“The hardest thing in the world to understand is the income tax.”
– Albert Einstein
But it doesn’t have to be. As tax season nears, and we all cringe, it’s important for us healthcare professionals to understand how to optimize our tax bill. Paying taxes isn’t fun. Paying more taxes than you need to is painful. Below, I’ll share a few tips for lowering your tax burden this year:
But first, one thing to understand is how income taxes are calculated, and what tax bracket you fall into. I didn’t fully understand the tiered way in which our tax responsibilities are determined until recently. I was under the impression that if you made a certain income, the entirety of your income would be taxed at that rate. The following chart shows you how to calculate your expected tax home income.
Now for the good stuff.
- If you have student loans, consider filing taxes separately from your spouse. Filing your taxes jointly can be a great financial perk of married life. The marriage tax credit can double your standard deduction compared to what you received as a single filer, and you get access to many other tax breaks, too. However, consider “married filing separately” this tax season. Under the right circumstances, doing so could save you hundreds of dollars on each of your monthly payments, and thousands over the life of your loans. The reason being, when filing jointly as a married couple, your spouse’s salary and debts factor into the calculations. Your minimum monthly payments on your loans could increase substantially, and you may no longer qualify for some income-based repayment plans.1
- Take a look at which tax credits are available to you. Each year, the IRS makes a host of tax credits and deductions available to filers. Knowing which ones you’re eligible for could save you a substantial amount of money. For instance, if you own a home and you itemize on your taxes, you can deduct the interest you pay on your mortgage as well as your property taxes. If you’re paying off student debt, you may be eligible to deduct the interest on your loan. Depending on your costs, you may also be able to deduct a portion of your medical expenses.2
- Contribute to your retirement plan (401k, 403b, IRA). Whether you’re hospital-employed, an independent contractor or operating a private practice, contributing to a tax-deductible retirement account can lower the amount of taxes you pay…and potentially drop you into a lower tax bracket (see above). The more money you put into one of these accounts, the more you stand to save. For the current year, deductible IRA contributions max out at $6,000 for savers under 50, and $7,000 for those 50 and over. For 401(k)s, these limits currently sit at $19,500 and $26,000, respectively.
- Fund a health savings account (HSA). If your employer offers an HSA plan, definitely take advantage of it! It’s one of the best non-taxable accounts available. You can set aside pre-tax funds and carry them forward indefinitely to cover both near- and long-term medical bills. Check out this page for what you can potentially spend your HSA funds on. To qualify for a program, you’ll need to be enrolled in a high-deductible health insurance plan. If so, the IRS allows you to contribute up to $3,600 this year if you’re under 55 and have self-only coverage. If you’re under 55 with family coverage, that limit rises to $7,200. And if you’re 55 or older, you can put in an extra $1,000 on top of the limit that already applies to you.
- Donate to charity. You should consider this regardless of the tax benefits, but it definitely sweetens the deal. As long as you donate money to a registered charity, you can claim a deduction on your taxes for that amount. I recently learned that this is not limited to cash donations. You can also donate goods and deduct their fair market value, which is the amount they’d be worth at the time of your donation. Did you know that you can even donate stocks to charity if you so choose? In prior years, only those who itemize on their returns could deduct charity donations, but there are special provisions in place for 2020-2021 that allow you to deduct $300 for charitable contributions.
- Sell underperforming equities. This is called harvesting losses. Essentially, if you have stocks in your portfolio that are underperforming, selling them at a loss could slash your tax bill. If your net investment loss exceeds your gains, you can use it to offset some of your ordinary income (up to $3,000 in a single tax year).
- Hire an accountant. The best place to look for one is honestly your digital Rolodex of friends. It may not seem useful to you now, but asking a friend (preferably one who works in finance or law) for a recommended CPA can help you incredibly down the line, as things tend to get more complicated once you begin taking on increasing amounts of financial responsibilities.
- File on time and online. Filing on time will save you lots on penalties and fees associated with late processing of your returns. If you expect to miss the deadline, the best thing to do is request an extension by filing Form 4868 here. Overall, electronic filing works best if you expect a tax refund because the IRS processes electronic returns faster than paper ones. You can expect to get your refund three to six weeks earlier than those who file via snail mail. If you have your refund deposited directly into your bank account or IRA, the waiting time is even less.
I hope these tips help you this tax season! If you want to read some of my other blogs on financial fitness, visit the links below. Happy filing!
“The views, opinions and positions expressed within this blog are those of the author(s) alone and do not represent those of the American Heart Association. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them. The Early Career Voice blog is not intended to provide medical advice or treatment. Only your healthcare provider can provide that. The American Heart Association recommends that you consult your healthcare provider regarding your personal health matters. If you think you are having a heart attack, stroke or another emergency, please call 911 immediately.”