As the famous saying goes, ‘A penny saved is a penny earned’. Tax planning is one of the ways that can help you save your taxes and increase your income.
Now, as a medical resident, you’ve embarked on the exciting journey of residency.
Between long hours, demanding schedules, and the constant hunt for knowledge, finances might not be at the top of your mind.
However, developing smart tax habits can now significantly benefit you in the long run.
Our upcoming blog is your go-to resource for understanding tax-saving tips and certain deductions for medical residents. Keep reading!
Table of Contents:
Tax-saving terms you should know.
How can doctors save money on taxes?
Additional tips for tax management.
Conclusion
Tax-saving terms you should know
Tax deduction: an amount that reduces the total amount your taxes are based on.
The Internal Revenue Service (IRS) allows taxpayers to lower their taxable income.
For example, $50,000 in taxable income minus $2,000 in tax deductions equals $48,000 in new taxable income.
Tax credit: A tax credit reduces the amount of taxes you owe to the government.
For example, $10,000 owed in federal income tax minus $3,000 in tax credit = $7,000 in new tax owed.
Both tax deductions and tax credits reduce the amount of tax you pay.
Tax Bracket: The tax bracket refers to different slabs at which different tax rates are applicable in a progressive way. It generally moves from the lowest to the highest-income groups.
How Can Doctors Save Money On Taxes?
Contribution to retirement accounts
Start saving for retirement early! A medical resident can contribute to various retirement accounts, such as 401(k), 403(b), or individual retirement accounts.
These retirement accounts can significantly reduce the amount of taxation, as the contributions are typically pre-tax.
Student Loan Interest
The interest paid on your hefty medical school loans can be deducted from your taxable income.
While student loan debt can feel like a heavy burden, here’s the silver lining: you can potentially reduce your tax bill by claiming the interest you pay on those loans.
Understanding the deduction:
The Internal Revenue Service allows you to deduct a portion of the interest you paid on qualified student loans during the tax year.
There’s a maximum deduction amount you can claim each year, currently set at USD 2,500.
Moving For Opportunity
Did you relocate at least 50 kilometers away from your residency? You might be eligible to deduct moving expenses like transportation and temporary housing. Keep a record of everything!
This includes:
Moving company invoices
Receipts for temporary housing (hotels and AirBnB)
Receipts for utilities connected or disconnected at your old and new residences.
Work-from-Home Perks
If you have a dedicated workspace at home specifically for studying or administrative tasks, A portion of your rent, utilities, and internet can be claimed as a deduction. The IRS has specific requirements for the home office: It must be used exclusively for business purposes.
Medical And Professional Expenses
Doctors wear many hats! This profession allows the deduction of qualified, unreimbursed medical expenses exceeding 7.5% of income, easing the financial burden of healthcare costs. The expenses include:
Professional memberships
Medical journals
Licensing fees
Scrubs
Continuing medical education courses and conferences.
Qualified Business Income Deduction (QBID) for Rental Property
Physicians who own their practice building or investment property can claim up to 20% of their rental income as a tax deduction.
Child Tax Credit
The child tax credit allows parents to deduct $2,000 per dependent child if their modified adjusted gross income is below $4,00,000 for married couples filing jointly or $2,00,000 for all filers.
Additional Tips for Effective Tax Management
Here are a few additional tips for you to manage your taxes effectively:
Track Your Expenses
Keeping records of income and expenses is the key to effective tax management. Utilize budgeting apps or spreadsheets to categorize your spending throughout the year.
Consider:
Use a receipt scanner to convert paper receipts into digital copies.
Set up a monthly reminder that can help you stay on top of expenses and ensure you don’t miss any potential deductions.
File Electronically
E-filing with the Internal Revenue Service (IRS) allows you to get faster refunds. User-friendly tax software can guide you through the process.
Maximize Your Withholding
A W-4 withholding form is filled out by employees to indicate their tax situation to employers.
Adjust your W-4 withholding form to ensure you’re withholding enough throughout the year to avoid owning a large sum at tax time, but not so much that you receive a small refund.
Stay Updated
Tax laws can change, so staying informed about recent updates can help you optimize your tax strategy. Also, consulting with a tax professional can be highly beneficial for complex tax scenarios or if you have any uncertainties.
Conclusion
Figuring out tax deductions and credits might seem tricky, but it's an essential part of financial planning for physicians and individuals alike.
Saving tax allows you to spend your money effectively. It helps you focus on what truly matters: your patients, your practice, and building a secure financial future for yourself.
Prime Financial Services is here to support you with experienced guidance on tax planning and saving it. with our seminars
Book now at: Financial Literacy Seminar Series
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