There’s a lot of talk from the White House and Capitol Hill about solving the “fiscal cliff” issue by preserving the tax cuts for “low and middle income folks” and raising them on “the rich”, generally defined as those making over $250K. Although some think the eventual compromise that will be reached may be a figure more on the lines of $500K-$1 Million, I’m not all that worried about increased rates on income over $250K, and I don’t think many doctors should be worried either. Here’s why:
Doctors Don’t Make Enough Money
Surveys show that the average doctor makes about $200K. Primary docs generally make less and specialists make anywhere from a little more to a lot more, depending on specialty, location of the practice, payor mix, hours worked, and business savvy. It’s easy to see that most docs make less than $250K, so we’re only talking about a subset of doctors that even need to begin worrying about it.
My Spouse Doesn’t Work
I suppose if you were part of a two-physician couple, then you’d have to be a little concerned. But many of those doctors making good money have a spouse that doesn’t work, works part-time, or works for much less money. If the total still doesn’t exceed $250K, no worries.
Retirement Savings Lower Your Income
Remember that when news articles talk about $250K of income, what they’re usually referring to is a figure called TAXABLE INCOME, found on line 43 of the 1040. Money put into 401Ks, profit-sharing plans, defined benefit plans, health savings accounts and other tax-deferred savings vehicles doesn’t count toward that figure. I can put $50K into a profit-sharing plan, another $15K into a defined benefit plan, and $6250 into an HSA. So as long as I max those out, I can make up to $321,250 before these tax rates affect me. Even if your spouse is a higher earner, maxing out both of your retirement accounts may still get you down into the unaffected “middle class” range.
Exemptions and Deductions Lower Your Taxable Income Too
I’m married with 3 kids, two of which wear clothes most of the time. But I get a $3800 exemption for each of them, no matter how they choose to dress themselves. That’s $3800*5=$19,000 more I can tack on to that $250K figure. Deductions also don’t count toward your taxable income. The standard deduction for a married couple in 2012 is $11,600. Between charitable contributions, mortgage interest, and state taxes, I expect $30-50K a year in itemized deductions. Add all that on to our previous figure. Now I can make up to $390,250 before I start having to pay at those higher rates. That’s almost double the average physician salary.
Only Income Above $250K Is Taxed More
But even if I still made more than $390K, only that portion above $250K AFTER retirement contributions, exemptions, and deductions would be taxed at a higher rate. So say I made $400K. That means I’d pay a little higher rate on that last $10K. At worst, it’s another 4.6%, or $460 bucks on that $10K. I spend that much registering vehicles every year. On $400K of income, that would only raise the effective tax rate by 0.1%.
So What’s Worth Worrying About?
The truth is that raising taxes on just the very rich isn’t going to fix our nation’s financial problems. Any real revenue increases are going to have to come from the upper middle class folks with AGIs between $100K and $250K, including most doctors. If Congress decides it actually wants to balance the budget, watch out for stealth tax increases on this group. Examples include not passing the AMT patch, decreasing the deductions on charity or mortgage interest, or phasing out exemptions at lower levels of income. Truth be told, most docs are likely to pay more in taxes due to the elimination of the one year payroll tax break (which was billed as a tax break for low-income folks) than increased tax rates on income over $250K
Increasing your understanding of the tax code will help you to logically decide financial issues, rather than making dumb decisions based on paranoia. A little knowledge goes a long way.
Agree? Disagree? Sound off below!