Tag: taxes

Miscellaneous Itemized Deductions may be worth less than you realize

You have to spend money to save money

One common phrase that we hear professionals say in passing is, “Oh, you can deduct that expense.”

What does that exactly mean? Generally, that means that you can count the amount that you spend against your taxable income, effectively lowering the amount by a certain amount. This amount is almost never equal to the amount that you spend. It does not mean that you are getting free money either. You have to spend money in order to lower your tax bill.

The most common category of miscellaneous itemized deductions used by a salaried doctor include unreimbursed job expenses. The amount that you can deduct must EXCEED 2% of your adjusted gross income. Let’s look at an example:

Bob earns $50,000 salary as an internal medicine resident. He spends $3,000 on meeting expenses that are unreimbursed by his program. Two percent of his $50,000 is $1,000. Bob can only deduct $2,000 of the $3,000 that he spent.

As a single filer with a salary of $50,000, Bob is in the 25% marginal federal tax bracket. That means he “saved” about $500 of federal taxes (25% of $2,000), but he had to spend $3,000 to do so.

If Bob didn’t go to the meeting, he would have “kept” $2,250.

The argument goes both ways. Itemized deductions are valuable especially for high-income earners with high business expenses. The more you spend on business expenses, the more that you can deduct. The bottom line is that you have to spend money in order to save money. There is no free lunch, but you can have a discount if you do buy it.*

[showads ad=adsense_horiz]

*Only a figure of speech. Meal deductions are also reduced by 50% in deductions. The argument is that you have to eat anyway, whether or not you are on business.

Do you want to get the latest Smart Money MD posts in you inbox?
Get the FREE Smart Money MD Financial Cheatsheet for signing up!

Pay your student loan interest while your salary is still low

pay off student loan interest

Tax season is in full season, and it is timely to go over a few pointers to help everyone out.

For most medical students and residents, student loans remain in deferment or forbearance. This means that you aren’t obligated to make any monthly repayments. It also means that interest accrues and compounds during that time. It also means that your mid-6 figure loan debt continues to grow.

Ideally, you should try to make monthly payments whether it is on a 15 or 30 year repayment plan, to keep the magic of compounding from working against you. Financially, you ought to repay at least $2,500 annually in student loan interest for a tax deduction at the end of the year. It only works before you attain attending status, because there is an income limit that you will exceed after training. For 2012 and 2013, phaseout for student loan deduction begins at $60k for a single filer and $125k for a joint filing. In 2014, it starts at $65k and $130k, respectively. If your annual adjusted gross income (AGI) exceeds the limit, then there will be no deduction for payment of loan interest.

[showads ad=adsense_horiz]

Use a Roth IRA to diversify your retirement savings

Include the Roth IRA into your retirement strategy

The Roth IRA (individual retirement account) is another form of a retirement account that allows you to withdraw your retirement earnings tax free. Enough has already been written about it online. I recommend everyone read the summary on the Wikipedia page.

The essence of a Roth IRA is that the money you place in the account has already been taxed at your current federal and state income levels. Any earnings made are withdrawn tax free. There are federal income limits on contributing to the Roth IRA, but there are ways around it. I recommend reading Harry Sit’s summary on his blog: http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html He already has a well-written summary on the process.

The premise of contributing using post-tax dollars allows you to diversify your savings and future dollars.

If you have questions, ask below!

[showads ad=adsense_horiz]