Amidst the rounds, reading, and resting (what’s that?), income taxes are probably the last thing on your mind. Nonetheless, you may find that you are missing out on a few opportunities to make the most of this inevitable chore.
Once you have the necessary documents from all of your financial institutions (interest statements, student loan summaries, mortgage interest etc.), file your taxes ASAP. If you are getting a refund, your target should be to file by the end of February to early March. Why? Trainees rarely owe significant sums, and the longer you wait to file, the more likely you are to be the victim of identify fraud and lose your refund to a scammer. File too soon, however, and you may need to file an amendment if an unexpected tax statement appears in the mail later than usual.
Don’t celebrate your refund
People often treat tax refunds as “found” money and use the cash to treat themselves. Instead, acknowledge that you are a chump for lending your money tax-free to the government all year. A large tax refund should prompt you to adjust your federal withholding with your employer (call HR to make this happen). Now, you can enjoy your money, and the benefits of any interest it could earn, all year long.
Don’t pay for something you can do yourself
It is shocking how many trainees pay triple digits for tax preparation. Most trainees can file simple returns on their own or using affordable online tax prep software. These programs creates your return based on an interactive questionnaire. Trainees may even be eligible for free filing depending upon household income.
Make a student loan game plan
If you take advantage of an income-driven student loan repayment plan, your adjusted gross income and income tax filing status determine your payment. This is especially critical if you are married, as your payment may be affected by spousal income and/or spousal student loans. Run the numbers at tax time to see the relative effects of “married filing jointly” versus “married filing separately” on both your taxes and your monthly student loan payments. If you do elect to file separately, don’t sweat the prohibition on using a Roth IRA. Investigate the “backdoor” Roth IRA, an approach you will need soon enough as an attending.
Cut your tax bill by saving
One of the key ways doctors can save on taxes is by making pre-tax contributions to savings accounts such as 401k/403bs, flexible spending accounts (FSA), and health savings accounts (HSA). Trainees should contribute at least enough to their work-sponsored retirement account (401k/403b) to scoop up any available matching. The match is literally free money from your employer and should not be left on the table. FSAs and HSAs allow you to pay for childcare and healthcare expenses with pre-tax dollars. Not only do these accounts reduce your tax bill, they also may drive down your student loan payments. Income-driven student loan repayment plans such as IBR are based on your adjusted gross income after these contributions are deducted. Now your monthly minimum student loan payment goes down — a really important benefit if you are seeking public service loan forgiveness.
Cash in those credits
One important facet of taxes you should understand is the difference between a deduction and a credit. Deductions reduce the total amount of your income that is subject to tax (which is charged as a percentage of your income). Credits, on the other hand, provide a dollar for dollar reduction of your tax bill. Hence, a $100 credit is worth much more than a $100 deduction. Trainees with childcare expenses will benefit from taking the Child Tax Credit, worth up to $2000 per child. A smaller credit is now also available for those caring for other dependents, such as an elderly parent. Trainees may also be eligible for the Retirement Savings Contribution Credit if they contribute to their workplace retirement account or IRA. Trainees with low residency salaries and no spousal income will receive the greatest value from this credit due to a process called income phase-outs, where higher earners get less (or no) credit.
If you paid any tuition after January 1 of this tax year (your last semester of school) and your classes started on or after January 1, you may be eligible for at least a portion of the Lifetime Learning Credit. Like the Retirement Savings Credit, the amount is subject to income phase-outs.
Now is a good time to revisit your federal allowances if you got that juicy refund. Make sure you consider the new tax bill and updated income brackets when making a switch. If Uncle Sam did send you a nice chunk of change, remember that it isn’t a gift. It was always your money, so use it wisely! Tax refunds can be put to work paying down credit card debt, building up your emergency fund, or feeding a Roth IRA.
Disclaimer: I am a licensed physician, not a financial advisor or accountant. The content of this editorial is informational and does not constitute financial advice. I have no conflicts of interests to disclose.
Dr. Elizabeth Bonachea is an attending neonatologist at Nationwide Children’s Hospital and The Ohio State University in Columbus, Ohio. She is an associate fellowship director and the faculty advisor of the Housestaff Financial Wellness Interest Group.