Basic Tax Aside
You don’t pay your marginal tax rate on all of your income. You fill the brackets sequentially with rising income. When people get angry that some small amount of money “pushed them into a higher bracket,” they are demonstrating a fundamental misunderstanding of the US tax code. Being in a higher bracket reduces the marginal value of the next dollar earned, but it doesn’t retroactively reduce all of your earnings. What this does mean, however, is that the take-home value of each additional unit of your work does decrease in higher brackets. If moonlighting at $200/hour ended up being $122 instead of $150 after taxes, you might choose to work fewer extra night shifts in the ED.
Student loan interest tax deduction
You may have heard that student loan payments are tax-deductible. This is unfortunately only partially true: a relatively small portion of your student loan interest is deductible, at least probably while you’re still a resident.
- Max $2,500 can be deducted per year
- Note that the student loan tax deduction is an “above the line deduction,” meaning that you can take it even though you are likely not itemizing your deductions.
Remember the difference between a deduction and a credit. Deductions reduce your taxable income (thus saving you a percentage based on your marginal tax rate). Credits, on the other hand, are a dollar per dollar back.
A single resident making the typical resident salary without any additional income will generally qualify for the full $2,500 deduction. That same resident will be in the 22% tax bracket, meaning that the deduction will save him less than one-fourth of that: $550. Better than a kick in the pants but nothing to get too excited about.
This is an example of how the government incentivizes certain behaviors through the tax code. For comparison, though it is a below the line deduction requiring itemization, you can generally deduct every penny of mortgage interest paid up to the house value of $1 million on your first and second homes. Despite what you hear from the politicians, perhaps the government prefers concrete foundations to educational ones.
For most residents with average loans, every dollar you spend on your loans during training will be dollars spent on interest because most residents face negative amortization during residency. If you consolidate your loans when you graduate, you will likely automatically max out the deduction the first year regardless of your actual monthly payments (i.e. even if you have $0 payments). This may seem counterintuitive, but the reason for this is that the IRS considers your new consolidation loan to “pay off” all of the uncapitalized interest that accrued while you were in school. Make sure to look at the 1098-E form your servicer sends you (and if they don’t send it, you can usually download it from their website).
Every year thereafter you’ll probably max it out with actual payments until you enter the phase-out.
Modified adjusted gross income (MAGI) limits (2018) for the student loan interest tax deduction:
- Full deduction: $65,000 if single, $135,000 if married
- Reduced by phase-out: $65k-$80k if single, $135k-165k if married
- Get nothing: >$80k if single, >$165k if married
- The IDR payments for a resident will nearly always max out this deduction, no problem. Sadly, a significant portion of a resident’s PAYE/REPAYE payments will be nondeductible, even more so for IBR.
- Borrowers in PAYE/REPAYE receiving the full $2,500 deduction will reduce monthly payments the following year by about $20.
- Attendings will generally get nothing. Residents in high cost of living areas may not either. Moonlighters ditto.
Lifetime Learning Credit
- You can get a credit of up to $2,000 to cover tuition expenses. The details are readily available online and baked into TurboTax, but the credit amounts to 20% of the first $10,000 of tuition and fees for individuals making up to $65k and married couples up to $131k.
- Most residents will get this credit when filing taxes during their intern spring for the fiscal year covering the second half of MS4 and first half of intern year, but if they had filed taxes every year of medical school (and aren’t still a dependent on their parents return), they could have received this credit all four years. That’s because according to the IRS:
Expenses qualify even if “paid with borrowed funds.”
You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student’s account.
So, don’t forget to take this credit if you paid anything in taxes. Since the credit is per tax return based on “academic periods” (e.g. semesters) and not per calendar year, you can squeeze out 5 credits from the 4 years of medical school (spring MS1, spring MS2, spring MS3, spring MS4, spring Intern year). That’s up to $10,000, if you would have ever owed that much to begin (it’s a “non-refundable” credit, which means that it won’t reduce your tax balance below zero).
Retirement Savings Contributions Credit (Saver’s Credit)
The Saver’s Credit is an awesome credit that a lot of residents unfortunately won’t qualify for. As an incentive for low-income workers to save for retirement, it has pretty strict income limits.
- Gives you a percentage back on retirement contributions up to $2,000 (a maximum of $1,000 back)
- Can’t be student more than 5 months of the year (ruining this for interns)
|Credit % per AGI||Married filing jointly||head of household||all other filers|
|50% of contribution||Up to $38,000||Up to $28,500||Up to $19,000|
|20% of Contribution||$38,001 – $41,000||$28,501 – $30,750||$19,001 – $20,500|
|10% of contribution||$41,001 – $63,000||$30,751 – $47, 250||$20,501-$31,500|
|No credit||AGI > $63,000||AGI > $47,250||AGI > $31,500|
The credit is good for a fraction of up to a $2,000 contribution to any retirement plan (403(b)/401(k)/Roth IRA/etc.), so for basically only for married residents without working spouses and even then at the 10% level (so $200). It’s actually a $2k contribution per year per spouse, so it’s really up to a free $400 ($200 x 2). Employer matches and pensions don’t affect this, and it’s a credit (not a deduction) so you get this money as cash.
The downside is that the only residents who will get this are those married with non-working spouses, and even then, residents in many locations and of increasing seniority will earn too much.
The plus side is that this can be a great deal for a low-earning spouse while you’re in school, particularly if your spouse puts the money away in a Roth IRA. The free money can really reduce the pain of starting your plans for the future since the government is actually paying you to put money away (when you’re broke).
The final downside is that this is also a “non-refundable” credit.
Earned Income Credit
The Earned Income Tax Credit is a refundable tax credit available to “low to moderate” income folks. You get it just for earning some income (but not too much). Example AGI limits from 2018:
- $15,310 with no Qualifying Children($21,000 if married filing jointly)
- $40,402 with one Qualifying Child ($46,102 if married filing jointly)
- $45,898 with two Qualifying Children ($51,598 if married filing jointly)
- $49,289 with three or more Qualifying Children ($54,998 if married filing jointly)
And investment income must also be less than $3,500 for the year.
For 2018, the maximum Earned Income Tax Credit per taxpayer was:
- $520 with no Qualifying Children
- $3,468 with one Qualifying Child
- $5,728 with two Qualifying Children
- $6,444 with three or more Qualifying Children
You must either have kids or be 25-years-old or older to get the credit, so if you have any income and this situation applies, make sure to file your taxes and get some free money. This is one of the only ways to get a real refund.