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Tax filing for greenhorn doctors

Posted on January 1, 2019January 30, 2021 by SmartMoneyMD

I no longer am surprised at the creativity of my peers in the medical community, whether one of them finishes an Ironman competition (common) or runs an army of fast food restaurants in addition to curing cancer (not common). In medical school, I recall having classmates who wrote complete review manuals to help us ace each of our in-service exams. This produced unintended consequences of raising the bar and convincing the course directors to conceive even more devious ways to grade their students. Ultimately, it allowed all of us to become more competent doctors.

Likewise, the collective brainpower of the Internet has allowed us to broaden our fund of knowledge. Want to learn how to write an app? No problem! Want to hire someone to write an app? That can be done too. As a doctor, one of the most financially useful skill that I’ve developed was learning the basics of filing my own taxes. I remember that the first year that I filed taxes as an intern, I paid my parent’s accountant to complete my tax return. He gave me a discount, since he already had our business. I don’t recall exactly how much he fees were, but I assumed that I paid at least $100…maybe more.

Six months after filing taxes, I received a dreaded letter from the IRS stating that I forgot to include a special state filing form and incurred a penalty of a few hundred dollars. Ouch.

Those of you financial whizzes who have gone through the medical training are probably tasting bile in your throat at this point. Medical interns who have no other significant source of income have only worked for half the year–this roughly translates to $25,000 of pretax income, depending on which century you underwent medical training. ?

You might also like: Why doctors should do their taxes at least once

Collect the paperwork

You will need to keep copies of all of the forms that you use to to file your taxes. Make sure that you keep copies of your tax returns as well–there is some variability with how long you should keep your paperwork for, but seven years seems to be a plausible duration. With the number of medical journals and textbooks that we tend to keep in the garage for decades, holding onto something as important as your tax returns for a few years should be reasonable!
Most medical residents will start receiving electronic or paper forms after January of the following year (i.e. you will receive paperwork for your 2018 taxes after January of 2019, and hopefully before April 2019). Common paperwork will include:

W2 form – This is a summary of your earnings broken down distributed by your employer. The numbers in each of the blanks will eventually make sense as some of the numbers will reflect your 401k contributes or HSA deferrals.
1099-INT – These forms are distributed by your financial institutions to reflect any interest income that you may have accumulated throughout the year. This can come from interest-bearing savings accounts or certificates of deposits (CD’s) that you might have purchased. Yes, you have to pay taxes on these earnings, and you pay them at the marginal tax rates.
1099-DIV – These forms will come from your brokerage firms if you have stocks that have distributed dividends. For instance, your Microsoft stock will distribute you quarterly dividends. You have to pay taxes on these earnings too, although at qualified rates most of the time.

Frankly, that’s all of the paperwork that I accumulated as an intern. I did not own any property, had no other income, and did not have any itemized deductions.

Use tax filing software

The easiest way out is to use a tax filing software. Years ago, the only option was TurboTax, but the market is now saturated with competitors. You can even find free software for the simple tax situations like the one above. Even with more complicated tax situations, I am still able to file using the software. These services also offer electronic filing for both federal and state forms. Nothing has to go in the mail, and you can fill out your data over several weeks as you obtain more forms.

File your taxes manually

The traditional way to file your taxes is to go to your local library to pick up tax forms, an instruction manual, and comb through the tax rules. You can still do that now, and it’s actually never been easier to manually file. It’s actually conceivable to file your taxes this way even through moderately challenging income scenarios, but it is quite daunting to start in this manner unless you have the most rudimentary tax situations.

Conclusion

Filing your taxes as a resident really isn’t that challenging, and it is worthwhile to go through the motions at least once in your working career. You actually can get a better idea of what each of your financial forms is useful for—if you end up using an accountant later in your career you will at least know what paperwork she will need in order to complete your tax return.
Happy New Year!

Why doctors need to do their own taxes at least once

Posted on May 6, 2018January 30, 2021 by SmartMoneyMD

For decades, I had been the DIY type. If the task at hand conferred low risk to my main career and if outsourcing the job was more expensive than what I could generate with my own career in the same amount of time, I was game. Tasks that I’ve tackled included changing the lightbulbs in my car, fixing a sensor in my hot water heater, replacing a fan in my furnace, and even repairing a chest freezer relay. I still consider myself the DIY type, except that with age and limited time I am more often faced with outsourcing tasks that I otherwise would have tackled years ago.

I don’t expect most doctors to be handy, techie, or even analytical outside of their careers. I’m willing to bet that most doctors don’t ever track their monthly expenses, let alone be able to draft out their financial plan. We are all capable of doing it, our jobs simply rob us of our brainpower. I need to unwind after a long day at work, and after a week of long days, the weekend simply can’t come soon enough. Sometimes the weekends are consumed by on-call emergencies. The last thing I really want to deal with in my limited free time is to fix an irrigation line or come up with strategic ways to increase my savings incrementally.

Grade school math and compulsiveness is all you need to file your taxes

Before tax software became mainstream, basic math and an incredible amount of persistence in reading about the U.S. tax code were all you needed to file your taxes. The biggest impediment was the time, energy, and motivation to thumb through pages of instructions not really knowing if you’ve interpreted the rules correctly. The challenges came when certain blanks were ambiguous–do you ask an accountant, check with a lawyer, or just fill in the numbers to the best of your abilities?

The game has changed with the Internet and tax software. You only need to follow basic instructions in order to file your taxes through tax software, and with some persistence with online forums you can easily become an advanced beginner to tax nuances. The beauty with tax software is that you can view changes to your filing dynamically and work backwards to figure out how each line on your 1040’s and Schedules are populated. Do that for a few years, and you’ve got the system down pat. Moreover, you’ll become less daunted when new tax rules are enacted.

All doctors should spend some time learning how to file their taxes

Even though all doctors should understand how to taxes are filed doesn’t mean that we need to be filing our taxes every single year of our lives. The principle of tax filing can be compared to learning the clotting cascade during medical school. You needed to learn it for your tests, but as an orthopedic surgeon you probably don’t need to be able to recite it by heart. However, even if you’re a bone doctor, you know that aspirin and direct clotting inhibitors work in different segments of the cascade.

Likewise, understanding how you file your taxes and what information is needed to file your taxes is helpful even if you have a tax accountant. You have to produce the tax documents for your accountant anyway, and it’d be a whole lot easier for your accountant to do your taxes if you already know what forms are needed. You’ll be more attuned to any changes in tax code, and you can even ask meaningful questions and confidently know that your accountant is doing the right thing for you by reviewing the results.

Start filing your own taxes in residency.

Even though you are chronically sleep deprived in residency, your tax status ought to be at its simplest—it would behoove you to try to file your taxes while the forms are still straightforward. Most medical residents will find themselves taking a standard tax deduction. Those who can itemize will likely have mortgage deductions, a working spouse, and children. Even then, residents are paid through a W2 as employees so income is easily reported.

Farm out your taxes to an accountant once you become rich

That’s right. You don’t have to be condemned to filing your own taxes forever…unless you love working through the tax code. Many doctors will have real estate investments, multiple income streams through dividends and stocks, and more complex business deductions. You can still figure out how each one of these variables fit into the tax returns, but at some point in your life you won’t have as much time to dedicate to this.

There’s no shame in farming out your taxes to your accountant, as long as you have a fundamental grasp on how the forms are completed.

Have you filed your taxes yourself before? If not, take the leap and start!

How to file your backdoor Roth IRA through HRBlock Online Edition

Posted on March 4, 2018January 31, 2021 by SmartMoneyMD

This tax year I decided to switch from TurboTax over to HRBlock Online edition, simply because one of my banks offered to cover the cost of the software (approximately $100-$110 for me). In exchange, I believe that I gave them permission to distribute my financial situation to their potential advertisers—this is probably not a great way to give up my privacy for $100, but I think that the AMA (American Medical Association) also distributes my information to insurance companies as well.

I’ve used both the online and CD version of TurboTax in the past, and the interfaces seem relatively similar when filing the backdoor Roth IRA. TheFinanceBuff had a page on using the CD version of HRBlock, but it seems like the online version has a few other not-so-obvious menus. I do thank Harry Sit for providing great concise financial information online throughout the years.

There are two steps in filing a backdoor Roth IRA. (1) Filing a non-deductible Traditional IRA and (2) Filing the 8606 Form for Roth Conversion. Let’s walk through the steps:

The online version has a top horizontal navigation bar with tabs labeled, “Overview”, “Federal”, “State”…etc. Under each tab are sub-tabs. For instance, under “Federal”, there are tabs for “Personal”, “Income”, “Adjustments & Deductions”. Click on “Adjustments & Deductions”.

Top tab options on HRBlock online edition

The interface tries to be helpful in suggesting options, but scroll down to the bottom to find the following click boxes and click “Yes”.
Click “Add” under Retirement and Investments”
Click “Add Traditional or Roth IRA contributions” You will be adding a non-deductible Traditional IRA.
Check “We contributed to a Traditional IRA”
Fill in the amount that you contributed. For 2017, the maximum for those under 50 years old is $5500.
You have zero dollars in this IRA at the end of the year if you converted all of it to a Roth IRA.
You did NOT recharacterize the IRA.
The IRA basis should be zero if you converted everything.
Again, you didn’t recharacterize.
Converted everything.
Now to file the 1099-R form that you received from your custodian to show that you withdrew your non-deductible Traditional IRA and converted it to Roth IRA.
Add in the 1099-R.
Select option 2, and continue to fill out according to what the 1099-R shows.
The funds came from an IRA.
You converted all of it.
I selected that I had a basis, but when you convert all of it before any interest accrues, you will not have any basis.

That’s it! Sound out below if you have questions.

I submitted my taxes!

Posted on April 13, 2017January 30, 2021 by SmartMoneyMD

It’s a recurring problem. Every year in April I frantically file my taxes at the last moment. Life doesn’t have to be a struggle to file taxes, but I allow it to be. Call it delinquency. I blame all of the institutions that are obligated to send me tax forms to file. They never send it at the same time. It forces me to wait until I receive all of the paperwork before I can submit everything to Uncle Sam. My motivation to file my taxes waxes and wanes in an unpredictable frequency and amplitude. You really have to catch me at my high point in order to get everything completed.

I file my own taxes. Yes, most financial bloggers do. My taxes really aren’t that challenging, as the bulk of my income still comes from a W2. That means I don’t get to fill out fancy deductions to save money after spending more money. I started doing my own taxes during internship when I received real taxable income. I remember that since half of my internship spanned the same calendar year as my 4th year medical school, I essentially paid no taxes. I think I earned like $20k that year. The tax software was also free, but I probably paid some amount to file my state taxes online. I also learned to decrease my withholdings through my W4 that year too so I also came close to receiving no money back afterward. I felt like a badass.

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Tax filing does become more complicated as we go through life. Kids. Mortgages. Tax lost harvesting. Second homes. Real estate deals. Multi-state income. Foreign transactions. Trusts. The redeeming aspect of complexity is the skillset is additive over time. It is actually beneficial to start learning about taxes when you’re making little money and have either negative of low net worth. You get through the filing process quickly and you learn. Tax software like TaxACT and TurboTax allows you to get through the process as painlessly as possible. Life isn’t as daunting as before the Internet age. By the time you get five bank accounts, three 401k custodians, a handful of brokerage custodians, and a few real estate properties, you will have had (probably) many years of practice. It might not be as challenging as jumping in headfirst into an eight-figure portfolio.

I’ve moved up in the world and no longer file 1040EZ forms!

As with most other people who choose to file their own taxes, I hope to minimize my tax burden as much as possible. Jeremy from GoCurryCracker is a master at this. I think I paid more taxes when I earned $20k a year than he does now earning a near six-figure income! If you had the choice between earned income or passive income, passive income wins all the way in being more leniently taxed. For W2 employees, the only deductions you really get are mortgage interest, property tax, and business expense deductions. The business expense part is really a moot point unless you spend significant mounds of money on conferences and meals because these expenses have to exceed 2% of your income. Generally speaking, on a $400,000 W2 salary you get to deduct business expenses that exceed $8000. All meal costs are only deductible at 50% too. I know plenty of doctors who spend more than that in unreimbursed expenses, but that’s somewhat lavish. I’d say that one could spend roughly $8000 for 2 1/2 fancy meetings (yes, PoF, cringe). Some conference registration fees can easy run over $1000 plus additional mini-courses. Put that in an expensive resort area, and you’ve got hotel fees in the $300 range. I probably attend one of these meetings a year, but really cringe at how expensive meals can be when there is limited access to grocery foods.

This year it took several hours to sort out my receipts and enter the data into TurboTax. I probably could have shaved off at least one hour had I known my poorly organized folder of receipts did not exceed 2% of my taxable income. Lesson learned.

All in all, it wasn’t a bad year. I paid more tax than I would have liked, but that’s what you get if most of your income comes from your primary job and you’re still building wealth. For 2017, I plan to implement the following changes to streamline my taxes:

1) Keep a running spreadsheet of meeting expenses. Fill out the blanks soon after the conferences so that expenses are still fresh in my mind. This will make the year’s end easier.

2) Make sure I keep track of my donations, especially to Goodwill. Ask for receipts so that I can clearly prove that my clothing drop-off is real.

3) Consider switching tax filing software. TurboTax is great. It’s also the most expensive of the bunch. The amount that we truly save is probably negligible ($20-$30) total, but it might create a good review of what is available.

What other pointers have you learned while filing your own taxes?

How Working Abroad Can reduce your taxable income by $100,800!

Posted on May 8, 2016May 8, 2016 by SmartMoneyMD

working abroad can reduce your taxes Many doctors have volunteered in foreign countries during medical school, residency, and even while in practice. It’s a great opportunity to see the world and provide much needed expertise to many people in need. Some of us end up working abroad for many years before moving back home, simply because the opportunity arises.

One financial perk of earning income abroad is that it can significantly reduce your tax burden. Firstly, you are unlikely to incur state taxes if you are living abroad. For many of us, this translates into at least a 5-6% reduction in tax burden. Moreover, thanks to the Foreign Earned Income Exclusion rule, your first $100,800 in income (based on 2015 rules) is federally tax exempt! For single doctors earning $300,000 gross income, this can potentially translate to a marginal tax rate reduction from 33% to 28%! What is more important is that a doctor earning $300,000 abroad will likely save approximately $33,333 in taxes compared to a doctor with the same income working within the United States!

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What options do you have to work abroad?

As far as large hospital entities go, I’ve seen options to work abroad through Johns Hopkins in Saudi Arabia, Cornell University in Qatar, and Cleveland Clinic in Abu Dhabi. Since these hospital systems are based in the United States, their counterparts abroad (which are typically operated by a foreign entity anyway) allow doctors who have trained in western Europe or the United States to practice without having to recertify.

There are other smaller foreign corporations and hospital systems (mostly in English-speaking countries) that also allow U.S.-trained doctors to work abroad. Keep a look out in your specialty’s job bulletin.

Will working abroad work for me?

Obviously you have to assess whether or not working abroad will fit your life goals and your family’s needs. If you were single and adventurous, it would be a no-brainer—you can work abroad, learn about new cultures, and even save some taxes in the process. Many of these cities offer international schools if you have kids, and access to entertainment much like what you would find in the U.S.

Have you considered working abroad? What was your situation that led you to decide to make your decision?

(Photo courtesy of Flickr)

Should I file my own taxes? Step by step rules to help you decide

Posted on March 2, 2016February 28, 2016 by SmartMoneyMD

Now that tax season is in full swing and we are all scrambling to round up our tax forms to file, it’s worthwhile to discuss whether one should use an accountant or just file taxes yourself. Essentially the purpose of tax season is to ensure that you are paying a fair amount of your income back to the government. The government provides infrastructure, safety, and rules in exchange for a share of our earnings.

Most professionals I know actually hire accountants to file their taxes. While each person has their own reasons for hiring an accountant, the most common excuses include:

Too busy
Too complex
Don’t want to be audited
Time could be used to earn more money

I asked ten of my colleagues whether or not they have ever filed taxes on their own, and none of them have. Not in residency, not in fellowship, and certainly not while they are holding a full-time job. Interesting.

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Why you should file your own taxes.

While our tax system has only gotten more complex, access to technology has only allowed us to file more easily. You can file everything electronically through third-party vendors at a fraction of the cost of an accountant. This can be done through software you purchase offline or even completely within the cloud. If you have any ability to search online, you can find most answers to everything that you will encounter. It really doesn’t get much easier.

Self-filing is cheaper. The up-front cost of filing your own taxes will definitely be lower than filing through an accountant. Third-party software ranges from FREE for 1040EZ forms to around a hundred bucks for more bells and whistles. Some vendors will charge an additional nominal fee for state filing, but typically that is also less than $50. Out the door, you will likely spend less than $150 if you self-file. I believe that I spent $70 through TurboTax last year even after (unnecessarily) upgrading (being tricked) to a fancier package.
You will understand the tax system more thoroughly if you file yourself. If you have to go through the steps of tax filing yourself, you will understand more about the federal and your state’s tax laws. You’ll probably understand more than the majority of your peers even if you file your taxes only once.
Self-filing is a no brainer if you are a resident or have limited income. If you earn $44,000 a year on a fixed income and your spouse stays at home, you’d better learn to file your own taxes, or have your spouse learn. Your accountant might charge you upwards of $500 to $1000 even if the simplest returns. If your accountant charges you $1000 to file a return on $44,000 of gross income, you are paying over 2% of your income to your accountant!
If you are on a fixed salary, self-filing will be easier. If the majority of your income comes from a W2, then it is likely that your tax return will be easy to file. You may not benefit too much from advanced help from an accountant.

When should you hire an accountant

In general, hiring an accountant is worthwhile if you are likely going to save more taxes by having professional help.

You have multiple income streams. Suppose that both you and your spouse have incomes. You have multiple investments that kick out dividends and distributions. Some of them are foreign investments. Maybe you own some land that is used for hunting or oil drilling. You are getting paid through many means of passive income. Lucky you.
You have a complex income structure. If you are self-employed, you have a slew of options to reduce your tax burden. Let’s say that your company employs you, and pays you a salary and distribution every month. What is the right ratio to justify your job? You might not understand or have the time to consider what expenditures are considered necessary for your business. An accountant may be able to help with that.
You just don’t care to learn about taxes. Okay, this is the most common reason my colleagues are relatively uninformed about their money. Chances are that if you fall into this category, you won’t make it on my website to learn either.

It might be helpful to do your own taxes AND hire an accountant

Look, having the option to outsource your tasks doesn’t mean that you have to stick with an accountant or vow to DIY on everything. It would be prudent to try doing your own taxes while you still have a simple financial arrangement, perhaps like in residency. You learn a lot about the U.S. Tax System simply by reading the help files in TurboTax or TaxACT (insert your favorite tax software). I sure did. Saved me a lot of money too.

One of my co-residents years ago told me that he paid his accountant $1,500 each year to do his taxes. His longstanding relationship with his accountant (repeat business) conferred him access to questions throughout the year if they arose (he did not consult with his accountant much outside of tax season). I was worth about $25 an hour during residency. The first year I did my taxes it took me maybe 3-5 hours to run through everything. I spent most of my time reading topics not directly pertaining to my tax situation, but I was curious. I saved $125 of post-tax or UNTAXED income by filing my own taxes. In contrast, my co-resident spent $1,500 of POST-TAX income on accounting fees while earning $52,000 of gross income. Assuming that he had little wealth from his parents, he probably spent 3% of his gross income paying his accountant! (I think that he was considerable more wealthy than I was or am even now). My tax situation did not really change during residency, and I breezed through subsequent returns in less than 2-3 hours each year.

While I still complete my own taxes (so far), it’s becoming more practical to consider hiring an accountant as I [hope to] grow my income in various ways. Unfortunately I am still in a salaried position that still pays out a W2, so my taxes are still a breeze. Consider reviewing what suggestions your accountant makes on your tax return to learn about his/her strategies. If you tax situation doesn’t change from year to year, you could consider filing the forms yourself in later years.

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The Truth About Deductions – You Keep What You Don’t Spend

Posted on December 4, 2015 by SmartMoneyMD

I still receive a good amount of advice from colleagues, friends, and family that it’s okay to buy a service or product because I can deduct it as a business expense.

Business deductions are great if you own a business. Small business owners have a great deal of flexibility in terms of deductions. Essentially any purchase or expense related to the business can be included: mileage driven to work, desks, computers, postage, utilities, rent…etc. The purpose of deductions is essentially a tax credit against your profits.

A simple example is that if you earn $100 but incurred costs of $80 in order to earn that $100, you only have a tax liability of $20. This amount is quite huge if your marginal tax rates are high, which is typically the case for most high earning individuals. The U.S. tax laws are quite generous to small business owners and allow many options for a business to succeed. For expensive equipment, you can opt for a Section 179 to depreciate items over a number of years. If you are going to spend the money anyway, you might as well take advantage of these benefits.

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Deductions are not for everyone.

Unfortunately, the majority of doctors are shifting towards salaried positions, which means that we receive our income through W-2 payments. As an employee, your ability to deduct your expenses is dramatically less than that of a business owner. Expenses for employees can only be itemized if they exceed 2% of your annual gross salary! Even then, you can only expense the amount that exceeds 2% of your income. For an employed physician who grosses $200,000 a year, you can only deduct the amount over $4,000. Let’s say that you went to one CME meeting and spent $5,000 on all expenses, and that your marginal federal tax burden is 35%. Essentially, the government will consider that you made $1,000 less in income, thereby “saving” you $350 in taxes. Okay, by spending $5,000, you “saved” $350 in taxes.

The math is better than having no deductions, but does that impact your spending decisions? Did you have to attend that particular meeting? What if you spent only $3,000 at the same meeting (stayed at a less fancy hotel, and ate cheaper food)? At a gross salary of $200,000, you don’t meet the 2% minimum requirement for deductions. However, you spent $2,000 less than you could have otherwise and also paid tax on the amount that you kept.

In scenario #1 ($5,000 meeting), you spent $5,000 and paid taxes (likely marginal) on $4,000 (the amount less than 2% of your income) of it.

In scenario #2 ($3,000 meeting), you spent $3,000 and paid taxes on $3,000 of it. However, you are “ahead” $2,000 from the amount that you didn’t spend. At a 35% marginal tax bracket, you still end up with an extra $1,300 to spend on other things.

Understand your goals.

Everyone is going to have different goals. If spending only $3,000 at a meeting would make you miserable, then you might as well spend $5,000 to enjoy your hard-earned money. Otherwise, you might be better off roughing it with $3,000 at the meeting, and putting the $1,300 you save towards your kids school tuition or a nice vacation.

What are your thoughts on deductions?

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(Photo courtesy of Tax Time)