Student loans, 401k plans, and taxable income are just some of the common stressors during tax season.
If you think some of the popular textbooks in emergency medicine are lengthy, try reviewing the US tax code. One tax policy organization claims the US tax code is over 70,000 pages long (Imagine about 30 Tintanalli textbooks stacked vertically) and has been changed over 4,600 times from 2001 to 2012 – about once per day [source: Tax Foundation]. No wonder we have so many questions about our taxes! Here are some answers to common tax questions I receive from emergency physicians to clear up some confusion.
Can I get a tax deduction for my IRA contribution?
This depends on what type of IRA you’re talking about. If it’s a traditional IRA, and assuming you are married filing a joint return, then you cannot get a tax deduction if your income (modified adjusted gross income) is more than $118,000 in 2016. Working full time in EM means you should be well above that. Realize that you can still contribute to a traditional IRA regardless of your income, but you might not be able to get a tax deduction. For a Roth IRA, the answer is no. Most physicians can’t contribute directly to a Roth IRA anyways. For a SEP IRA, the answer is yes. This applies to EPs who are independent contractors and are using the SEP IRA as their primary retirement plan vehicle. Just make sure you don’t go over the SEP IRA contribution limit. The max is $53,000 for 2016 but also depends on your independent contractor income.
What percent am I paying in taxes?
Believe it or not, the answer to this question is a bit tricky. Imagine that: a tax question that doesn’t have a definitive answer! If you are referring to the tax on the last dollar of income you are making, then look at the tax rate schedule below:
Realize that the table only refers to federal taxable income which is income after a number of deductions. It doesn’t include other taxes. The tax rate only refers to the federal income taxation of the taxable income that falls within that bracket. For example if you make $250,000 in taxable income, only the portion of that taxable income in the 33% tax rate ($250,000 – $231,450 = $18,550) is taxed at the 33% rate.
Here’s one way to know your rate – reverse engineer it. Add up all the major taxes you pay including federal income tax, state income tax, Social Security and Medicare tax (or self employment tax if independent contractor), and property tax. Then divide that total by your gross income. This gives you an estimate of income tax rate as a percentage of gross income.
Can I deduct my student loans?
Your student loan payment is not deductible – only the interest on the loan might be. You face a couple of problems here:
- The maximum student loan interest deduction is only $2,500. With many residency graduates coming out with debt in excess of $200,000, that’s not a huge break.
- There are income limitations on that deduction. If you are married and make more than $160,000 in income, then you won’t get a deduction. So the student loan interest deduction will likely only apply to you during the year you graduate from residency or before when your income is lower.
I sold my home last year for a gain. Do I owe any additional tax?
There are numerous factors involved here, but I’ll assume that you are married and sold your principal place of residence. This means you lived in that home for two out of the last five years before you sold it.
In this case you may be able to exclude up to $500,000 of gain on the sale. Here’s an example. You bought your home in 2009 for $500,000 at the bottom of the market and sold it in 2015 for $900,000 for a $400,000 gain. Because the gain is below the exclusion of $500,000, you do not owe any capital gains tax on the sale.
Even if the gain was over $500,000, you are not taxed on the entire gain. For example if the gain was $600,000, the first $500,000 is excluded and you are taxed on the remaining $100,000 in gain. More good news here is that you are likely taxed at the lower capital gains tax rate not your regular income tax rate. Plus if you added improvements to your home, the gain is reduced.
I’m an employee and I worked for two different employers last year. Can I double my 401k contribution and get double the tax benefit?
In a word: No. Assuming that both employer-sponsored retirement plans are 401k plans only, then the maximum you can contribute to a 401k plan regardless of number of employers is $18,000 (or $24,000 if you are above age 50). This means that if you worked for two employers, you cannot contribute $18,000 to the first 401k plan and another $18,000 to the second 401k plan. The employee limit is per taxpayer not per employer. If you go over the $18,000 limit then you’ll have to remove the excess form one of the plans by your tax filing deadline. However each employer can make employer contributions separately to each plan and that does not count in the $18,000 total.