What Will You Owe From Your Wages In 2017
In this post I want to review some of the common taxes that you should be peripherally aware of for 2017. Having at least some understanding of them will allow you to make better decisions for your finances. In this 2017 tax overview I am going to be talking about mostly wage taxes which affects the majority of us doctors. We will discuss how to lower your taxes as well.
For the most part, there aren’t any major changes, so this might be more of an overall review of how your income is taxed. I’ll make it an easy read, I know most everyone has a good idea of how it works.
I learn something new myself the more I write about this stuff. Another great reason to blog, or podcast or weblog. I’d encourage everyone to further their learning through such activities.
Hopefully this will make you stop saying things like “I don’t want to work more because I will actually lose money from getting bumped into the next tax bracket!”
Your Tax Burden For 2017
Since we’re talking about tax brackets let me go over the US income-tax brackets. I know you know them but it doesn’t hurt to understand the system that is responsible for your biggest expense in your budget.
You are taxed both on the federal level and for most of you, on the state level as well. On top of this, you also pay taxes towards medicare and social security, these together are called payroll taxes of FICA. That’s 4 different taxes that you are responsible for out of your paycheck:
- federal income tax
- state income tax
- medicare tax
- social security tax
Most doctors have their highest tax brackets fall in the 28-33% range. Now remember, this is the highest bracket for you, not all your money is taxed at this final percentage – only whatever is above ~$190k (more on this later, as our federal taxes are a progressive tax system).
State income taxes for doctors varies from 0% up to 10%. We usually fall at the very top due to our income. There are local taxes as well but that’s rare and usually miniscule.
The majority of us are employees of larger medical groups, receiving W2 income. Some are independent contractors, receiving 1099 income and even fewer are partners, receiving K1 distributions. Generally, being a 1099 is better than K1 for write-off purposes. You are definitely screwed when getting a W2, yet most doctors prefer to get W2 income due to the fear of navigating the taxes of the alternative.
If you are an employee then you are likely paying only 50% of the FICA taxes, while your employer is paying the other half. The majority of us doctors pay around 8.5% FICA taxes on our gross income.
If you are self-employed, an independent contractor or a partner then you would pay the whole FICA share which is somewhere around 16%. A truly shitty deal if you are getting your income in forms of a K1 since your deductions are limited.
Federal Income Tax Brackets
So let’s look at the 2 tables below, the first one is the tax rate for a single person, based on however much their taxable income is.
The second is for couples filing jointly. There are other tax-tables out there too, I’m just giving you the overview.
Now remember, this is for taxable income, so don’t worry if you are making $450k, you are likely getting taxed on quite a bit less than that. You get to deduct:
- your retirement contributions
- your personal exemptions
- a standard deduction or an itemized one
Let’s break this down in case you don’t know exactly what each line means. So if you make $300k, you deduct your ~$50k in retirement contributions (assuming you contribute), then you deduct ~$10k for exemptions/standard deductions.
Now, it’s quite unlikely for your deductions to be that low, most docs are itemizing their deductions and probably getting somewhere in the $30-50k range of deductions, hopefully much more than that.
After deducting that shit from your gross income, you are left with your taxable income, the income that will be taxed by the IRS. Let’s say this ends up being around $200k after those above deductions.
Looking at the tables above:
1)The first $18,650 is taxed at 10% as a couple (=$1,865).
2)Anything above this, up to $75,900, is taxed at 15% (=$8,588).
3)Everything from $75,901 to $153,100 is then taxed at 25% (=$19,300).
4)Finally, from $153,101 to $200k is taxed at 28% (=$13,132).
Adding the values in the parenthesis above up, we get a total of $42,885. This is the total money you will pay towards federal taxes.
So you aren’t “taxed at 28%”, you instead have an actual (called ‘effective’) tax rate of 21%.
How Can You Pay Less Taxes?
You can pay less taxes by earning less wages. I am not being a smart-ass, your time spent looking for loopholes or ways to decrease your taxes while earning a wage, is better allocated to finding ways of generating income from your own business.
I highly recommend that you buy this book and look through all the little things that no accountant or CFP will ever be able to share with you. It’s not that they don’t want to let you know – but if a patient asked you how to prevent a migraine, could you think of every single, little thing out there?
Here is an example of how incredibly low your taxes could be if your income was coming from investments rather than wages. Note that most “income” from mutual fund investments is considered long-term capital gains, which is taxed very favorably in the US tax code.
If you and your spouse earned $30k a year from investments alone, then you would take home around $29,169. That means you would pay only 2.8% in taxes.
Oh but Dr. Mo, how the fuck am I gonna live on $30k??
I get that, it’s not a whole lot money to most doctors. But if you had your own business or were an independent contractor, then you could write off quite a bit of your overhead against your income – you could earn another $50,000 from the business/contracting and you could still show $0 in wage earnings.
Now, that right there is powerful. Earning $80k and paying ~3% in taxes. It’s not a trick, it’s not a gimmick. It’s what the really wealthy have figured out and taking advantage of.
Is Your State Tax-Friendly?
These are the long-term thoughts you should be having, whether your state is a tax-friendly state. Remember, you will be taxed according to where your primary residence is located. You can still enjoy the scenery in New York or the beaches of California without paying NY or Cali taxes.
As a retiree your purchases might slightly increase, so take sales tax into consideration. Oregon has 0% sales tax. But then again, it has a 9% state income tax.
Property tax doesn’t vary a whole lot from state to state. Though there are locales where property tax can go up by only a set amount every year. This is really nice because if your home value went up by 30% then guess what, your property tax will change accordingly.
My condo’s annual property tax is $2k, while my buddy’s home, worth 4x my condo, is <$1,500.
How does your state tax retirement income? There are 2 aspects to retirement income taxing – how your social security is taxed and how your investment income is taxed.
Most investment income is taxed at a lower tax rate than your wage income. This is another reason why I want to encourage you to have less wage-income and have more investment-income.
Want to see how “tax friendly” your state is? Check out the pictorial below. Click on the link and you can even estimate your taxes based on your gross income and depending on which state you live in.