresholds


Probate thresholds are the minimum amounts of an estate that are exempt from inheritance or succession tax. Planning for the transfer of assets, such as property, investments, or medical practices, depends on these thresholds. A change in these thresholds can have a significant impact on the amount of tax heirs must pay. For example, if the threshold is lowered, a larger portion of the estate could be subject to tax, reducing the net inheritance for beneficiaries. 💰


These thresholds change based on government tax and economic policy, introducing an element of uncertainty into estate planning. For medical professionals, who often accumulate significant estates throughout their careers, it is crucial to keep up with changes in inheritance thresholds to structure their assets efficiently . This may include the use of trusts , living gifts , or life insurance as part of a strategy to minimize the tax burden on their heirs.


B. Withholding on supplementary salaries: 22% (and 37% on 1M) if not planned, affecting cash flow.


The 22% and 37% supplemental payroll withholding tax can significantly impact a medical specialist's cash flow if not properly planned. This withholding applies to income in addition to regular pay, such as bonuses, commissions, or unused vacation pay. Lack of planning can result in an unexpected and significant reduction in available cash.


What are supplementary wages?

Supplemental wages are additional payments an employee receives beyond their base salary. This includes:

• Performance bonuses

• Commissions

• Overtime payments

• Prizes or rewards

• Payments for severance or dismissal


The IRS has established specific rules for withholding taxes on this type of income.


Retention rates of 22% and 37%


There are two main methods for withholding tax from supplemental wages:

• Percentage (Fixed Rate) Method : Most employers choose this method for its simplicity. Tax is withheld at a flat rate of 22% on the supplemental amount if the total accumulated for the year is equal to or less than $1 million.

• Aggregate method : The employer adds the supplemental salary to the employee's regular salary and then calculates the total withholding as if it were a single payment. This can push the medical specialist's income into a higher tax bracket, resulting in higher withholding than expected.


If the sum of a medical specialist's supplemental wages in a year exceeds $1 million, the withholding rate on the portion above that amount is 37%. For example, if a specialist receives a $1.2 million bonus, the first million will be subject to withholding at 222%, while the remaining $200,000 will be withheld at 37%.


Impact on cash flow

An unexpectedly high withholding can have a negative impact on a physician's personal cash flow. Although the withheld tax is a credit adjusted on the annual tax return, a lack of liquidity at the time can cause problems, especially if the money was intended for investments, major debt payments, or personal expenses.


Example:

A physician receives a $50,000 bonus. If the employer uses the flat-rate method, $11,000 (22%) will be withheld. If that money was needed to cover an immediate expense, withholding could be an issue. The key is planning . By being aware of how and when these withholdings are applied, a medical specialist can take proactive steps, such as adjusting contributions to retirement savings accounts (such as a 401(k) or IRA) or negotiating with their employer how the supplemental salary will be paid to better manage cash flow.


C. Local incentive that requires ongoing requirements (hours, community service, validity of the decree).


When a medical specialist benefits from a local tax incentive, such as Puerto Rico's Act 60, continued access to this benefit depends on compliance with certain requirements. Failure to comply can result in the revocation of the decree and the loss of tax benefits, which directly impacts their financial planning.


Continuous Compliance Requirements

Tax incentive decrees are not a blank check. For medical specialists, the continuation of these benefits is subject to continued demonstration that they are complying with the conditions established by law. These requirements typically include:


• Hours of service: Many decrees require a minimum number of hours of professional service that the specialist must provide annually. This may be within a private practice, in public health clinics, or in hospitals. Failure to meet this requirement may lead to the revocation of the benefit.

• Community service: In some cases, beneficiaries are required to perform a certain amount of community service or contribute to health projects in underserved areas. This requirement aims to ensure that the tax incentive generates a positive social impact and not just a personal economic benefit.

• Validity of the decree: Each tax decree has a specific validity period. For example, some may be valid for 15, 20, or more years. However, this validity is subject to compliance with annual requirements. The government reserves the right to audit and revoke the decree if noncompliance is detected.


Impact on Financial Planning.

For medical specialists, reliance on these tax decrees is a double-edged sword. While they offer a significant reduction in the tax burden, they also impose administrative and compliance responsibilities that must be constantly managed.

• Risk of revocation: If the physician cannot adequately document that he or she has completed the required service hours or community service, he or she risks having the decree revoked. This would not only mean the end of future benefits, but could also result in the retroactive payment of taxes that had been avoided.

• Cash flow impact: The sudden loss of tax benefits can drastically alter a physician's cash flow, forcing them to pay much more taxes than they had projected. This can affect their ability to invest, save, or meet their financial obligations.


In essence, planning is key. Medical professionals must be proactive in monitoring and documenting their compliance to ensure that the tax benefits are not only attractive in theory but sustainable in practice.



The outlined topics (annual adjustments, withholding of supplemental salaries, local incentives) underscore a central problem for medical specialists in Puerto Rico: the complexity of the tax system and the vulnerability of their finances if not planned proactively. The solution to this problem lies not only in reducing the tax burden, but in adopting a solid framework that combines intelligent revenue allocation, tax-efficient accumulation, and rigorous compliance monitoring.


Tax-Efficient Income Allocation and Accumulation Methods


Tax planning for a physician must go beyond simply filing annual taxes. The key lies in how income is structured from the outset. Using income allocation methods such as creating a legal entity (e.g., a professional corporation or LLC) allows the medical specialist to separate their personal finances from those of their practice. This can open the door to more efficient accumulation strategies, such as optimizing retirement plan benefits, acquiring assets that offer depreciation, and reinvesting earnings to reduce taxable income. A proactive focus on tax-efficient accumulation allows the physician's assets to grow at a higher rate, minimizing erosion due to taxes.


Audits of Compliance with the Decree


Dependence on tax incentives like those under Law 60 requires constant diligence. A quarterly compliance audit of the decree is a critical step. This process ensures that all established requirements (service hours, donations, etc.) are being met and that documentation is in order. A regular internal audit prevents unpleasant surprises during a government audit, protecting the physician from the revocation of the decree and potential retroactive penalties.

In conclusion, financial management for a medical specialist in Puerto Rico is a complex task that requires a strategic approach. By integrating a framework that prioritizes intelligent income allocation, tax-efficient accumulation, and continuous monitoring of compliance with decrees, the physician can not only mitigate the high tax burden but also build a solid and secure estate for the future. Fill out the form and let's start working on solid and lasting asset protection. Click here.


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