A single 39-year-old physician living in Portland, Oregon working 1 hour a day doing telemedicine, earned a gross income of $86,500 in 2017. What’s even more delicious is that he only paid $10,000 in taxes for all of that income.
Federal income taxes came out to 7% – $6,000.
State income taxes came out to 5% – $4,300.
That’s a total tax burden of 12% or $10,300 with very little tax strategizing.
2017 Income Taxes
My income has been all over the place in 2017 but I have managed to piece together enough of an income to pay for my lifestyle. $87,000 may not seem like much but it’s all relative and that’s what I try to get across in this blog.
My wealthier physician friends don’t believe it’s possible to retire on anything less than $5,000,000 and they have genuine concerns for me. I managed to retire with a net worth below $800,000.
I didn’t get a chance to plan much for my 2017 income taxes – this was my first year as an independent contractor.
It makes little sense to work more than necessary or to earn than necessary because the US tax code is a progressive tax system. Meaning, you are penalized for earning more income as an employee. The situation is more favorable if you are a business entity but more income will always mean more taxes.
It’s said that if you are single there are no deductions that you can claim but I would rephrase that because it’s not an accurate statement.
For example, I can deduct up to ~$50k by putting that money into qualified retirement accounts. This can be done with a SEP IRA or a Solo 401k.
On top of this huge deduction I can also take a deduction for my annual property taxes which is based on the tax-bracket I fall into.
My biggest deduction, however, is the money I spend to earn the income I earn as a sole proprietor. For the most part I can completely write off my expenses such as medical board licenses, home internet, medical journal memberships, and certain entertainment expenses.
Total Income for 2017
My total income for 2017 was a mix of W2 income and 1099 income. Even though I was a per diem the entire year, 2 companies decided to pay me as an employee. As such I received my income on a W2 form which limited my tax strategy.
I no longer work for these 2 companies in 2018.
Income as an Employee
If I’m considered an employee then it’s assumed that I am provided with everything necessary to do my job by my employer. Well, that’s total bullshit because even though I was an employee I didn’t get any of these things:
- health insurance
- life insurance
- disability insurance
- dental care
- retirement options
- reimbursement for my personal technology
- reimbursement for medical licensing
You can try writing such things off as a physician and if your income is high enough then the IRS likely won’t care. But if you’re earning only $50,000 as a W2 employee and decide to write off $20,000 in expenses then you better warm up a seat for the IRS dude.
Income as an Independent Contractor
A very small portion of my income came from independent contractor work. This income is paid out on a form 1099-MISC and it’s assumed that the employer hires the independent contractor with minimal support.
In my case, I am provided the software platform but am responsible for having my own laptop, internet, and medical license in order to do the work necessary.
I also might incur legal fees for a lawsuit or a medical board investigation. I may have to rent equipment if my own equipment malfunctions.
I may have job application costs or marketing costs. All these and many more expense items can be directly deducted from a 1099-MISC.
My 2017 Tax Deductions
When it comes to tax deductions it’s important to understand that you can write off whatever you want on your taxes. That doesn’t mean that the IRS will accept it.
Note that you don’t write “internet service – $600” on your tax form. The IRS only sees the total deduction for various categories on your tax forms.
Let me give you an example to demonstrate this: I have no need nor desire to have home internet or a personal cell phone. I have both of these expenses for the pure purpose of earning an income as a sole proprietor.
If I didn’t want to earn an income then I would go to the library or use public WiFi for internet and I would carry a cell phone without cell-service and connect to the same WiFi for VoIP calling or browsing.
I can justify this to the IRS because I have lived without home internet and without a personal cell phone in the past. Your situation may differ and so you might find yourself in the position of having to prove to Uncle Sam that you don’t use those services for personal use at all.
As a real employee my employer often will pay for my health insurance premiums. As a wanna-be employee, such as when a company wants to pay me as an employee but not treat me like one (looking at your KP!), I cannot deduct my health insurance premiums.
But as a sole proprietor (an independent contractor) I can deduct all my monthly health insurance premium payments.
Just because I can deduct my health insurance premiums doesn’t mean that I don’t care how much I spend on my health insurance. This is a topic I keep repeating because what you deduct against your income is money that’s spent. Sure, you don’t have to pay tax on that money but it’s money you won’t have in your pockets, either.
The gods of justice have been good to me. I incurred legal fees for my ongoing medical board investigation right around the time that I started going per diem.
This is actually a very interesting situation for me. My legal fees were so high that not only did it wipe away all of my 1099 per diem income but I was able to deduct the excess against my W2 income.
For example, let’s say I earned $70k in W2 income and $10k in 1099 income. And that I had $20,000 in legal fees. This means that I can deduct $10k of my legal fees directly from the 1099 income leaving me with no taxable 1099 income (yay). And… I get to deduct the other $10k of my legal fees from my W2 income, dropping the income down to a taxable level of $60k.
Paying Zero Income Taxes
It would be fantastic if I could pay even less taxes or no taxes at all. It’s not that hard to get to the point of paying no income taxes. There are a few online personal finance bloggers who have written about this.
I’ll give you a brief example of how to achieve this.
Let’s start with what I can write off 100% against my income in order to avoid paying income taxes on that money:
- business expenses
- individual 401k contributions
- traditional IRA
- HSA contributions
1. ) I already told you that my internet, cell phone, some of my housing expenses, health insurance, and licensing as a physician is part of my business expense. That right there is the majority of my financial existence. I would give it a face value of ~$7,000/year.
2.) The next category is having an Individual 401k (aka Solo 401k). That’s another $18,000 at minimum a year.
3.) If my income is low enough then I can deduct $5,500 for a traditional IRA.
4.) And another $3,200/year for HSA contributions.
That’s a total of $33,700 that I can earn without paying any income taxes. Here is where this gets interesting. Because I would be considered to be in the zero-income-tax bracket my long-term capital gains from my index fund investment returns would be taxed at 0% as well.
So as a single dude I could earn $33,700/year from work and have another $40,000/year of long-term capital gains income from investments and still pay zero income taxes.
Tax Filing Fees
It costs $0 to file your state and federal income taxes but I paid $199 so that I could use Turbotax. The problem is that Turbotax is a bit shady with no transparency and they almost tricked me into paying another $50 just so that I could deduct my Turbotax fee from my return!
It wasn’t until I read the fine print which was a government mandate where it pointed out that I don’t have to pay that money.
The point is that $200 is way too much to file my taxes online when I can do it all for free using the IRS tax forms. If I can’t figure it out using the online tax forms then I can get help using various online tax forums.
The next time you’re ready for a job transition consider the factors I mentioned above because I don’t see any reason for us physicians to get screwed the way we are as high-income employees. This category has it the worst compared to all the other income-earning categories.
Discuss your tax options every time you talk to your financial adviser. Your FA should have some ideas to give you though remember, they aren’t tax strategists, nor CPA’s. But they can often help you quite a bit with tax planning. My financial adviser recently brought on a CPA which is brilliant.