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Income Tax FactsFederal and state income taxes will have a major impact on your life, beginning with your first year of residency. Consider the following:

Last Year’s Tax Freedom Day-April 21, 2014Single Tax Rates

Taxable Income Tax Rate

$ 0-$ 9,075 10.0%

$ 9,076-$ 36,900 15.0%

$ 36,901-$ 89,350 25.0%

$ 89,351-$186,350 28.0%

$186,351-$405,100 33.0%

$405,101-$406,750 35.0%

$406,751 & Over 39.6%

Married Filing Jointly Tax RatesTaxable Income Tax Rate

$ 0-$ 18,150 10.0%

$ 18,151-$ 73,800 15.0%

$ 73,801-$148,850 25.0%

$148,851-$226,850 28.0%

$226,851-$405,100 33.0%

$405,101-$457,600 35.0%

$457,601& Over 39.6%

AGI Income Rank AGI Share of Federal Tax Paid Top 1% Above $434,682 (21.90%) 38.10%

Top 5% Above $175,817 (36.80%) 58.90%

Top 10% Above $125,195 (47.90%) 70.20%

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Limited Time Opportunities

You will have opportunities during the next few years to do some things that you will not be able to do later in your working career. There are income limitations on Roth IRAs, Traditional IRAs, the deductibility of student loan interest and other provisions of the Internal Revenue Code.

Traditional IRA Roth IRA

AGI Limitations AGI Limitations

Married Filing Jointly $96,000-$116,000 $181,000-$191,000

Single $60,000-$ 70,000 $114,000-$129,000

Student Loan Interest

AGI Limitations

Married Filing Jointly $130,000-$160,000

Single $ 65,000-$ 80,000

Lifetime Learning Credit

AGI Limitations

Married Filing Jointly $108,000-$128,000

Single $ 54,000-$ 64,000

Taking advantage of these and other limited time opportunities can lead to significant tax savings.

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Common Tax Traps

Claiming Too Many Exemptions on the W-4

In order to increase take-home pay, people will claim too many exemptions on their W-4. The more exemptions claimed, the less federal, state and county income tax is withheld. While this helps monthly cash flow it leads to a lousy April 15 and large balances due on the income tax returns.

Moonlighting (Working as an Independent Contractor) Without Proper Tax Planning and Record-Keeping

Early in their careers, many medical professionals will take on extra work as an independent contractor to supplement their regular income. As an independent contractor, they are responsible for all of their own taxes and are considered self-employed. In addition to federal, state and county income taxes, they will also have to pay self-employment taxes, which can run as high as 15.3%. Self-employed individuals pay their taxes in quarterly installments and can incur significant penalties if the quarterly estimates are not paid. Because of the high tax rates self-employed people pay, record-keeping is extremely important because taxes are paid on self-employed income minus the expenses incurred in producing the income. Again, not paying the quarterly estimates when due and not keeping the records needed to document expenses can lead to a lousy April 15.

Working for Multiple Employers With Too Little Tax Withheld From Each One

One of my clients, a resident anesthesiologist, worked part-time for several clinics and hospitals. Because he earned a relatively small amount from each employer, very little income tax was withheld. From an overall perspective, however, his earnings for the year put him in a high tax bracket and led to a large balance due on April 15 because of the minimal income tax withholding.

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Pay as You Earn, Income Based Repayment and Married Filing

Separately

Every year we field questions about whether or not it is beneficial for married couples to file separately in order to qualify for lower payments under the Pay as You Earn or Income Based Repayment programs. The answer to that question depends on the facts and circumstances for each taxpayer. Important factors to consider are:

1. The amount of income from the spouse without student loan debt;

2. Whether the married couple would normally claim the standard deduction or use itemized deductions;

3. Are there other dependents (children) besides the spouses and who would be able to claim them if the return is filed on a married filing separately basis;

4. What deductions or credits would be lost if married filing separately is utilized

The child care credit, the adoption credit and all education credits are disallowed to taxpayers using a married filing separately status. Exclusions or deductions for U.S. bond interest, tuition and fees deduction and student loan interest are also disallowed for taxpayers using a married filing separately status. Married couples filing separately must also use the same type of deductions (itemized or standard) as their spouse. Special rules also apply as to which spouse can claim various itemized deductions as well.

Non tax factors that should be considered are the impact lower payments will have on overall interest payments on the loans and the effect debt forgiveness can have on future taxes.

A qualified tax professional can help you determine the amount of tax you will pay filing jointly and separately with your spouse. The extra tax you might have to pay utilizing the married filing separately status and the lowered student loan payments under IBR and PAYE programs are only two of the factors you must consider in determining which filing status to use.

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Married Filing Separately (MFS)

Credit or Deduction Disadvantage of MFS

Lost Credits Earned Income Credit

Credit for the Elderly or the Disabled

Child and Dependent Care Credit

Adoption Credit

Lost Education Benefits Education Credits

Student Loan Interest Deduction

Tuition and Fees Deduction

Savings Bond Interest Exclusion

Standard Deduction If one spouse itemizes deductions, the other must also itemize (that is, cannot claim the standard deduction).

Taxable Social Security A greater percentage of Social Security Benefits may be taxable.

IRAs Traditional IRA deduction and Roth IRA contributions are phased out at $10,000 of modified AGI.

Spousal IRA rules do not apply.

Passive Losses and AMT Exemption Both affected by using the MFS filing status