By Dr. James M. Dahle, WCI Founder
WCI Reader Question – “Are There Tax Deductions for Medical Residents?”
Could you do an article on tax savings for residents specifically? I have lots of questions and it would be a great help. For example, I had to buy ~$3000 worth of equipment for residency and did not get reimbursed at all. I wanted to know how best to lower my taxes using this, including potentially getting an education tax credit for the $900 I spent on books. You could also include moving expenses, travel expenses to different sites and so on.
Tax Deductions Are Not Unique for Doctors
One of the funniest things about doctors and their finances, at least when you step back and take a look at it, is that they think they're different from everybody else. There are a few minor differences of course, but for the most part, personal finance for doctors is exactly like personal finance for everybody else. What I mean to say is that what is deductible for residents is exactly what is deductible for attendings is exactly what is deductible for everyone else. You don't need resident-specific information; you just need a basic understanding of the tax code (the subject of the book I keep trying to get around to writing.)
Some good examples of this concept can be taken from your specific questions. You mention that you bought “$3,000 worth of equipment for residency.” Now, I don't know whether you're talking about the mountain bike you ride to the hospital, some fancy stethoscope, or a set of books, and the devil for deducting equipment is all in the details.
Deducting Work Expenses as an Employee
Residents are first and foremost employees, so the rules that apply to residents are found in the sections of the IRS code that deal with employees. Employees can theoretically deduct their unreimbursed work-related expenses (not that mountain bike), HOWEVER, this is subject to two huge caveats that usually keep residents from actually saving anything on their taxes.
First, you have to itemize your deductions. If you take the standard deduction, like most residents, you're out of luck. You're also out of luck for that portion of your itemized expenses that is less than the standard deduction. For example, if your standard deduction is $12,400, and your itemized deductions are $13,000 of which $3,000 is otherwise deductible work expenses, then you're really not getting much tax savings for having spent that $3K (probably about $150 in tax savings.) Obviously it's pretty dumb to spend $3K to save $150 unless you were going to spend that $3K anyway.
The second caveat is that unreimbursed work-related expenses (done on Form 2106 and plugged in on line 21 of Schedule A) are subject, along with investment related expenses and tax preparation fees, to a 2% of income floor. That means if your income is $50K, you don't get to deduct the first $1000 of those deductions. Now that resident mentioned above doesn't even get to save that $150.
So is it possible to get a deduction for unreimbursed work-related expenses as a resident? Sure, it's possible, but not very likely.
Work Expenses as a Business Owner
So, the secret to deducting work related expenses is to avoid being an employee and be a business owner instead. The way for a resident to be a business owner is to moonlight and be paid as an independent contractor (1099 income.) Now, all those business related expenses are all of a sudden completely deductible as a business expense on Schedule C. It doesn't matter if you itemize or not. It isn't subject to the 2% floor. It's just 100% deductible against your business income. That can include all kinds of stuff you might need for your regular employee job too, such as these items:
- CME Costs
- Medical License
- DEA License
- Lab Coats
- Scrubs
- Stethoscope
- Books
- Pager
- Cell Phone
- Computer
- Professional society dues
- Job search expenses for a “job in your current occupation” (I interpret this as your attending job search expenses are deductible, but your residency search expenses are not.)
Deduct Commuting Expenses
Commuting rules are the same for everyone. You can't deduct your commuting expenses but you can deduct work-related travel. The basic gist of this is that if you go to two work sites during the day, the travel between the two is deductible, but the travel from your home to the first site, and from the second site to home is not. The deduction is either actual expenses or 56.5 cents per mile. Remember, if you're an employee, it goes on Schedule A and is subject to the 2% floor. If your second job is as a business owner, then you can put it all on Schedule C.
Travel to Temporary Job Site
You can also deduct travel to a temporary job site (think a rotation somewhere away from your home hospital.) However, it can't be in the same metropolitan area. I missed this one in residency for my two elective rotations (one in another state and one in another country.)
Work-Related Education Tax Deductions
Some educational expenses are deductible. However, this area gets pretty gray for residents. It's easy to meet the first requirement (“the education improves or maintains skills needed in your present work,”) but the second requirement, that it cannot be “needed to meet the minimum education requirements of your present trade” nor “part of a program of study that will qualify you for a new trade” is a little harder for residents to jump over. I would argue that if you are reading a book in residency that it is “needed to meet the minimum education requirements of your present trade” but I think there's a little room there for an alternate interpretation (i.e. that your present trade is medicine in general rather than a particular specialty.)
So while it's possible to get a deduction, I don't know of any education-related tax credit you could take as a resident. Pub 970 lists 4 requirements to get the American Opportunity Credit. Residents don't even meet the first of these. Qualifying for the Lifetime Learning Credit is a little less rigorous. However, residents still probably aren't going to qualify (unless their kid in college.) The reason is that it requires the student to attend “an eligible educational institution” defined as “any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.” That doesn't sound like residency or any CME course I know of. Eligible expenses are defined as “student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance.” Again, that's quite a stretch for a resident to claim this tax credit.
Moving Expenses
Moving expenses can also be deductible. You have to be relocating for a job, it has to be further than 50 miles away, and you have to stay at that job for a year. The cool thing about this one is that it is an above the line deduction- meaning you can take it even if you use the standard deduction.
Student Loan Interest
The first $2500 that you pay in student loan interest each year is also an above the line deduction. Most residents and fellows will be able to take this, but few attendings will due to the income limitation, which phases out between $60-75K for single filers, and $125-155K for married filing jointly. Interestingly, if you are married filing separately (like many residents trying to minimize IBR/PAYE payments, you can't deduct this at all.
Retirement Contributions
Residents are often allowed to participate in a 401(k)/403(b) and can at least contribute to a traditional IRA. This is a big deduction, but I think most residents ought to take a pass on it and contribute to a Roth IRA or Roth 401(k) instead. A side benefit of taking this deduction may be lowering your IBR/PAYE payments and possibly increasing future loan forgiveness.
Child Care Expenses
Lots of residents find this one useful. Basically, 20-35% of the first $3K you spend on legitimate child care can be taken as a tax credit (better than a deduction). The limit is 20-35% of $6K if you have two or more kids. For a typical resident with 1 kid, that's basically $600 back in your pocket.
Although residents don't really pay all that much in taxes compared to what they will pay later (this year I'll be paying about 3 times my resident salary in taxes), a little extra money is a lot more valuable for them. Making sure you get all of the deductions you qualify for sure beats leaving Uncle Sam a tip.
What do you think? What deductions did you take as a resident? Did I miss any big ones?
I think the above post pretty much covers it all. I’m a big fan of the moonlighting to make more of my expenses tax deductible. I did it as a resident, and I still do it as an attending…it’s many thousands of dollars of tax savings every year. Plus you can use that 1099 income to contribute to a solo-401k. The benefits are huge above and beyond just the additional income.
As far as cell phone goes… only the portion that is dedicated towards business use is tax deductible, right? Seems like most residents doing moonlighting, in an urgent care for example, couldn’t really justify much a deduction on this? Or is there some acceptable fudge factor to justify more use? I was wondering, too, if this was the case for a computer. Of course, I wouldn’t just buy a computer to save on taxes; however, if I was in need of a new computer both for personal and business use, would I be able to deduct the entire purchase price of the computer? All the other items listed seem otherwise self explanatory. Thanks for the great post.
No, you can only deduct the portion actually used for business. No fudge factor. Although that’s a tough one to prove in an audit.
Here are two more potential deductions that come to my mind:
1. A licensed psychiatrist or psychologist who is undergoing psychoanalysis as a required part of training in that field. Any other licensed professional must claim costs associated with psychoanalysis as a medical deduction.
2. Temporary job assignments – IRS Publication 463 -The rotation must be for a specific period of less than one year, and you must intend to return to the city that you were living in prior to the rotation. This is a huge deduction for those doing a fellowship for one year or less.
Hi Lawrence,
Thanks for the message. Where would one deduct psychoanalysis as required for training? Thanks
Is there an income limit for the childcare deduction? We are married filing jointly (MFJ) both MDs so may be over the limit if there is one.
http://www.irs.gov/uac/Ten-Facts-about-the-Child-Tax-Credit (See # 9)
yes, there is a phase-out for the dependent care credit but that only affects the percentage to compute your credit. If you make over $43,000 then you can use up to $3,000 per child for up to 2 children and you would get a credit of 20% for those costs incurred for childcare for both parents to work. There is no income limit where the credit itself is completely phased out.
Laundering scrubs and labcoat.
The big tax savings item specific to interns is the lifetime learning credit (see page 19 of IRS publication 970 that you link above — http://www.irs.gov/pub/irs-pdf/p970.pdf). Read the publication for details, but essentially, if you (or your lenders) pay tuition for your final semester of medical school on or after January 1 of your year of graduation, you will be issued a 1098-T form for tuition paid. If your last semester of medical school cost $10,000 or more, this will equate to a $2,000 non-refundable tax credit (not a deduction, but rather a credit toward your tax bill) which could very well wipe out your tax bill for the first six months of residency and get you a complete refund of your federal withholding for the first half-year of residency. This was my experience as an intern several years ago and I used that refund check to start funding my Roth IRA and making $2,500/year in interest-only student loan payments for the subsequent calendar years of residency. That was a few years ago, but my quick reading of publication 970 seems to indicate that this would still be applicable for today’s interns (med school class of 2014). You should be able to contact your medical school’s financial aid office to find out if you will be getting a 1098-T for tuition paid in 2014.
Good tip, thanks for sharing.
Xeno and WCI,
Great tip. I help first year residents with this all the time. I was considering writing a guest post on this very subject but you summed up the easy part well.
The hard part about this is that many (probably most) medical schools don’t do the 1098T correctly. University’s have the option of electing to show amounts billed or amounts paid on the 1098T. You only get to take the LLC for amounts paid. Many, if not most, universities bill the final tuition payment in the fall/winter of the year before graduation. So for tax year 2014, if these same universities only report the amount billed on the 1098T then they will send out a 1098T with $0 billed for 2014 even though the payments for tuition may have been taken in January of 2014 (payments from loans count!). Remember this if the medical school elected to report amount billed, then they will not report the amounts paid in Jan 2014. There will be thousands of recent medical school graduates who will do their taxes this year with a 1098T that is not correct and it will cost them $800 to $1000 of LLC credit, effectively making their tax for the entire year $0.
I have my resident clients go to their Bursar office at their medical school and get me their payment history for the last year of school to show when tuition was actually paid. I use this as my record for LLC more often than the 1098T. Schools should be reporting amounts paid, I am not sure why they report amounts billed because that means nothing for tax purposes
Is it legal to do American Seminars as CME? Basically its reading material and questions, and you can decide where to go and read. Wonder if people here do it and if its legal.
https://www.americanseminar.com/how-it-works-0
It’s legal to do. The CME is fine. There is probably not a big issue using CME funds from an employer to buy a course like this. The only question is whether the travel expenses themselves are eligible for your CME funds, or if not, are deductible. I’m pretty skeptical about that.
WCI,
Great article.
Are board certification costs deductible?
What about travel and interviews for a fellowship?
I have heard conflicting answers with regards to whether or not fellowship expenses can be deducted. My fellowship contract is from July 31 through July 31 of the next year, so I think I am out of luck for deducting fellowship expenses.
Job search expenses can be deductible. Here’s the info:
http://www.irs.gov/uac/Job-Search-Expenses-Can-be-Tax-Deductible
It’s a bit grey though. The question is “Is this a new job in the same field” in which case it is deductible or “Is this a first job” in which case it isn’t deductible. If you take the deduction, be prepared to possible defend your decision in an audit.
Regarding the board certification costs, licensing exams are not deductible the first time they’re taken. However, board certification isn’t a licensing exam and isn’t even required to practice in any given state (even if your employer or medical staff requires it.) So I think it would qualify as either an unreimbursed employee expenses (Schedule A, subject to the 2% floor) or if self-employed, as a business expense on Schedule C.
Mine were reimbursed, as are those of many employee docs.
Also interested in what you think about board certification exam fees. I was reimbursed by my fellowship already for a lot of the other items but would be nice to deduct the boards.
Since investment advisor fees are tax deductible from personal income taxes, and starting a business is a great thing (think SEP IRA or solo 401k–if you’ve annually maxed your other tax deffered growth investment vehicles), and the ‘personal investor’ hobby is a lucrative as you describe……are there any docs out there that are setting up a DBA…llc where you pay yourself (working as another entity) a usual/customary charge for investment services? most of the $ paid to the investment service company could be placed into a SEP IRA/solo 401k–so there would be minimal business taxes. I imagine there has to be some reason why this couldn’t work. (do you need to file certain paperwork with SEC or have certain credentials to qualify as investment service entity that qualifies for the personal tax exemption?)
What you’re gaining on one hand you’re losing on the other. I’m not seeing a huge benefit there. Your deduction becomes income somewhere else (on which you must pay payroll and income taxes again.) Is it possible you could get some more money into a retirement plan this way? Sure, but it’ll probably cost you some more taxes. Also, keep in mind the nature of that deduction-it’s on schedule A and subject to the 2% floor.
i am currently a fellow. My wife is not working this year as we had our first child. We moved across country and it cost ~$8000 to move that was NOT reimbursed. I also had to pay for my boards, $3000. Are these worth itemizing? Can I do this on an online tax software or do you recommend using an actual accountant? Thanks!
Are your itemized deductions more than the standard deduction? You can easily run the scenario both ways with tax software. A tax preparer can also do it for you if you can’t figure it out. It doesn’t sound like anything complicated enough for an actual CPA to me though.
Thanks for your reply. I have read you use turbotax basic edition. I assume that is for the desktop and not the online version? Do you see any advantages of using the deluxe edition? I will be filing for Minnesota and Missouri (both have state taxes and Missouri has city taxes). Thanks for everything!
Turbotax has changed stuff around the last few years. I had to buy one of the more expensive versions last year and may need the home and business this year. They keep doing this stuff and I may end up with TaxAct soon.
What about travel for oral board exams? My work is reimbursing me the registration fee but not the flight and hotel costs. Are those deductible as a work expense or would they count as necessary for the function of my job?
As noted above, I would deduct it on Schedule A as an unreimbursed employee expense subject to the floor or if I had some 1099 income, on Schedule C.
My wife and I make ~200K. I am a fellow and she is a dentist. We typically have ~5000k in business expenses that my wife and I pay (fees, courses, licensing etc). Both her and I receive W2s from our respective jobs. This year, I started moonlighting to supplement income. Although I only picked up a couple of shifts ~total ~$4000 – this was 1099 income. Would I then be able to deduct all of our unreimbursed expenses or is there an 1099 income requirement?
Any expenses required for your 1099 job should be deductible. You can’t run a loss too many years in a row without raising a red flag with the IRS though. You can’t deduct her business expenses against your business’s income either.
Great article. Big fan of your website and have told many people about it. I have a question I was hoping you could answer. My wife and I are both residents with a starting income of 50k. We each have about 190k in student loans. We will be using PAYE for loan repayment and were wondering if you thought it would be better for us to file Married filing jointly or Married filing separately? Thanks
Run the numbers both ways. Also, it really depends on if you’re going for PSLF or not. MFS will probably give you higher taxes but lower payments.
I am a recently graduated DMD, currently in a 6 year OMF residency program. I am considered an employee of a hospital. My program offers both 4 and 6 year residencies; the only significant difference is that 2 years of the 6 year program include attending medical school while still collecting a paycheck from the hospital. I need to pay for medical school tuition on my own.
Is an itemized deduction for work-related tuition possible here, or do the “minimal education requirements of present trade or business” or “program of study that qualifies you for a new trade or business” disqualifiers come into play?
Thank you
I think the disqualifiers do come into play in your case. If you disagree, you’re welcome to take it up with an auditor and/or tax court (although it’s possible you don’t get audited for it, but it’ll be a pretty big deduction that ought to be looked at carefully.)
Really enjoyed your talk when you came to U of A last year. I’m moonlighting at an LTAC in town for some 1099 income and interviewed for fellowships this year. When using TurboTax Home and Business edition, it’s instructing me to file job-seeking expenses under job-related expenses instead of under business expenses on Schedule C. But this doesn’t seem right from what you have above. Did I miss something new?
Remember that just using Turbotax doesn’t relieve you of the need to understand the underlying tax law. The rules on job interviewing expenses can be found here:
https://www.irs.gov/uac/Job-Search-Expenses-Can-be-Tax-Deductible
Here are the relevant sections:
In order to put something like that on Schedule C, it needs to be an expense for your current business. What is your current business? It is providing physician services. If the new job you’re interviewing for is also an independent contractor position providing physician services, that sounds an awful lot like a new client for your current business to me. However, you’re describing a fellowship job, which is likely an employed position. That sounds to me like it needs to go onto Schedule A where it will be much less valuable and probably worth nothing.
My husband is a resident who takes call from home. He sometimes travels between the main hospital and the VA which I know we can deduct as a travel expense. But he often comes home and then has to go back out again on the same day to either location. Is it correct that we can only deduct the cost of the second trip if he goes to both locations a second time (and then only deduct the distance between them again)?
I read the above about travel expenses for a fellowship. I think they would be tax deductible.
Is this a new job in the same field? – Yes he’s already working as an eye doctor as a resident.
Is this a first job? No, he’s already being paid to work as a physician
What am I missing here?
Thanks!
As a general rule, commuting is not deductible but business travel is. As a resident, he is an employee and those expenses are unreimbursed employee expenses subject a floor (and thus probably not worth squat to you.)
Regarding the fellowship expenses, it’s not completely clear to me what you’re asking.
I have a friend who was resident 1st half of 2015 and received new job sign-in bonus which reported on 1099-MISC. He has since been a physician with W-2 (but not from employer who gave his that bonus). The bonus is quite big that he expects to pay a lot of tax due when working on tax filing. Is there anyway he could treat it as side small business and deduct expenses like DEA/any professional fees, phone bills, travel millage, hotels, even claim home office expense (inside the Cond. he owned when he was resident, but sold after moved to new job across state)? Any suggestion?
Thanks
Yes, any legitimate business expenses he used to earn that 1099 money can be deducted as a business expense on Schedule C. Maybe he can find a few minor deductions there, but if he really wants to save a lot of money in taxes, he should open a SEP-IRA and put 20% of that 1099 money into it. Be aware of how that will affect future backdoor Roth IRAs of course-he may want to roll it into his 401(k) before the end of the year.
Do you think you can write off your student loan interest against your business income?
No. If your income is low enough (think during residency) you can take a deduction for up to $2500 of it though.
I am preparing to start a new job where I am an employee for the first twelve months before being able to become a partner. I am not able to contribute to the practice’s 401k/profit sharing account until I have been with the practice for 12 months. I want to maximize my contributions to a tax-deferred savings account but it seems that most individual 401k plans only allow contributions of around $18,000. Are you aware of alternative 401k options to maximize my tax-deferred contributions during that first year before I am able to contribute to the practice’s 401k?
First, individual 401(k) plans allow contributions of $53K. Second, employees can’t use an individual 401(k). You can do a traditional IRA and maybe an HSA. If you moonlight, you can do an individual 401(k) with that money.
Why not take this chance to pay down your loans, beef up your emergency fund, save up a downpayment, and have your 401(k) contribution ready to go in 12 months?
I was mainly considering ways to reduce taxable income to decrease my effective tax rate during that first year.
The first six months out of training is often a great time to NOT decrease your tax rate, but rather do Roth contributions and conversions.
I agree with WCI. If you have the cash flow and have a 401k in residency and know ahead of time you won’t be able to contribute until 12 months on the job as an attending, then obviously try to throw as much money into your residency 401k as possible. Conversely, if you know you will get a $53K employer contribution with your first paycheck in August, then don’t contribute to residency 401k at all in first half of your final calendar year in residency (aka last 6 months of residency). Remember, even of you can’t contribute anything in 2016, you’ll be able to get $53K in over the last 6 months of 2017 if you plan accordingly.
To be specific, I am in my last year of residency, my wife works at a startup and we were married in the last tax year. Together, we gross approx. 120k. She has no student loans, I have a ton. I am enrolled in IBR with PSLF (almost 7 years in to PSLF, no plans to turn back now). Last year, we chose to file separately since the tax savings of filing jointly were far outweighed by the increase in my loan payments (by 3-4k over the course of the year). This tax year, I interviewed for fellowships (approx $6500 in costs), and we will have a child that will cause us to meet our out of pocket maximum for healthcare and cost roughly $4-5k in medical expenses. Of note, my wife does not have any itemizable deductions.
-In order to become a “business” (ie, paid on a 1099 basis), do you need to file any paperwork or do anything besides just collect income on a 1099?
-If I did earn income on a 1099 by moonlighting at a nearby LTAC, would my moonlighting income have to exceed my job search deductions? I doubt I would be able to work enough shifts to make that a reality. Or is it OK to run my “business” at a loss and make say 3k in income but deduct the 6500 of job search?
-Does it still make sense for us to file separately with the upcoming changes? Obviously, I can just run the numbers when the time comes, but is there anything that jumps out at you?
-If we do file separately again, should I claim the child as my dependent and all of his healthcare/child care expenses on my tax return to maximize my deductions and get us the most money back as a couple? I think sum total of health care, child care, and job search deductions would be $12k or more. Again, the wife has no itemized deductions.
Thanks for the advice. Love the book and the website.
No. You’re a sole proprietor without doing anything.
You can lose money for something like 2 of the first 5 years.
Probably (because you’re going for PSLF), but you need to run the numbers.
Hard to say. Run it both ways. Tax software makes it easy.
Hi, I just realized I might be able to deduct my expenses for my Internal Medicine Board exam fees (ABIM). I was working on filing an amendment and came to a point where I realized I needed some advice. I work at an organization for which I receive a K-1. I am trying to figure out if i “materially participate.” I did not work 500 hours last year (2015 , for which i am attempting to file an amendment) for this group , but I am wondering if I qualify for material participation based on the “any 3 years in a personal service activity” criteria. I can’t quite understand the implications, I was a resident for the preceding few years – so worked far more than 500 hours in this same activity (as a physician of course), but not for the same organization for which I received the K-1.
Does this qualify me ?
I think if it does I would be able to claim this expense of the exam as a loss.
Hi WCI,
Just read through your entire article here…thanks for all the information as always! I’m a huge WCI fan and have been spreading the word to all my classmates. I’m an OMFS resident in a 6 year program that includes medical school and have been moonlighting as a 1099 while in medical school. If I paid medical school tuition this past year, is my entire tuition tax deductible since it is an educational expense that “maintains or improves my job skills”?
This is what the IRS website says…
“You may be able to deduct work-related education expenses paid during the year as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions. To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) that your employer or a law requires to keep your salary, status, or job. However, even if the education meets either of these tests, the education can’t be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.”
Also, you do not need an M.D. to practice OMFS so it is not a program that qualifies me for a new trade or business or I need to meet the minimal educational requirement of my trade/business.
Ooohh…that would be a very nice deduction. That’s a little gray (i.e. it hinges on whether OMFS is a new trade or the same trade as dentistry) but I think I’d probably try it. I suppose an auditor could argue that your education qualifies you for a a new trade (i.e physician) and then you’d be out of luck.
It would be nice to hear the accountants weigh in on this one. If one doesn’t comment here, you might try posting your question on the forum.
My husband is starting residency next year and is about to go through the interview process. I will be looking for a new job in the city where he matches. I’m looking at the IRS guidelines and trying to figure out what job-search expenses I might be able to deduct from our joint return so I can track them. Would I only be able to deduct expenses where I was actively interviewing for jobs (will be staying in my same field)? Hoping you might be able to provide some insight into this. I know with move-related expenses there is some additional leeway with MFJ in the distance rule, but not sure about this.
Thank you.
Moving expenses and job search expenses are deductible.
https://www.irs.gov/pub/irs-pdf/p521.pdf
https://www.irs.gov/newsroom/job-search-expenses-may-be-deductible