By Dr. James M. Dahle, WCI Founder
I finished my taxes for the year. It seems I become “less successful” at keeping my taxes low each year. It's true what they say- the only thing worse than paying taxes is not having to pay taxes. Last year I was able to brag that I paid taxes at a lower rate than Mitt Romney. Unfortunately, that's no longer true (unless something has changed in Mitt's tax situation.)
2013 was my first year at “peak earnings” as an attending. I made partner midway through 2012, which comes with a significant raise. It also means this is the first year where I have paid all of my own payroll tax for the whole year. That's painful, especially when combined with the new Obamacare Taxes. I know there have been so many tax increases in the last four years or so that it is hard to keep track of them all. I found the two Obamacare taxes to be especially painful, once I finally realized how they are assessed. Like most years, I have to learn a new schedule or two, and this year it was Forms 8959 and 8960. But before we get to the Obamacare taxes, let's do a report on my taxes for the year.
The Damage
Last year I paid 9% in Federal, 3.6% in Payroll (Social Security and Medicare), and 2.9% in State Income Taxes for 15.5% total. This year, thanks to a higher income, I did a lot worse. I paid 12% in Federal Income Tax, 6.4% in Payroll Taxes (for an additional challenge, you can figure out my my gross income using nothing but that figure), and 3.4% in State Income Tax for a grand total of 21.8%. Ouch. That's over 6% more than last year, a lot of which is payroll tax. Thanks to our progressive tax code, my income was 45% higher, but my total tax burden was 70% higher than in 2012. Yea, it's a first world problem, but it's still painful to write tax checks for amounts similar to your entire income as a resident.
The Deductions
I managed to deduct quite a bit of money. The most valuable deductions, of course, are business expenses like malpractice insurance, CME costs, and the costs of running The White Coat Investor, LLC. You don't have to pay any payroll tax (or any of the additional Obamacare taxes) on those. I'm not going to count those, however, since almost all of them truly are business expenses I wouldn't otherwise have without a business. I was able to deduct 29% of my income in “above the line deductions” and another 16% in itemized deductions and exemptions. Thus my taxable income was 55% of my income net of business expenses. My biggest deductions were retirement contributions, charitable contributions, self-employment taxes, mortgage interest, health insurance, HSA contributions, property taxes, and state income taxes. The state income tax deduction would have been higher, except this year I realized that Utah doesn't require quarterly estimated payments, so I actually paid my entire 2013 state income tax bill in April 2014. I'll get that deduction next year.
The New Obamacare Taxes
Many of you may not understand how the two new “Obamacare taxes” work. If your total income (1040 line 22) is less than $200K ($250K married), you don't have to pay them. For some reason I was under the impression that your taxable income (1040 line 43) had to be over $250K married. Since mine was well below that, I thought I would be exempt. Not so. There are really two Obamacare taxes, one of which is an additional Medicare tax and one of which is an additional dividend/capital gains tax. The first, and easiest to understand, is the 0.9% on all income over $200K. It is calculated on IRS Form 8959 “Additional Medicare Tax.” Basically, take your total income (1040 line 22) and subtract $200K and multiply the result by 0.9% to get your “Additional Medicare Tax. It's slightly more complicated if you're self-employed (you get to exclude half of the self-employment tax from income), but essentially the same thing. That cost me a little over $1000 this year. That's not too bad, unless you also add in the 30% jump in health insurance premiums I saw thanks to PPACA requirements.
The other “Obamacare Tax” is the 3.8% assessed on all investment income for those with a Modified Adjusted Gross Income (MAGI) above $200K ($250K married.) Now, my MAGI is much less than my total income (you get to subtract some of my largest deductions like retirement contributions, health insurance, and HSA contributions from your total income to get your MAGI) but unfortunately (or perhaps fortunately), my MAGI is still more than $250K, so I have to pay this tax. This is done on Form 8960 “Net Investment Income Tax.” Basically, I get to take all my investment income (interest, dividends, capital gains) and multiply it by 3.8%. That cost me another couple hundred bucks. Luckily, I invest in a very tax efficient manner. The only reason I ended up paying much at all was simply due to some windfalls-one from my old malpractice insurer and the interest from the money my residency program withheld inappropriately for payroll taxes for a couple of years. This tax is one more reason to moderately to highly paid doctors to invest very tax-efficiently in their taxable account, especially combined with the increase in qualified dividend/long-term capital gains rates from 15% to 20% for those in the very top bracket. Instead of the capital gains brackets being 0% and 15%, they're now 0%, 15%, 18.8%, and 23.8%.
Another Painful Discovery
I also discovered that my rental property in Virginia requires me to pay Virginia state taxes on that income. I get to deduct what I pay on my Utah state taxes, so that isn't so bad. But having to deal with the Virginia state tax forms again is a huge pain compared to Utah's very simple layout. I ended up paying Turbotax $45 so that I could pay Virginia $18. Yet another reason not to be an absentee landlord.
Another tax year is come and gone. Money made, taxes paid, and lessons learned. Income is always good, but it certainly becomes less good as it gets larger! What did you learn while doing your taxes this year? Comment below!



I saw a big jump in income (but relatively paltry compared to yours) as a family doctor no longer in the military. My tax bill jumped from 9% to 13%. Unfortunately I don’t have huge deductions as of yet. Maybe next year.
I once had a friend tell me his dream was to pay $1,000,000 in taxes. I think that wouldn’t be so bad either given the implications.
Would you mind elaborating (or directing me to a previous post if there is one) on your being reimbursed “interest from the money my residency program withheld inappropriately for payroll taxes for a couple of years.” I heard that this was an undecided policy question while I was in residency, but I never heard the resolution. How can I go about recouping not only the interest but the payroll taxes I paid too?
You can google FICA Resident Refund. But I’ll save you time: if you haven’t already filled out paperwork for the reimbursement (several years ago) there is nothing you can do. Sorry to be the bearer of bad news.
Your residency program had to apply to get it, at a time when it wasn’t clear that it was ever going to come. I didn’t get it for all 3 years of my residency because the GME office didn’t do the paperwork. If you haven’t heard from them, you’re probably out of luck, but call your residency to find out.
The conspiracy theorist in me wants to believe the IRS delayed making these payments until 2013 so they could collect the additional 3.8% tax. Between my wife and I, that cost us over $800!
I’m estimating your gross was just under 380K based off your payroll taxes. If I remember correctly you have not formed a corporation yet so everything passes through the SS and FICA, correct?
I knew someone would take that up as a personal challenge.
Glad Richard did…I was going to but instead I will just assume he is right and move on with my life 😉
You can also make an estimate based on just the Medicare “extra” he paid, although “just over $1000” isn’t very precise.
Quick and dirty back of napkin estimate 365,000
You said the new Obama taxes capital gains/qualified dividend tax rates are “0%, 15%, 18.8%, and 23.8%”, but since this income shows up on 1040 line 22, isn’t this income also subject to the 0.9% Medicare surtax (in addition to the 3.8%)? 0, 15, 19.7, 24.7%? Or is this income adjusted out of the 0.9% calculation?
No, I believe it’s included. I guess I should have added it in.
The 0.9% tax is only on earned income, not on unearned.
Cool beans. Not sure I caught that.
I’m not surprised you paid 22% this year in taxes…..Seems about right given what I know and the fact you keep this site going which helps you significantly…..However, I am still shocked and confused as to how you limited last years to 15.5%, well done sir!
Should have seen the year before, and the year before that, especially the year I was deployed. I paid almost nothing in the military on 6 figures of income.
Can you give us a breakdown of how you did that those years (I’m assuming less awkward than showing current numbers, and anyhow pre-peak earning will be more helpful for the young attending).
Also, an idea for a post: what to do last year of residency/first year as attending to maximize tax situation.
Good idea on the post. I’ve done similar things before (i.e. what residents should do, what new attendings should do), but without the tax focus.
The main thing I did the other years was make less money.
While in the military, I paid no state income tax and a good chunk of my pay (BAH, BAS, and most of my income while deployed) was completely tax free.
I have always maxed out all available tax-deferred accounts (unless it was going into Roth). I give a good chunk to charity, I’ve owned my home since the end of residency, and I’m married with children. I keep track of the little things (like charitable and business mileage) but that’s not where most of my tax breaks come from. It’s the big things that matter most.
I think there is something is not right in the way you calculated Additional Medicare Tax. If you are MARRIED and filling out JOINT tax return, you have to take your total income (1040 line 22) and subtract $250K, not $200K (and multiply the result by 0.9%) to get your “Additional Medicare Tax.”
That’s how it worked on my 2013 tax return.
You’re right it’s $200K single and $250K married.
If your rental real estate was in Texas, then you would not have had an extra state tax form to fill out.
Darn right. Remember, of course, that like that of many others who had to move in 2009-2011, this property wasn’t bought as an investment!
Also the 3.8% tax becomes a non-issue when your K1 shows a loss despite the positive cash-flow you collected.
Hello White Coat,
Great blog post! Your financial transparency is half of what makes your site helpful and fun. Using http://www.taxpolicycenter.org/taxfacts/payroll-tax-calculator.cfm for 6.2% payroll taxes, it looks like thanks to your extra windfalls this year you earned about $450,000 in 2013 wages. So, did I win the payroll challenge? 🙂
Maybe someone more adept with financial algebra can demonstrate how this could have been computed by hand? Would love to see the arithmetic at work.
You’re definitely on the high side. The other guessers were in the ballpark though.
If the contest is over… 🙂
What algebraic expression would solve for wages?
I got started with [(.062)*X ] + (.062+.009)(1-X) = 0.064
but this X figure, on the other hand, is too low… how would you set it up?
Using real data and computations like your =PV & =XIRR calculations in previous posts takes definitely takes the White Coat Investor website to the next level in personal finance blogs.
Well done Sir. Quick question. You said you were able to deduct 29% of your income in “above the line deductions”. What are those items?
HSA contributions, health insurance premiums, self-employment tax, and mostly retirement account contributions.
Just nabbed my first attending paycheck and would love to run a couple questions past yall
1) I’m stuck in the fortunate/unfortunate position of being well-paid but as a W2. My marginal rate is 39.6% and since I am not allowed to participate in the company 401k until next year, I’ve calculated my effective rate to be roughly 30%. The company currently withholds about 28.5% for me. Should I adjust that or just pay the difference come tax season? Not sure how many deductions I can actually claim as an employee but perhaps those will cover the difference? Or even net me a refund if I’m particularly aggressive with deductions?
2) I read off the IRS website that SS rates (for employees) are at 6.2% with a wage base limit of 117k. It looks like I’m getting exactly 6.2% withheld from my paycheck. Should I expect to see that number zero once I’ve earned 117k or will I need to specifically reach out to HR to enact this change?
3) I read off the IRS website that Medicare rates (for employees) are at 1.45% with no wage base limit. In addition, there is an addition 0.9% withholding after 200k. It looks like I’m getting exactly 1.45% withheld from my paycheck. Should I expect to see that number rise to 2.35% once I’ve earned 200k or will I need to specifically reach out to HR to enact this change?
Thanks again for all your help and this blog! Really incredibly helpful and I wish I would have taken the time to read it earlier as a resident to jump on more of the advice. I probably should have had a more solid grasp of the tax code even as a resident but this stuff really just slaps you in the face when playing with attending numbers!
-Darren
Congratulations on your new found financial status.
1) Nobody knows without more info. Keep a little extra cash around just in case you owe a bunch come April. You won’t have penalties since you should be safe-harbored, but you’ll still have to pay the tax.
2) Yes. It should automatically go to zero.
3) Yes. It should automatically increase. HR should know how to do that. That said, watch your paystubs and make sure it happens.
Hello
Question about MAGI
If I had an LLC and put my disablity, health insurance, long term care insurance under the LLC (kept it open) are all those tax deductible and not considered part of MAGI? I am looking at this from the standpoint of ObamaCare or healthcare.gov (possibly soon to be defunct). Would that be an advantage of a LLC over solo propietorship.
For MAGI
Would this include distributions, withdrawals from a Roth IRA? Any amount of money?
What about money used to pay health premiums and dental premiums from an HSA?
Any other income not MAGI?
That’s correct. But it’s often not a great idea to pay for disability with pre-tax dollars and you usually can’t anyway.
HSA withdrawals don’t add to MAGI and neither do Roth IRA withdrawals.
Hello
As a follow-up to that comment
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