By Dr. Jim Dahle, WCI Founder
Several years ago, I got this email from a WCI reader who wanted to know about 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 ~$3,000 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 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. Basically, 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.
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.” 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, but 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. When this email first came in, employees could theoretically have deducted their unreimbursed work-related expenses (though NOT that mountain bike). But thanks to the Tax Cut and Jobs Act of 2017, taxpayers no longer can claim unreimbursed employee expenses. Unless, that is, they were a qualified employee (Armed Forces reservist, qualified performing artist, fee-basis state or local government official, or an employee with impairment-related work expenses) or an eligible educator (some K-12 teachers).
So, is it possible to get a deduction for unreimbursed work-related expenses as a resident? Not really.
More information here:
Work Expenses as a Business Owner
The secret to deducting work-related expenses is to avoid being an employee and to be a business owner instead. The way for a resident to be a business owner is to moonlight and to 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 old 2% floor that no longer exists. 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
- Cell phone
- 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.)
Now, the more conservative accountants will tell you that you have to pro-rate items that you use for both an employee job and your business or that you use for personal use and your business. You could pro-rate either by the amount of time it is used for each or perhaps the ratio of the money earned in one or the other. In practice, I think that is done much less often than perhaps it should. Whether that is “playing the audit lottery,” I'll leave it up to you.
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 the travel from the second site to your home is not. The deduction is either actual expenses or 67 cents per mile . Remember, if your second job is as a business owner, you put it all on Schedule C. Note that both jobs have to be in the same industry.
More information here:
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). I believe “temporary” is defined as less than 365 days.
Work-Related Education Tax Deductions
Some educational expenses are deductible, but again, you'd have to either be self-employed, an Armed Forces reservist, a qualified performing artist, a fee-based state or local government official, or a disabled individual with impairment-related education expenses
This area can get 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, 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).
I don't know of any education-related tax credit you could take as a resident. Pub 970 lists four 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 is 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 US 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 used to be deductible until the 2018 TCJA. You had to be relocating for a job, it had to be further than 50 miles away, and you had to stay at that job for a year. The cool thing about this one was that it is an above-the-line deduction, meaning you could take it even if you used the standard deduction. It's gone. Except for military members. Sorry.
Student Loan Interest
The first $2,500 that you pay in student loan interest each year is also an above-the-line deduction. Most residents and fellows can take this, but few attendings will due to the income limitation, which phases out between $75,000-$90,000 for single filers  and $155,000-185,000 for those 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.
Residents are often allowed to participate in a 401(k)/403(b), or they can at least deduct a contribution 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 PAYE/SAVE payments and possibly increasing future loan forgiveness.
More information here:
Child Care Expenses
Lots of residents find this one useful. Basically, 20%-35% of the first $3,000 you spend on legitimate child care can be taken as a tax credit (better than a deduction). The limit is 20%-35% of $6,000 if you have two or more kids. For a typical resident with one 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 (when this post first ran in 2014, I was paying about three times my resident salary in taxes), a little extra money is a lot more valuable for them. Making sure you get all the deductions you qualify for certainly beats leaving Uncle Sam a tip.
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
What do you think? What deductions did you take as a resident? Did I miss any big ones?[This updated post was originally published in 2014.]