9 Ways to Start Tax Planning for Next Year

Today is Tax Day and if you’re like me, you may have just done your taxes and realized you owe money back (or perhaps your refund was less than you expected). While many people just accept their refunds or pay what they owe, be different. Start putting things in place now so you can lower your tax bill next year. In other words, don’t just focus on tax filing, focus on tax planning. Here are a few ideas below:

1. Max out pre-tax retirement accounts and Roth accounts

Let’s start by reducing your taxable income. One of the best ways to do that is to stuff money into pre-tax retirement accounts. This means using the 401K or 403b at your job or opening a solo401K if you are self-employed. Last year, you could stuff $20,500 into retirement accounts but this year (2023) the amount has increased to $22,500 per person. Along with using pre-tax retirement accounts to save money in taxes in the current year, you can also consider Roth accounts like a Roth IRA to save money in taxes in future years. For those like me who may not be able to contribute to a Roth IRA directly due to your income, contributing to a Roth IRA indirectly via the backdoor (by contributing to a traditional IRA and then converting that money to a Roth IRA) is another good option.

2. Stuff money into additional tax-advantaged accounts (457b)

Many physicians and governmental employees have additional pre-tax accounts open to them such as a 457b or deferred compensation plan. These plans are not retirement accounts, but they do allow you to contribute as much as $22,500 a year (in 2023) into them. The money you contribute is not taxed which can save you thousands of dollars in taxes the year you contribute to it. Just be sure to contact your human resources department to see if you have the plan and are eligible to use it. Also check out the 457b plan details and ensure your employer is stable.  

3. Consider the use of a Healthcare Savings Account or (healthcare) Flexible Spending Account

A Health Savings Account (HSA) is an investment account open to those who have a high-deductible health insurance plan. As of 2023, you can put up to $3850 if you are single or $7750 if you are married (or have family members on the account). The money you contribute is not taxed and you can then invest that money which will help it grow to an even larger amount over time. You can then remove the money out of this account tax-free if used for health expenses (in the current year or during any year in the future). For those who are not eligible for an HSA (because you have a different type of health insurance plan) you can usually use the healthcare flexible spending account. This is an account that allows you to put money away (pre-tax) that you plan to use on healthcare expenses throughout the year. Unlike an HAS, you cannot invest the money in the account and it must be used within a 12-to-15-month time frame, but if you know you will have healthcare expenses (from doctor visit copays, prescriptions, and procedures) using an FSA may be beneficial and save you money in taxes as well.

4. Use the Dependent Care FSA

If you are someone with children or other dependents like aging parents that you care for, consider using the dependent care FSA. This is an account you can stuff money into each year (tax free) that you can use to pay for dependent care expenses like daycare costs for your kids or nursing home costs for your parents. The max amount you can put into this account as of 2023 is $5000 for those who are married (or $2500 for those who are single or file their taxes separately). If you are a parent who is going to spend that money anyway, you might as well save a little bit in taxes to do so.

5. Take advantage of deductions like charitable giving and mortgage interest

If you are someone who has a home or likes to give to charity or churches each year, you may have other tax saving measures open to you. If the amount that you give each year and spend on mortgage interest (not the full mortgage payment but the amount that is used to pay interest) exceeds the standard tax deduction, then it may be in your best interest to itemize your taxes. When you itemize your taxes, you are able to take advantage of other deductions in the tax code (for charitable giving and mortgage interest payments) that could save you even more money in taxes. Ask your accountant to run the numbers and see if that makes sense for you.

6. Tax loss harvesting

If you are someone who invests a decent amount of money in taxable brokerage accounts (ie. If you invest money outside of retirement accounts) then you may be able to take advantage of other deductions. As we’ve seen over the past few years, the stock market does not always go up. Sometimes it goes down. When it goes down the value of some of your investments decreases. You may be able to sell some of those investments at a loss and then use that loss on your taxes to decrease the amount you owe. (You can then buy back a similar investment at a later date) Speak to your financial advisor to determine if you have enough money in brokerage accounts to tax loss harvest and whether or not it makes sense for you to sell some of those losses to offset your taxes.

7. Consider changing your business structure  

It’s 2023 and many more people have side businesses and hobbies that bring in extra income. Perhaps it is time for you to re-think your business structure because doing so may help you save money in taxes. Many people opt to make their business an LLC, but when it comes to taxes, you still have choices. You can choose for your business to be taxed as a sole proprietor (in which you will have to pay self-employment taxes) or….you can choose for your LLC business to be taxed as an S Corporation. Choosing to tax it as a sole proprietor requires less work but if you choose an S corporation then you may be able to save money in self-employment taxes which can amount to thousands of dollars per year. Speak to your business manager or tax professional to determine if you should reconsider your business structure and how it is taxed.

8. Get some 1099 income

If you aren’t someone who wants to start an entire business or hire a tax professional, perhaps you can still use some of your side income to your advantage. You don’t have to have an official LLC or a business corporation to take advantage of some of the benefits in the tax code. As long as you have some 1099 income you can start deducting expenses that are related to that income and you can even get an employment identification number to open up a solo401K (which is a retirement account for people with side income and businesses). Opening a solo401K will allow you to stuff even more money into retirement accounts. If you make a good deal of money, you can even open a “Megabackdoor Roth account” to stuff up to $66K into retirement accounts each year as of 2023.

9. Restructure compensation from your job

If you are someone who is employed and has no desire to start a business or get side income, there are some other things you can consider to lower your taxes. One idea is for you to think of other ways to get compensation from your job in ways that are taxed differently. For example, many doctors have money for Continuing Medical Education (CME) at their jobs which is fully reimbursable. Instead of increasing your salary, maybe you ask for more CME money and fewer restrictions on how it is used so you can get thousands of dollars each year tax free to spend on electronics and courses or conferences in exciting places? If your job has a retirement match, maybe you negotiate a higher retirement match instead of a bigger salary since the money your employer puts into retirement accounts is tax free?

Tell me, what changes do you plan to put in place this year to reduce your taxes? Have you tried any of the ideas above?

5 Things to Consider when Deciding to Invest vs Pay Down Debt (Part 2)

 When we talk about deciding to invest or pay down debt, many people have many different opinions. While some people will give you a definite answer telling you to do one thing over another, many others will give you an honest but unsatisfying answer of “it depends.” In order to make the best decision for you, here are 5 things to consider:

1.     Volatility. Although the market may have had averaged returns of 8 to 10% over the past 30 years, this does not mean your money will increase by 8-10% each year. Some years the returns will go up and some years the value of your investments will go down. Be sure that you’re aware of this fluctuation so you can prepare for it. Investing involves risk. The more risk averse you are, the more it may make sense for you to pay down debt.

2.     Inflation. As we’ve all witnessed over the last couple years, most things increase in cost from year to year. Although the standard degree of inflation is about 2-4% per year, there can be years and times (such as the present) in which goods and services increase by nearly 10% in a year. The higher the percentage of inflation, the lesser amount you keep as “real profits.” The purpose of investing is to grow your money, but if inflation is high, then the true value of your money decreases and your profits are worth less. Make smart investments and don’t forget to factor in inflation when you are estimating your investment returns and comparing it to paying down debt.

3.     Risk. While it is normal for the value of your investment to fluctuate from year to year, one thing many people don’t always plan for is the risk that they could lose all of their money. Although scary, this is a possibility. Someone could steal your investment, the company you invested in could go bankrupt, the bank could confiscate it, and the value of the business could fall to zero. Some investments make those unfortunate scenarios more likely than others. Be sure that you are considering this if you decide to prioritize investing. Get a true sense for how risky the investment is, realizing that some investments are secured and insured while others are not. Spreading your investment across multiple companies or stocks or real estate helps to mitigate this risk. If you decide to invest, determine how much risk you are willing to take.

4.     Incentives. One of the things that can easily sway your decision one way or another when deciding to invest or pay down debt are monetary incentives. If your job gives you a match” to invest money for retirement, then investing makes sense because it helps you take advantage of that incentive. On the other hand, if your largest form of debt is your student loans and you are in some sort of loan forgiveness program that will pay down your debt for you, then taking advantage of that program and providing the minimum debt payment needed in the interim likely makes the most sense. Take a look to see if you are incentivized to do one over the other.  

5.     Taxes. Although it is nice to invest money and make profits, don’t forget to consider taxes. Those in high-income professions, who are often paying higher shares of state, federal, and FICA taxes must consider this even more. Are there ways you can invest that reduce your taxes? Are there incentives in the tax code that allow you to write off certain debt payments? Which types of investments or debt repayments lower your taxes the most?

Don’t forget to consider these 5 factors when deciding to invest or pay down debt

Should You Invest or Pay Down Debt?

When it comes to the age-old question of invest vs debt, many people wonder what to do. Some say invest without looking back. They tout that if the compound interest you can gain by investing is larger than the interest rate on your debt, then it's a "no-brainer." Other people say pay down debt. They mention that a life of no debt is a life of freedom and paying it down gives you a guaranteed return, free from risk. But is it really so black and white? How can two seemingly smart camps of people come to such vastly different conclusions?

When it comes to investing or paying down debt, the right answer depends on a unique set of circumstances and facts that can be ever changing in our lives. Yes, they include math. But they also vary based on our risk tolerance and individual values. Let's take a deep dive and examine this further.

Benefits of Investing

Investing has several benefits. For starters, it allows you to put your money in a position to grow and make a profit. Most people don’t build wealth or even acquire the funds needed to meet their financial goals by just saving. They are usually able to meet these goals investing, whether that’s in the stock market or in real estate or in some other lucrative business venture. The younger you are, the more likely investing will work out in your favor because you have more time for compound interest to turn your investing yield into even greater returns. Although nothing in life is guaranteed, and some investments can fluctuate in value from year-to-year, investing money allows your money to grow and can help you reach your financial goals sooner.

Benefits of paying down debt

Investing has benefits but so does paying down debt. For starters, paying down debt gives you a guaranteed return. Unlike investments that can decrease in value during market downturns, paying down provides certainty. It’s a surefire way to enhance your net worth. Not only does it decrease your liability, but it also helps to free up your cash flow. By getting rid of those monthly debt payments you will have fewer fixed expenses/bills and more money to spend on other things. In addition to more cash flow, paying down debt provides another benefit that can’t be quantified: financial freedom. There is no doubt that people, especially high-income earners, who are debt free, feel psychological freedom. They can leave jobs they don’t like without worrying about how they will repay their student loans. They can take guilt-free vacations and enjoy more of life's pleasures. People may lament certain investments that don’t pan out but very few people regret paying off debt.

So what should you do?

Should you aim for the growth and the magic of compound interest by investing? Or, should you free up your cash flow and get a guaranteed return by paying off debt?

It depends.

If you get a great investment return (like a retirement match at your job) then investing likely makes the most sense. If you have high-interest debt from a credit card or personal loan, then paying down that debt likely makes the most sense.

If you’re in between or neither scenario applies to you: Let the interest rate be your guide and if all else fails, split the difference.

If the interest rate on your debt is higher than the estimated, inflation-adjusted returns you expect from your investments then it likely makes more sense to invest. How do you make this comparison? Take the estimated return you expect to get from your investment, subtract out inflation, and compare your new inflation-adjusted return on investment to paying down debt. If the estimated return you get on your investment is still greater than what you would get on your debt then invest. If the estimated return you get on your investment is less than the interest rate on your debt then pay down the debt. If the returns are about the same or you are unsure which one is better, then do both. Use a portion of your income to pay down debt and another portion to invest. How much you allot to each category largely depends on your risk tolerance, personal goals, and overall financial plan. 50/50 is a good place to start. 

Student Loan Changes For Doctors

On Wednesday, August 23, 2022 President Biden announced a new federal student loan relief plan. Altogether, there are 4 big changes that may affect physicians and other young professionals with federal student loan debt:
 
1. Student Loan Forgiveness. Many people on the far left lobbied the President to forgive up to $50,000 in student loans. They cited evidence that college tuition has skyrocketed in recent years and stated that many of the people who took out loans in undergrad did not fully understand the repercussions of taking out such large debt burdens at a young age. Many teenagers were led to believe that the salary they would make after graduating college would make up for the amount they took out in student loans, which has not been true. However, several people on the far right disagreed. They did not want President Biden to forgive any amount of student loans. They feared that wide-spread forgiveness would worsen inflation and benefit college educated individuals who already make a high income. The President compromised and landed somewhere in the middle.
 
His new plan approves $10,000 in loan forgiveness for individuals making $125,000 or less (and couples with a combined income of $250,000 or less) using 2020 or 2021 tax returns. Individuals who went to college on a Pell Grant (and also make $125,000 or less) will qualify for up to $20,000 in forgiveness. The Biden Administration’s goal is to give added relief to Pell Grant recipients who come from disadvantaged backgrounds. The income cap of $125,000 is in place to ensure that upper class Americans aren’t getting debt relief they may not need.
 
This means that most residents and fellows will qualify for forgiveness. It also means that some attending physicians in lower paid specialties and doctors working part time will qualify. Because this income cap is based on adjusted gross income, not salary, doctors who put lots of money into pre-tax retirement accounts may be able to qualify for forgiveness as well.  
 
This student loan forgiveness plan also states that those who have student loan balances of $12,000 or less when they graduated from undergrad will now have the balance automatically forgiven after they make 10 years of payments (although I doubt this will apply to most doctors)
 
2. Extending the Pause on Student Loan Payments. Many people with federal loans haven’t had to pay on their loans in over 2 years. At some point, those payments would need to be restarted. Unfortunately, many people have gotten so used to not making payments on their student loans that restarting them would be a burden. But it is not just the borrowers that would have difficulty restarting payments. Loan servicers were having issues with administration. By law, your loan servicer would need to warn you months in advance of any payment due and they hadn’t yet started contacting borrowers. Plus, large federal loan servicers like Fedloans were in the middle of switching borrowers to new loan servicers like MOHELA. Long story short, the system was not prepared to start the payments in September and with midterm elections on the horizon, it wasn’t politically favorable to start the payments in the fall either. As a result, the payment pause has been extended. Payments will continue to be paused until December 31st 2022. Federal student loan payments will resume in January of 2023.
 
3. Changing The Way IDR Payments Are Calculated. As it currently stands, income driven repayments (IDR) are when you make student loan payments based on your income (instead of making payments based on the total amount of debt you owe). The thought is that basing the payments on your income will make the payments more affordable for low-income and middle class Americans who have high debt burdens and modest salaries. The amount you pay under these income driven repayment plans ranges from 10% of your discretionary income to 20% of your discretionary income depending on the plan. President Biden’s new student loan plan would change that.
 
The Biden administration has pitched a new income driven repayment plan. With this new plan, those who have student loans from undergrad will have their payments capped at 5% of their discretionary income (instead of 10% of their discretionary income). This will effectively cut their monthly payments in half. Plus, the administration will change what is considered “discretionary income.” Previously, your discretionary income was your Adjusted gross income (the amount of money you pay taxes on) minus the 150% of the poverty line for your state and family size. Now it will change. According to the website, “no borrower earning under 225% of the federal poverty level (which is about $15/hour or less) will have to make a monthly payment. In other words, the amount that is considered “discretionary income” will be changed in a way that benefits the borrower and requires them to pay less money per month. People who make around $15/hour might not have to pay anything at all.
 
4. Preventing Your Student Loan Balance From Growing. Another feature of the new student loan repayment plan mentioned in the proposal is that student loan balances will not grow from year-to-year while in repayment. This is likely the most meaningful change for doctors and young professionals because one of the biggest complaints about student loans has been the high interest rate. It is discouraging to have to take out six-figure student loan debt in medical school and then have the balance grow while you were in training as a resident and fellow. Under the proposed new student loan repayment plan, this will never happen again.

The current proposal is for the government to have a new income driven plan that will automatically forgive the unpaid interest on your student loans (think of it like the REPAYE plan, but better). This means if you are in-training as a physician and you have $250,000 in student loans with an interest rate of 5% on your loans. Your balance will never grow to be more than $250,000. Why? Because the government will pay the unpaid interest. What do we mean by “unpaid interest?” Let me give you an example.
 
If you have $250,000 in student loans with an interest rate of 5% and your income driven repayment amount as a resident is $200 a month then your monthly payments (of $200x12 months) will not even cover the interest that is accruing on your loans. This means that even if you make your payments on time, your student loan balance will grow from year-to-year. With this new student loan repayment plan the government will forgive all that unpaid interest which will prevent your balance from growing year-to-year. Not having your student loan balance grow while you’re in training will save lots of docs tens of thousands of dollars in interest payments. (And basically eliminates the need for any trainee to refinance their loans) This is HUGE.
 
While I’m excited about the changes there are still a few questions and details we need to explore such as:

• How to handle people with undergrad and grad school loans. With the new changes, people with loans from undergrad only pay 5% of their discretionary income. But what will happen to people who have loans from undergrad and grad school? Will they pay 5% or 10%? Will it be a weighted average?

• The overall structure of this new IDR plan. Will high earners be able to make payments based off of the 10-year standard repayment plan? Will married couples be able to exclude their spouses income? Will they remove interest retroactively or just going forward? This all remains to be seen.

 
While there are many questions left to be answered, these changes are considered a step forward in the right direction. Another change would potentially be to put some sort of cap on tuition rates or make college more affordable. You can stay up to date on all the changes by clicking here: https://studentaid.gov/debt-relief-announcement/.

What are I-bonds and are they worth the hype?

Every other month there seems to be a hot topic in the finance space. Some months the story is about cryptocurrency. Bitcoin mining is setting the world ablaze and Dogecoin has gone to the moon (and back). Other months it’s all about stocks. Tesla is undergoing stock splits. Amazon is crushing small competitors, and Walmart is taking over healthcare. Sometimes we can’t get enough of real estate as we hear stories of folks using cash to pay above-asking price for average homes or scroll down our newsfeeds of targeted marketing for overpriced real estate courses. The recent weeks are no different. Only the craze isn’t crypto or individual stocks or real estate, it’s bonds. Yep, you heard that right, bonds. More specifically I-bonds. Let me clarify some half-truths and dispel some myths.

What are I-bonds?

Generally speaking, bonds are a type of asset. You loan money to an organization, company, or in this case the federal government and they pay you back the money with interest. They promise to give you back the money with interest by issuing you a promissory note called a bond. There are different types of bonds and each one has a slightly different structure. I-bonds are “inflation-protected bonds", which is one of the many different types of bonds a person can purchase.

How do I-bonds work?

You pay for the bond (through the treasury website). Each person can buy a maximum of $10,000 worth of bonds each year. The interest rate that you make on the bonds is based on two factors: a fixed rate and a variable rate. The fixed rate is pre-set and based on market terms. Currently it’s 0%, which is about the norm. The variable rate is based on inflation and changes every 6 months. Currently, its around 9% per year. (A person would earn half of that amount for 6 months and then the rate would be changed once more if inflation changes during the next 6 months).

Why do people want them?

Because they think they can make a lot of money. Because I bonds or inflation protected bonds are based on the inflation, the rate of return on these I bonds seems extremely attractive. As of early May of 2022, the stock market is down, the price of real estate has skyrocketed, cryptocurrency is volatile, and cash is losing value. Having an investment like I-bonds that provides you with a guaranteed interest rate over 9% (at least for the next 6 months) seems like a good deal and much better than other investment choices at the moment.

What’s the catch?

Although I-bonds protect against inflation and provide a guaranteed interest rate the real rate of return on your money is actually zero, or negative. Let me explain. Because the fixed rate of I-bonds is zero and the variable rate is set to inflation (currently around 9%) you haven’t made any true gains. If inflation has gone up by 9% and the value of your bond has gone up 9% then then your true gain is actually zero because your purchasing power is still the same. Stated differently, If you invested $1,000 in I-bonds, with a guaranteed inflation protected rate of 9%, the value of your money is now $1090. However, if the price of monthly groceries for your home also went up by 9% from $1000 to $1090 then you haven’t really gained anything. The price of goods and services went up at the exact rate your bond went up so your net gain was zero. You don't make money by just seeing an asset go up in value. You make money by increasing your purchasing power to outpace inflation. If all you do is simply break even with inflation each year then you haven’t really gained as much as you might have thought.

Are there any other downsides?

Yes. There are taxes and liquidity issues. Per the rules of governmental I-bonds, you must hold the bond for at least 1 year. This means if an emergency comes up, you cannot liquidate or sell your bond to get your money back. You have to keep the money there for at least 1 year. Secondly, if you take out your money in less than 5 years you forfeit 3 months of interest on your money. This means if you cash out the bonds in less than 5 years you lose some of the profit you made. Lastly, you must pay federal taxes on the interest gains (unless you use the money for college expenses or hold it for at least 30 years). So if your money was keeping up with inflation, but then you have to pay federal taxes on your profit, you’ve actually gained less than inflation, putting your real buying power in the negative.

Should you buy them?

It depends. It’s not like I-bonds are all bad. As we mentioned above, they keep up with inflation. So at a time where stocks are down, real estate is too high, and cash in a savings account is losing value, I-bonds can be beneficial. Although your real return is zero, your return is even more negative in other alternatives. For example if inflation is at 9% and your savings account is only giving you a return of 0.01% then the value of your money is losing value drastically day-by-day. I bonds can be a good way to protect some of your purchasing power or at least prevent you from losing so much of it in cash.

Some people think they could come out ahead by buying I-bonds during stock market dips then selling them and buying stocks when the market recovers. That strategy is flawed because it requires you to be able to predict the future and of course none of us have a crystal ball. Trying to predict the future by timing the market is a recipe for disaster. If you have large sums of money in cash or have transitioned from the wealth building stage of your life to the wealth preserving stage of your life, then I-bonds can be a great idea in today’s times. Just make sure you go into them with your eyes wide open and fully understand the value. If you are someone who is saving up for a large purchase like a home downpayment, a future car, or to buy into a practice or new business then I-bonds can be a great investment.

(Of note, I recorded a podcast episode on this topic at the Physician Philosopher with Dr. Jimmy Turner that you can find here)

7 Tax Tips to Keep in Mind

One of our largest expenses each year is the amount we pay in taxes. Although we should all contribute to various government programs and priorities, it behooves us not to pay more than we need to. Here are some tax tips to keep in mind:

1. Contributions to retirement accounts lower your taxes. As a young professional, you have many uses for your money. Perhaps you want to go on vacation, drive a nice car, or maybe just need to keep up with rising housing costs. Regardless of the expense, it is important that you not lose sight of the bigger picture. Many of you would like to build wealth or at least become more financially stable. One way to do that is to invest money on a consistent basis. Ironically enough, investing money through retirement accounts not only helps build your net worth, but it also helps lower your taxes. When it comes to tax lowering strategies, investing through retirement accounts is a no-brainer.

2. Remember that every dollar is not taxed the same. I’m constantly reminded of this whenever I’m contemplating a new side hustle or business partnership. The tax code is progressive. This means that lower amounts of money are taxed at lower rates than higher amounts of money. As soon as you reach certain thresholds you could jump from one tax bracket to another resulting in a higher tax bill. This is important to keep in mind as you continue to progress in your career. Chances are that you will make increasing amounts of money as you continue to work, so understanding the tax implications is vital. If someone is in the 24% tax bracket, then they will only get to keep about 76cents of each dollar they earn (and this doesn’t account for state and FICA taxes). I’m not saying earn less, but don’t forget that the more you earn, the more you will owe in taxes, so plan accordingly

3. Don’t forget to account for FICA taxes. For some reason, when I think of taxes, I think of my federal tax rate. Oftentimes I forget about another high tax: FICA taxes. FICA is the Federal Insurance Contributions Act that mandates workers contribute to Social Security and Medicare. If you are employed, then your employer deducts these taxes from your paycheck. However, if you’re self-employed or own a small business like I do, then this tax becomes a lot more noticeable. Those who own a small business or who turned their side hustle into an LLC are now responsible for paying taxes on the money they earn. In addition to paying federal and perhaps state taxes on the profits, they must also pay these FICA taxes. As a self-employed person, you have to pay the employee half of FICA taxes and the employer half of these taxes. This amounts to an extra 15% in taxes you must pay, on top of your normal federal and state taxes. You may want to consult with a tax attorney or accountant for the best strategy when your business becomes profitable.

4. If you’re single and childless, you’ll likely pay more in taxes. I’m reminded of this fact every year around tax time. Many of my friends from high school who have kids are usually excited to be getting money back from their taxes. Meanwhile, I file my taxes and just hope I don’t owe anything. Why is it that my friends are getting money back and I’m not? Could be due to a variety of reasons, but there are a couple things to note: 1) single people have higher tax rates than people who are married and file their taxes jointly and 2) people who have children get more tax credits and tax deductions than people who don’t have kids. I’m not saying get married and have kids to lower taxes. This is just some insight as to why some folks may owe more or less in taxes than others.

5. You must pay taxes on business profits. Many people are entrepreneurial and have dreams of building a business they can call their own. While there is nothing wrong with this aspiration, don’t forget about one of the responsibilities of owning a business: added taxes. As a business owner, you must pay taxes on profits you make. This means you have to keep good records of business revenue and business expenses so you can determine the business profit amount to pay taxes on. Since you don’t have to pay taxes on business expenses, be sure to keep receipts of business purchases you make. Failing to do so could result in higher taxes.

6. You may be able to write off some educational expenses. This was a pleasant surprise to me the year I graduated medical school. I was able to get a noticeable sum back on my taxes that year by accounting for my time in school. The IRS has a tax credit called the “lifetime learning credit” worth up to $2000. If you’re someone who paid for some sort of schooling in 2021, you can take advantage of this credit. Those who were still in undergrad may be eligible for a different credit that results in even more money. Simply ask your school for “From 1040” so that you can enter the necessary information to get the credit.

7. You can deduct some of your charitable donations. Many people give a portion of their earned income away. Some people do it at their church and give 10% of their income as tithes. Other people give to certain non-profits or noteworthy causes throughout the year. If you do something like this as well, keep in mind that you may be able to deduct this expense. Everyone can deduct at least $300 of charitable donations. Depending on your tax bracket and the way you file your taxes, you may be able to deduct even more.

I am not a tax lawyer or accountant. However, each year I continue working in my career and building my side business, I learn even more about ways to be more efficient with my money. This includes profitable tax strategies.

What tax strategies have you learned this year?

5 Things to Know about the Sign-on Bonus

When it comes to physician pay, things can get a little nuanced. Many of us take out hundreds of thousands of dollars in student loans for med school, then spend 3 to 9 years getting additional training while being paid much less than we are worth. But after that time period, usually when we are in our 30s, things finally start to improve. We become “attending physicians” which means we are able to work fewer hours and enjoy a drastic increase in pay. As part of the compensation package, many of us will receive lucrative salary offers which include a sign-on bonus. Similar to professional athletes who sign new contracts, the physician sign-on bonus is an amount of money we receive, in addition to our salary, for agreeing to work for an employer for a certain length of time. This sign-on bonus can be a great addition to our wallet, but there are a few nuances we all should be aware of.

1. The amount varies based on specialty. Although most doctors get one, the amount we each receive can vary greatly. Doctors who work in primary care tend to get a lot less than doctors who specialize or perform more procedures. Doctors in private practice may get a lot more than others who are employed by academic centers. A report released by a consulting firm in 2021 showed that some doctors got a sign-on bonus of only $1,000 while others got $75,000.[1] Regardless of how much you are initially given, it is important to ask for more. Oftentimes, this is one of the things that employers will be willing to increase if you ask. The amount may vary from person to person but most employers are willing to increase the amount if you ask.

2. The amount you received is taxed (so you get less than you think). Many doctors see the sign-on bonus amount in the offer letter and think that is how much they will receive in their bank account. Unfortunately, the amount that is given to you is less than the amount on the contract. Why? Taxes. You have to pay taxes on this money and it is usually taxed at your ordinary income tax rate. If you are in the 35% tax bracket, then you’ll have to pay 35% in taxes. If you are in the 24% tax bracket, then you will have to pay 24% of it in taxes. In addition to federal taxes, many doctors will have to pay state taxes on the money as well. My point? Before you start thinking of all the ways you will spend your sign-on bonus, make sure you account for taxes. Also note, that the amount you pay in taxes depends on your tax bracket for the year (so the best time to receive the money is usually in the year you are in the lowest tax bracket).

3. There’s a chance you may have to pay it back. This usually comes as a surprise to many doctors, but it happens much more than you may think. Oftentimes when employers give you a sign-on bonus, it is not just free money for you to keep. Instead, it is often structured as a “forgivable loan.” This means that you get the money as a loan, and if you stay at the company for a certain length of time, usually 2 or 3 years, then the loan is forgiven and you get to keep all the money. However, if you leave the job prior to that set time period, then you have to pay the money back. The unfortunate thing about having to pay the money back is that they usually make you pay back the pre-tax amount. If your sign on bonus was $10,000, chances are you may have only gotten $7,500 after taxes, but if you leave before that set time period you will have to pay back the full 10,000 (the pre-tax amount).

4. You should negotiate how it is structured. To avoid having to repay the full pretax amount of your sign-on bonus if you leave before the stipulated time, negotiate how it is structured. Instead of having the full amount forgiven after 2 or 3 years, get a fixed amount forgiven each month that you are there. For example, if your sign on bonus states you have to stay at the job for 2 years to keep the money (or have the loan forgiven) then negotiate in the contract that 1/24 is forgiven each month. That way if you stay for 1.5 years you aren’t on the hook for the entire amount.

5. People receive it in different ways. To my surprise, there’s a good deal of variability in when a doctor actually receives his or her sign-on bonus. Some docs receive the full amount the day they sign the contract. Other doctors don’t receive the money until the first day they work. Some employers will split it up and give you half the first year and half the second year. There are others who will give you a small portion of it as a residency stipend to help supplement your income while you are still in training. My point? The timing on when you receive the sign-on bonus can vary greatly. Be sure you understand how yours works and negotiate a different structure if you’d prefer to get it sooner or later.

To summarize, there are quite a few nuances involved with physician sign-on bonuses. Make sure you understand how yours work and negotiate a different structure if you desire.

The Dilemma of Emergency Funds - and how to solve it

I don’t think anyone can deny that emergency funds are beneficial. If an unexpected expense occurs or heaven-forbid you lose your job, having money available to use is extremely valuable. But for many folks, especially those who are younger, building an emergency fund, one with 3 to 6 months of expenses, can take many months or even a full year to obtain. The time it takes to save up for an emergency fund has a hidden cost.

Money you set aside in a savings account (to build an emergency fund) is losing value day-by-day in a savings account (due to inflation) and it also isn’t growing (because it isn’t being invested). The opportunity cost or hidden cost of building an emergency fund is the difference between the value of the money you have in the emergency fund and the value of what you could have had if you had invested that money in the market instead. Stated differently, stacking money in an emergency fund means there is less money you can use to invest in the market. Although there is no guarantee that money you invest in the market will increase in value, on average, the market tends to go up over time and money invested in index mutual funds (groups of stocks) tends to increase in value over the course of each year. My point? Maybe you would have been better off investing your money instead of stacking it in a savings account to build an emergency fund...

As if this wasn’t enough, it seems the timing of building an emergency fund is off. When we are younger in our careers with lower income and a big need for an emergency fund, it’s harder to save up for one and the opportunity cost of saving this money, instead of investing it, is quite high. However, when we are older in our careers with a higher income, it is much easier to save money for an emergency fund, but the emergency fund is not as crucial (because we are more financially stable and more likely to be able to cover the cost of an unexpected expense with money from our paycheck or money we already have invested in the market). What does this mean? Emergency funds are most useful at the time in our lives they are the hardest to get and less useful when we are better able to afford them.

So what is one to do?

When we need an emergency fund the most, it’s hardest to get. When we need it least, it’s easier to have. It is because of this dilemma that many folks have begun to question the traditional cash emergency fund. Perhaps opening a HELOC (home equity line of credit) from your mortgage makes more sense. Other people state if you can get a zero-interest credit card then what’s the problem?.Or, maybe it just makes sense to invest that money?

When it comes to pure math, many of these ideas make sense. The problem is that when it comes to personal finance a lot of it hinges on our individual behavior not our ability to do math.

Zero interest credit cards give us the ability to quickly purchase things we desire. Although it can be good for emergencies, many people end up using these cards even when they don’t have emergencies. They spend a lot more money than they would have if the money were being taken directly from their checking account or emergency fund. My point? Credit cards make it too easy to spend money we don’t have on things we don’t need. Most of us need less temptation, not more.

Opening a HELOC from your mortgage can be a great option but since many young professionals are just starting out in their careers, they may not even have a mortgage yet. If they do have one, they may not have much equity available to use. Plus, I personally don’t like the idea of putting my house at risk for an unexpected expense I could have planned for in advance (via a cash emergency fund).

Investing the money in taxable accounts via apps like Robinhood gives you the chance to allow your money to grow. However, if an emergency does arise, you’d have to sell your stock in order to use the money and selling the stock creates a taxable event which decreases your profit. Plus, it may take a few days to sell your stock and have the cash deposited in your account.

A Roth IRA seems to give you the best of both worlds. It allows you to invest money and take out your contributions at any time (while leaving your profits in the account) but it isn’t perfect. There is still a chance the market could experience a downturn and if that happens during the time you need your money for an emergency, then there is a chance that you may not have the amount of money you need when an emergency arises. My point? If you invest the money you take a risk that the money could go down in value and having less money available when you need it most is not ideal.

So how do you handle the dilemma of emergency funds?

Should you prioritize saving money in cash or just invest money in the market? The right answer for you depends on a lot of factors like your household income, job stability, monthly expenses, and net worth. If you’re wondering what I, as a senior family medicine resident, heading to fellowship next year, do…I do both.

I keep about $1000 to $2,000 in a savings account, save about $200 a month for large expenses like a vacation or Christmas gifts, then have the rest of my emergency fund money invested in index mutual funds in the market. Most of the money is in a Roth IRA but I do have some money in a taxable account (that I got as stock options from a previous company as a part of their compensation package). I also invest a portion of my income in my work retirement account. I’m pretty risk averse, so once I become an attending physician (and experience an income boost), I do plan to have 3 to 6 months of expenses in cash. My point? The right answer on what to do with an emergency fund may differ for each person, but having a little extra in cash, especially as a resident or person making the median income, is helpful. Just don’t forget to invest a little along the way.

Tell me, what do you think? What are your feelings about emergency funds? Do you have one? How much have you saved? Where is the money located? Have you decided to invest as you save (via a Roth IRA)?