Smart Money MD

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.*

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*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.