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9 pm Eastern Time, during our Live
Breaks for Interns and First Year Medical Residents
Welcome to the working world. After four years
of college and four years of medical school, you've finally entered
the work force. To get where you are today, you no doubt spent
countless hours studying science and medicine during the previous
eight years. The problem is that you were left with almost no
time to learn about many other issues, including personal income
taxes and basic financial planning.
For those of you who started working this July, here's
some tax savings opportunities available to you:
Put $1,000 in your pocket
with the Lifetime Learning Credit
The Lifetime Learning Credit of up to $1,000 per year
is available to most first year medical residents. Keep in mind that
a tax credit is a dollar for dollar reduction in your tax liability
for the year. For example, let's say that you prepare your tax
returns, and calculate that you're due a refund of $500 from the IRS
prior to factoring in your tax credits. If you're entitled to a
$1,000 tax credit, your refund will increase to $1,500.
To be eligible to claim this tax credit, the following
two tests must be met:
You need to have paid your medical school tuition
during the calendar year
Your income can't exceed $50,000 if you're single or
$100,000 if you're married.
If you're like most interns or first year residents,
you were still in medical school during the first half of the year
and (hopefully) paid your tuition either by direct payment or through
student loans subsequent to January 1st of this year. And since
this is your first year working, your income will most likely be well
below the income threshold listed above.
The Lifetime Learning Credit is equal to 20% of the
first $5,000 paid during the year for tuition, books, and
required fees. To claim the Lifetime Learning Credit, you'll
need to complete and attach a Form 8863, Education Credits, to your
federal income tax return.
The Cost of Moving to a New
City is Tax Deductible
If you moved more than 50 miles in connection with the
start of your internship or residency program, don't forget to deduct
your moving expenses on your tax return.
To deduct your moving expenses, the following two tests must be met:
Distance Test: The distance between your new work place and
your former home must exceed the distance between your former work
place and your former home by at least 50 miles. For taxpayers
starting their first jobs, the distance test will be met if your new
place of employment is at least 50 miles away from your former home.
Time Test: Moving expenses will only be deductible if you're
employed on a full time basis for 39 weeks during the first 52 weeks
immediately following the move. If you lose your job because of
"involuntary separation" prior to working a full 39 weeks,
the time test will be considered to have been met.
When deducting your moving expenses, your limited to the following items:
The cost of moving and storing household items and personal effects
The travel and lodging incurred by you and your family members during
the move. If you used your car to travel to your new home, you
can deduct $.10 per mile driven plus parking and tolls.
To deduct your moving expenses, you'll need to complete and attach a
Form 3903, Moving Expenses, to your federal income tax return.
Remember, your moving expensed are allowable even if you don't itemize
Student Loan Interest is Once
Good news for people paying those huge student loans each month. The
interest paid on those loans is tax deductible. Here's the basics of
deducting your student loan interest:
You can deduct up to $2,500 of student loan interest paid each year.
Interest on loans in forbearance or deferral is not deductible unless
payments are made on those loans. Expect a Form 1098-E from
your loan processor each January reflecting the interest you paid
during the previous calendar year.
The student loan interest deduction is allowed even if you don't
itemize your deductions.
Middle and high income taxpayers aren't allowed to deduct their
student loan interest. For 2001, no deduction will be allowed
if you're unmarried and your adjusted gross income (AGI) exceeds
$55,000 or if you're married and your combined AGI exceeds $75,000.
Starting in 2002, a single person can earn up to $65,000 and a
married couple can earn up to $130,000 and still deduct some of their
student loan interest.
Start Contributing to Your
Employer's 403(b) Plan Right Away
Contributing to your employer's 403(b) plan is one of the best things
that you can do.
As a medical resident, first ask the benefits department if you're
eligible to participate in the hospital's 403(b) plan. If so,
you're allowed to elect to have up to 20% of your salary withheld
each pay period. You then direct how your salary deferrals will
be invested within your own 403(b) account. Most plans offer a
wide variety of quality mutual funds to choose from.
What makes contributing to a 403(b) plan so attractive is that the
money withheld from your pay check and contributed to your 403(b)
account is tax deductible and grows tax deferred.
What that means to you is that if you're in the 28% tax bracket, it
only costs you $72 in after-tax money to contribute $100 to your
403(b) plan. You've already made $28, or 39%, on your $72 investment.
Even if money's tight, try to sign up to contribute at least $100 per
month into your 403(b) account. The $72 per month that you'll
forgo won't make or break your budget. Plus, after just a few
months, you'll see your 403(b) account start to grow.
Don't let this opportunity pass you by. Contributing to an
employer sponsored 403(b) plan is a great habit to get into.
Completing Your W-4 Form
When you start a new job, one of the first things that your new
employer will ask you to do is to complete a W-4 Form. On the
surface, completing the W-4 seems like a simple enough task. All you
need to do is fill in a few lines - whether you're single or
married on line 3 and how many allowances you're claiming on line
5. And if you want additional taxes to be withheld, you'd
indicate how much on line 6.
In too many instances, however, how you complete the W-4 Form results
in the incorrect amount of taxes being withheld.
Why the Form W-4 doesn't work right
The rate that taxes are withheld from your pay depends on your
marital status and how many allowances your claim. Less taxes are
withheld for people claiming to be married than those who claim
single. Plus, less taxes are withheld with each additional allowance
that is claimed. To have the most taxes withheld, therefore, you
should complete the W-4 Form claiming "Single - 0 allowances".
The underlying problem with the W-4 Form is two-fold:
Each employer withholds taxes as if they're your only employer
If you tell your employer that you're married, the withholding
tables assume that your spouse doesn't work.
If you work for more than one employer, or if both you and your
spouse work, you need to be very careful when you complete the W-4
Form. It's not uncommon for an individual who works for more
than one employer, or a married couple comprised of two working
spouses, to owe $3,000 or more in taxes because not enough taxes were
withheld throughout the year.
As a rule of thumb, if you're married, and both you and your spouse
are medical residents who don't own a home or have any other large
tax deductions, then you should submit new W-4s with your employer
claiming "Single - 1 allowance". Otherwise, you might
be in for an unpleasant surprise when you complete your taxes next winter.
You Have Student Loans?
Here's a memo that we recently received from financial planner Jason
Skolnick of Linsco Private Ledger who has dozens of young
doctors as clients:
As of July 1, 2001, the interest rates on variable rate Stafford
Loans will be greatly reduced from their 2000 levels. This is
due in part to the Federal Reserve Board's reduction in short-term
interest rates during the last six months.
These low rates are near historical troughs and it may be time to
lock in these rates by consolidating your student loans. When
one consolidates through Sallie Mae, the weighted average interest
rate (rounded to the nearest 1/8%) will be locked in for the life of
With interest rates so low, why not take advantage of this great
opportunity if you are in the process of repaying your student loan debts.
CALENDAR FOR THE MONTH OF AUGUST, 2001
Saving and Investing
Returns on extension are due 8/15/01
Requests for 2nd extension, Form 2688, due 8/15/01
For 2000, the standard deduction for a single individual is $4,400
and for a married couple is $7,350. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses. For 2001, the standard deduction has been increased to
$4,550 for a single individual and $7,600 for a married couple.
- For 2000, the personal exemption is $2,800. Individuals
will claim a personal deduction for themselves, their spouse, and
their dependents. The personal exemption has been increased to
$2,900 for 2001.
- The maximum earnings subject to social security taxes
has been increased to $80,400 in 2001 from $76,200 in 2000.
- The standard mileage rate has been increased to
$.345 per mile as of January 1, 2001 from $.325 per mile
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan remains at $10,500 for 2001, and has been
increased to $11,000 for 2002.
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