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MONTHLY TAX NEWSLETTER - AUGUST 2001

An index and links to our previous months' newsletters can be found at oldnews.html


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Tax 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:

  1. You need to have paid your medical school tuition during the calendar year

  2. 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 your deductions.

Student Loan Interest is Once Again Deductible

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.


Do 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 the loan.

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

Month

Income Taxes

Saving and Investing

 

August

  • Returns on extension are due 8/15/01

  • Requests for 2nd extension, Form 2688, due 8/15/01

  • Self-employed individuals who went on extension need to fund retirement plans by 8/15/01 or should file Form 2688


2000 & 2001 TAX FACTS

  • 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 during 2000.
  • 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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