Increasing Taxes? Not that worried.

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!


Increasing Taxes? Not that worried. — 13 Comments

  1. As part of Obamacare, isn’t there going to be an additional 3.8% tax on income over $250K and a 0.9% increase in the Medicare tax? My understanding is that those increases are in addition to any marginal tax rate increases for those making over $250K. Thoughts? Corrections?

  2. i worry more about healthcare especially medicare given my patient population then any of this.

    i personally consider the additional tax a seperate issue but of course it all adds up.

  3. Tom: I believe you are right. 3.8% on adjusted income (or investment income) over 250K and 0.9% Medicare.

    The 3.8% however is not committed to health care I believe.

    When you think about it, its pretty dumb. You pay 1.45% on the first 105K, then nothing until over 250K. Would have been much smarter to just extend the 1.45% to all pay much like social security is done.

  4. Correcting above: Medicare tax is always on all income and there is no cap. Only SS is capped for the first $110k this year (cap rises next year). PPACA adds an additional 0.9% Medicare tax (1.45+0.9) on wages above 200/250k singled/married. FICA taxes are always on wages, not taxable income; I believe they allow you to deduct only your FSA contributions from your FICA wages.

    According to the NYTimes, the new 3.8% tax is only on net investment income for 200/250k singled/married.

  5. Matt’s correct. Just by way of clarification, that 1.45% (actually 2.9% if you’re the employer) isn’t new. Only the 0.9% is new, and it’s only on taxable income over $250K. The 3.8% is only on investment income and only on taxable income over $250K. So if your taxable income is $270K, and your made $15K in investment income, then you’d pay that extra 3.8% on $15K. If your taxable income is $255K and your investment income is $15K, then you’d pay that extra 3.8% on $5K only.

    I agree with you Rex that decreasing Medicare payments should be a far bigger concern for most docs.

  6. I got this From Smart Money.

    The additional 3.8% Medicare tax will apply to the lesser of your net investment income or the amount of AGI in excess of the applicable threshold. Net investment income includes interest, dividends, royalties, annuities, rents, income from passive business activities, income from trading in financial instruments or commodities, and gains from assets held for investment like stock and other securities.

    So doesnt this mean if your investment income is low such as 100 dollars but your AGI is 450,000 then you would only pay the additional amount on the lower which would be the 100 dollars.

  7. Am I worried? No.
    Does it change my decision tree a bit? Yes.
    With an HHI of about 450k, and only 17k x 2 in 401ks available to us
    And in a high tax state which puts us in AMT death zone, it all adds up.
    So no more Roth 401k.
    Bonds probably switch to munis and out of tax deferred and into taxable. Tax sheltering equities becomes much more important, especially given the likelihood of 20% cap gains, possibly higher for qual dividends.
    So we have to pay attention. There are much worse problems to have.

  8. I spend no time worrying about these increases in marginal tax rates. No time at all. Because the decline in reimbursements is all any of us should be concerned about. Who cares if you are being taxed 20 cents, 30 cents, or 40 cents on the dollar when you never got the dollar in the first place?

  9. Cynical, but a valid concern. I’m actually a little more worried than I was when I wrote this a few weeks ago. Since it looks like we’re going over the fiscal cliff, not only do we get no doc fix this year for medicare payments, but we also get our tax rates increased as the Bush tax cuts expire, no matter how much we make. I preferred both the Obama solution and the Boehner solution to this.

  10. Taking 40% of anyone’s income (even a marginal rate) is wrong. Just because it does not affect you does not change that. The whole argument obscures the generational theft that will continue regardless of rates.

  11. I’ve got another post out today that shows I should have been much more worried about going over the fiscal cliff than just going with the Obama plan, at least tax-wise. I agree with you that marginal tax rates, at both extremes, have a moral component to them. I also agree the generational theft is immoral.

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