Tax Deductions for Medical Residents to Know in 2023
As a medical resident, you may wonder how to handle your taxes, particularly if you’re tackling taxes for the first time as a medical resident.
What exactly is a tax deduction? A tax deduction allows you to subtract a certain amount from your taxable income (the portion of your gross income on which you must pay taxes). A tax deduction lowers the amount of taxes you owe. You can take tax deductions as a medical resident, but you might be surprised to find that tax deductions might not differ from that of many other professions.
We’ll discuss tax deductions medical residents must consider as well as how to handle tax deductions as a physician. Let’s take a deeper look so you know exactly what to expect for medical resident tax deductions. By the time you’re done reading, you won’t miss a beat concerning tax deductions for resident physicians.
Tax deductions are not unique to doctors
Medical residents make far less than practicing physicians. Practicing physician salaries may range from $353,970 for cardiologists and $198,420 for pediatricians, according to 2021 data from the Bureau of Labor Statistics.
Medscape’s 2022 Residents Salary and Debt Report stated the national average medical resident salary is $64,200 on average. Salaries rose 2015 to 2019 from $55,400 to $61,200. In addition to seniority, geography, employer, and specialty also play a factor in the amount of salary medical residents receive.
As a result of the lower salary amount (compared to that of practicing physicians), it’s worth considering how you might lower the amount of tax you have to pay.
Just like any other profession, you can either take the standard or itemized deductions.
- Standard deduction: The standard deduction is a single deduction at a fixed amount that reduces the amount of tax you have to pay. The 2023 standard deduction amount is $13,850 for those single and married filing separately, $27,700 for those married filing jointly (or for qualifying widowers) and $20,800 for those filing head of household.
- Itemized deduction: Itemized deductions mean that you give up the standard deduction. You want to make sure your itemized deductions total is larger than the standard deduction amount for your filing status. If not, you may pay more in taxes if you choose to itemize. You must complete and file a Schedule A form with your tax return to maintain records of all your expenses.
How do you know whether to take the standard deduction or itemize, since you can’t do both? Who should itemize?
Let’s take a quick look at the pros and cons of itemizing.
We’ve already discussed the fact that itemizing might add up to more than the standard deduction. The more you can deduct, the less you’ll pay in taxes. Here are a couple of other benefits:
- Many options for itemizing: You can deduct a wide range of deductions, from medical expenses to mortgage interest.
- Owning a home: Owning a home might exceed the standard deduction, such as for mortgage interest and property taxes.
Now, the downsides for itemizing for medical residency tax deductions:
- Takes more time: Itemizing is more complex, so it’ll likely take you or your tax preparer more time to do your taxes.
- Must furnish proof: You’ll need to make good on your claims. In other words, if you say you have moving expenses, you need to prove it by saving your receipts.
Are you using tax software? If so, input your information by answering both the itemized and standard deduction questions. If you have a tax preparer handling your taxes, they may want to calculate your taxes both ways to find out how you’d save the most money. Ultimately, the goal for tax deductions for medical residents is to come out with a lower tax bill.
What physicians can get tax deductions from
Let’s take a look at a few possible deduction options as a medical resident that may help you save money.
- Work expenses deducted as an employee: Total itemized deductions must exceed the standard deduction to deduct work expenses as an employee. Expenses you deduct must be greater than 2% of your adjusted gross income.
- Work expenses deducted as a business owner: Do you have a side gig in addition to your residency? You can deduct startup costs, inventory, utilities, business insurance and other types of insurance, business property rent, auto expenses, rent and depreciation on equipment, office supplies, office furniture, advertising and marketing, business entertainment, travel expenses, interest, bad debt, taxes, employee costs, contracted labor, and legal and professional fees.
- Travel to a temp job: You can deduct travel expenses for a temporary work assignment away from home but not an indefinite work assignment (any work assignment over one year).
- Moving expenses: You can deduct hauling, packing, crating, in-transit storage, and insurance expenses related to moving.
- Work-related education: You can deduct the costs of education, whether you take continuing education classes, classes required by your employer, and more. The tuition and fees deduction can reduce your taxable income by up to $4,000, even if you don’t itemize your deductions. Check with your tax preparer for more information.
- Student loan interest deduction: You can take a tax deduction for the interest paid on student loans that you took out for yourself, your spouse, or a dependent, which applies to all student loans, not just federal student loans, used to pay for higher education expenses. You can take out a maximum of $2,500 a year.
- Retirement contributions: If you have a traditional IRA (not a Roth IRA — those are not tax deductible), you can contribute up to $6,000 for 2022 and $6,500 for 2023 and can deduct it from your taxes. Keep in mind that the contributions you make to your 401(k) can reduce your tax liability but you can’t take a tax deduction on your income tax return for contributing to a 401(k).
- Medical expenses: The IRS currently allows the deduction of qualified unreimbursed medical care expenses (including unreimbursed payments for preventative care, treatment, surgeries, dental care, vision care, psychiatric care, prescription medications, and more) that exceed 7.5% of your adjusted gross income. You must itemize instead of taking the standard deduction.