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The Tax Cuts and Jobs Act: What does it mean for medical residents?

Jose Espada • 1/26/18

The Tax Cuts and Jobs Act: What does it mean for medical residents?
  • Modified from another BLOG post on Kevin MD.

Donald Trump signed the Tax Cuts and Jobs Act (TCJA) of 2017 late December 2017.  We are all feverishly reading news summaries of the bill, trying to figure out how the new bill will affect our taxes.

How does the major provisions of the bill apply to medical residents and fellows?

First, I am not an accountant or tax attorney. Therefore, I recommend that you talk with your accountant (or download one the tax software when they come out) for advice about your particular situation.

Here are the major provisions of the new tax bill as they apply to medical residents:

The New, lower tax brackets

The previous 10%, 15%, and 25% tax brackets are now 10%, 12%, and 22%, respectively. This means that the marginal tax rate for most residents and fellows will decline by 3%.

Most of the provisions of the tax bill are not permanent, and without additional action from the government, reversed in 2025. It is unlikely either political party will raise these brackets. Besides, current residents will be out of residency by 2025 anyway.

Higher standard deduction, repeal of personal exemption

The standard deduction doubled to $12,000 for single taxpayers and $24,000 for married couples. However, with the personal exemption eliminated, expected to be $4,150 per person for 2018, the overall impact of these two changes depends on the size of your household. Single taxpayers will have a net benefit from these changes, while married couples with children would actually lose more in personal exemptions than they would gain from the increase in the standard deduction.  However, with the increase in the child tax credit (see below), I think few, if any, middle-class Americans (including medical residents) will experience a tax increase under the new tax bill.

Increased child tax credit

The tax credit increased from $1,000 to $2,000 per child. Unlike a tax deduction, a tax credit is reducing the tax liability rather than the income before taxes are calculated.  As a result, this negates any tax increase through the elimination of the personal exemption. Residents who do not pay any federal income taxes, up to $1,400 of the child tax credit can be refunded.

Student loan interest deduction remains intact

The student loan interest deduction remains intact, at $2,500 per year.

Moving expense deduction repealed

The moving expense deduction, often used by medical students or residents when they transitioned from medical school to residency or residency to their first attending job, eliminated. In addition, if your employer pays for your moving expenses, now that will be considered taxable income under the new tax bill.

Other provisions less likely to affect medical residents

Other components of the new tax law include changes to state and local tax (SALT), property tax, and mortgage interest deductions, are less likely to affect residents because most take the standard deduction. Residents are unlikely affected by changes in the Alternative Minimum Tax (AMT) or estate tax.

Case studies

There is no perfect way to figure out how much you will save in taxes because of the new tax bill. Since the tax code remains very complicated and is only slightly simplified with the new tax bill, the only (albeit imperfect) way I can think of to compare the actual effect on your taxes would be to use the 2017 (pre-TCJA) and 2018 (post-TCJA) versions of tax software to do your 2018 taxes.

Case 1: The single resident

Start with the single resident with student loans. Makes $50,000 a year and has $200,000 in student loans. Here is how taxes would look, under the old system and the new system:

Resident #1Old SystemNew System
Salary$50,000$50,000
– Standard Deduction$6,500$12,000
– Personal Exemption$4,150$0
– Student Loan Interest$2,500$2,500
Taxable Income$36,850$35,500
x effective tax rate13.7%10.9%
Taxes$5,051$3,879
– Child Tax Credits00
Final Tax Bill$5,051$3,879
Federal Tax Rate10.1%7.8%
This resident will save:$1,172

Net Result: This resident would receive a nearly $1,200 tax cut, a 23% reduction on his current tax bill.

Case 2: The married resident with two kids

The married resident with two kids, spouse takes care of the kids, so the family of four makes the resident’s salary of $50,000.

Resident #2Old SystemNew System
Salary$50,000$50,000
– Standard Deduction$13,000$24,000
– Personal Exemption$16,600$0
– Student Loan Interest$2,500$2,500
Taxable Income$17,900$23,500
x effective tax rate9.7%10.4%
Taxes$1,733$2,439
– Child Tax Credits20004000
Final Tax Bill-$268-$1,561
Federal Tax Rate-0.5%-3.1%
This resident will save:$1,294

Net Result: Losing the personal exemption on the family of four, this couple receives a tax cut of nearly $1,300 because of the expanded tax credit.  In fact, this resident actually pays no federal income taxes at all, and actually receives more than $1,500 from the government. Of course, still pays payroll taxes (Social Security and Medicare) of more than $3,500 each year.

Case 3: The double-income no-kids resident couple

The double-income no-kids (DINK) resident couple. They make $100,000 combined and have $400,000 in student loans.

Resident #3Old SystemNew System
Salary$100,000$100,000
– Standard Deduction$13,000$24,000
– Personal Exemption$8,300$0
– Student Loan Interest$2,500$2,500
Taxable Income$76,200$73,500
x effective tax rate13.6%11.0%
Taxes$10,358$8,049
– Child Tax Credits00
Final Tax Bill$10,358$8,049
Federal Tax Rate10.4%8.0%
This resident will save:$2,309

Net Result: Because of their higher income, this resident couple will receive the highest tax cut of the three residents in our example (more than $2,300).

Additional Reading

For those who want a more detailed look at the tax bill, look at the excellent summaries by Michael Kitces and CNN. If you are curious about what the tax brackets would have been in 2018 without the new tax law, check out this summary from Forbes.

Conclusion

The recently passed tax bill should lead to a tax cut for the vast majority of medical trainees. Use your tax cut wisely to pay off your student loans, build an emergency fund, or invest in a retirement account.

“Wall Street Physician,” a former Wall Street derivatives trader, is a physician who blogs at his self-titled site, the Wall Street Physician.

Author

Jose Espada

Jose Rivera Espada is the director of financial aid at IU School of Medicine, a nine-campus allopathic medical school in Indiana. Jose’s experience includes working as an assistant director of financial aid at Butler University and a financial aid counselor at Indiana University in Bloomington. He has served on various committees at the Association of American Medical Colleges (AAMC) as well as state and regional financial aid organizations. He speaks regularly about financing medical education at colleges and universities throughout the state of Indiana. He earned an undergraduate degree from Indiana University and worked toward a master’s degree in music education before finding financial aid as a profession. He performs regularly with small professional choral ensembles in the Indianapolis area.