All Articles Clinical Career

Uncle Sam Incentivizes You To Make Less Income

Chasing A Lower Income Makes Sense At A Point In Your Career


If you make $250k a year through employment you get very few tax incentives. You can likely deduct $18k which you would stash away in a 401(k). Then you get a little break in the form of a personal exemption and you may either take a standard deduction or tally up your receipts for an itemized deduction. Your tax rate would be something absurd… you’ll get to keep maybe 60% of it… not taking into account all the extra expenses associated with living a lifestyle built around a full-time job.

In the below calculation you can see that a gross income of $250k is taxed at $232k after deducting the $18k that’s contributed to a 401(k). It’s a rough estimate of taxes but you will owe somewhere around $90k to Uncle Sam for Federal and State (Oregon) income taxes. 

What if you only made $60k. You could still put away $18k in a 401(k) if employed or into a solo 401(k) if self-employed. That would leave you with only $42k of taxable wages. You could even contribute to a deductible IRA at that point and lower that income by another $5k. In the below calculation you can see that $42k of gross income would be taxed at around 25%, you would keep more than 75% of your money.


At this lower income other tax breaks suddenly become available to you which disappear for those who make above the cut-off (actually you get penalized with higher medicare taxes). For example, you can deduct your student loan interest payments at lower income levels. With a few more deductions from your gross income you may even qualify for lower health insurance premiums.

This strategy of lowering your income may not be a viable option if you have a ton of student loan debt left. But once you start making a significant dent in that debt and you stash $100-200k away you could take advantage of working less, keeping more of your income, still having your savings grow and getting tax breaks.

Imagine working just a few hours a month with a ton of free time. You could even continue to contribute $18k per year to your 401(k) while working in this fashion. With your $200k invested and paid off student loans you would have nearly $2 million after 25 years. And if you didn’t invest another nickel then you would have nearly $900k. Remember, money invested in broad index funds continues to grow and generally outpaces inflation over the long-run.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.