Imagine a family of 3 living in Arizona. 1 parent working part-time, 1 parent staying at home with a 5 year-old child. If the working parent can generate $60,000 in annual wages then the total tax, including federal, state and payroll (social security + medicare) would come out to $2,176. That’s a 3.6% effective tax rate, which is a very low income tax rate.
This lower income tax rate means you get to keep $4,818 per month from your income, that’s a pretty sweet chunk of money.
Lower Income Taxes
The biggest expense physicians have isn’t their mortgage. It’s not health insurance or car expenses. It’s income taxes.
In 2014, when I earned $430,000, I paid over $130,000 in taxes. That’s $10,000 per month of expenses.
Here is the math for how I got to a 3.6% income tax rate.
$916/mo would go to your IRA which reduces your taxable income and you are left with a take-home income of $3,900/mo. You get a nice tax break for personal exemptions and standard deductions – as of 2016, when I wrote this post.
For an urgent care doctor to make $60k, they would probably have to work around 600 hours a year. That’s 60 10-hour shifts or 75 8-hour shifts. One could bang that out in 3 months and enjoy their free time for the rest of the year.
Structuring a Work Schedule
Dr FIRE @ PoF has a brilliant post on structuring your work schedule around the tax calendar to get the lowest tax bill. One could work 2 months in one calendar year and another 2 months in the following calendar year and still have the same income, nearly $58k of take home for 12 months. But by breaking up the income between 2 consecutive tax years you will owe probably near $0 in taxes.
The tax numbers I posted using only $60k of gross income should make your jaw drop. Shit, it should conclude the post. Drop the mic and walk away!
But… you might be thinking WTF is Dr. Mo, I don’t want to just take home $57k/yr (you greedy bastard!).
Living on Less Income
You’ll have to figure out how you can fit this bit of info into your life. For me, I’d have to go knock someone up and marry them to get that low tax rate. But even without doing that I can disproportionately lower my taxes by lowering my income.
So I get to keep more by earning less… which means I would be working less, a lot less. This might seem intuitive to your but it’s fucking eye-opening. Makes me wonder why I’m still working full-time but I’m still working that out.
With no debt and $500k saved up a quick math shows that if your investment were to grow at 5% while adding $11k/yr to that investment then you would end up with $1.7 mill after 20 years, not bad. I could definitely work at that slow pace for 20 years.
Fast forward – 2021
I’m adding an update to this post in 2021. My net worth is over $1,000,000 and I’m earning around $60,000 to $80,000 per year.
Looking back, I have kept my income taxes low over the past few years. This allowed me to work less and keep more money.