Personal Finance Expert Explains How Doctors Can Save a TON on Taxes

What's up everybody? It's Megan here with Student Loan Planner, and we're going to chat about how to save money on taxes as a physician with student loan debt. And wow, what about the worst topics ever? Let's jump in. We have actually consulted with more physicians than any other profession with our one-on-one student loan consulting. We've worked with about 18,000 people so far, and most, not most of them, but the largest profession has been physicians for us. And that just goes to show that you guys do graduate with quite a bit of student loan debt outstanding. I think you're the second to dentists as far as like the sheer amount that we graduate with. Your average balance is about $300,000. I think ours is about $304,000 from the people that we've worked with. So not a chump change. That's a lot of money, and that can create a lot of anxiety and just negative feelings about money. And oftentimes, this is the first introduction to money that you have. So how gross, right? And my dog says hi. So physicians are also a little interesting in the sense that your income trajectory is very different than other professions, where we go to school for a while, we get the loans, get the degree, and then we're in residency for a long period of time. It can be between like one and four years or more if you're going to like fellowship after residency. So it can be a long time before you're actually making that physician salary as well, like as an attending physician's income. Residency is the lowest income that you're going to be making outside of when you were in school, right? And you didn't make anything. But with physicians having that income trajectory, it can make figuring out what to do with your student loans kind of difficult, right? But also another interesting fact with physicians is a lot of physicians tend to be eligible for that Public Service Loan Forgiveness Program, or PSLF for short. So a lot of physicians that we work with aren't actually paying these student loans off, they're going towards loan forgiveness. And so in that sense, we're kind of treating the student loans as a tax on our income instead of a debt that we're paying back. So we're going to talk a little bit more about that as we go along. But those are some of the things that make student loan repayment and tax situations a little bit unique when it comes to a physician or a little different when it comes to a physician. But there are plenty of ways to save money on both taxes and student loans. So let's jump straight into it from probably the most applicable to just about anybody to some more specific situations that may or may not be applicable depending on your situation. And then next we're going to talk about like student loan specific things that can help us save taxes or vice versa, like tax things that'll help us save money on our student loans. So the lowest hanging fruit here are interest subsidies, and this has to do with your actual student loan payment trajectory, like you making payments on your student loans and you getting interest discounts depending on the plan that you're on. So interest subsidies, they are, it depends on the plan that you're on, how exactly they work, but basically if our payment is not enough to cover the interest cost, which a lot of times in residency that's the case, our payment based on income is really low compared to what it would be if we were trying to pay the loans off on a regular paid schedule, like an amateurized schedule. And so what happens is on on some of the older plans like ICR or IBR, income-based repayment, that unpaid interest gets added to our balance. So if our payment is a hundred dollars a month but our interest cost per month is a thousand a month, well nine hundred dollars goes unpaid, you know, right? That unpaid interest gets added to our balance. But plans like pay and the save plan, which I know save is being heavily debated right now, but both of them have some kind of interest subsidies available to them. And pay is also not a plan that we can enroll in anymore at this time, at the time of this recording, but if you're on it already it does have somewhat of an interest subsidy. And then save has a really sweet interest subsidy where it waives a hundred percent of unpaid interest. So pretty wild, it keeps the interest cost down really low. And this may not actually matter for folks going towards loan forgiveness, right? Because we're just trying to pay as little as possible to maximize how much we can get forgiven later. But those interest subsidies can behaviorally make us feel better because our balance isn't growing or growing as fast. But if you're someone who's not going towards loan forgiveness, interest subsidies are a great way to save money on our interest cost over time because it's going to reduce how much we're going to have to pay back. So very applicable to just about anybody. Now next up are things that we can contribute to, like HSAs, health savings accounts, or FSAs, which is a flex savings account. You could also have a dependent care account kind of tagged to that. And then you've got the fours, the 403Bs, the 457s, the 401ks. If you're a federal employee you might have a TSP. These are retirement vehicles that you can contribute to to save for your longer term goals. So I know that seems so far out probably right now, but they're really great vehicles to be contributing to because they, of course, save for your retirement or save for your health care expenses. But the other side benefit is it is not taxed today. So that money that you set aside in those accounts does not get taxed today. So we save money on our taxes there because our adjusted gross income is lower. And then the extra plus here is if we have student loans and we're on an income-driven plan, that income-driven plan is going to go off of your adjusted gross income. So now your student loan payment is lower because your adjusted gross income is lower by contributing to these buckets. So talk about like a win-win-win, right? We save money towards our long-term future, we save money on taxes today, and we save money on our student loan payments today. So really great, great buckets to be contributing to if you have access. Now, there's also a student loan interest deduction. So third up, we've got the student loan interest deduction that is a tax deduction if we have, you know, paid towards student loans. You can deduct up to $2,500 from your taxes of paid interest, and that equates to about $500 or $550. But there's some things you need to know about this. So this may not be eligible or available, sorry, to attending physicians because it has an income cap. But if you're in residency, this certainly could be relevant because you're making lower income. And the phase out, so basically for single, you can take this interest deduction if you make under $80,000, modified adjusted gross income under $80,000. It starts to phase out between $80,000 and $95,000. So if you make over $95,000 as a single person, you're not able to take this interest deduction. But again, remember, it's only $500, $550, so not crucial, not a ton of money. If we're married and we file taxes jointly, which keep that in mind, if we're filing jointly, we can take this deduction if we make under $165,000. There's a phase out between $165,000 and $195,000. So the more we get closer to the $195,000, the less we can take of a deduction. Once we're over $195,000 as a married joint couple, we cannot take that deduction. So there are limits to this, right? Not everybody is going to be able to take this interest deduction because as an attending physician, hopefully you're making more than this, but could be relevant to somebody. If we're filing taxes married separately for student loan purposes, we're not going to be able to take the student loan interest deduction. But there are some positives to filing separately that we're going to talk about here in a bit. But next up, we've got tax loss harvesting. And this is a pretty strategic way to save money on taxes. If you are investing in non-retirement investment accounts, or you have a high yield savings account, basically any account that generates taxable growth to you. And this might sound familiar. So let's say you have a savings account. It paid you $25 last year. You would get some kind of tax document at the end of the year that says, hey, you made $25. Yay. But then pay taxes on it, right? And you might be thinking, gosh, this is so silly. It's not a lot. Or this is a savings account. I'm kind of bummed that I have to pay taxes on the growth. So that is the case with any non-retirement investment accounts, which those could be pretty crucial to your retirement savings too, if you've already maxed out how much you can do in those retirement vehicles, since they do have limits. And we have to pay taxes on the growth of those accounts over time, which taxes, if we can reduce them, let's do it. So tax loss harvesting is a way to reduce taxes. What this is, best example I can give, or best kind of visual I can give to tee this up, is think about investing in the stock market as you on an escalator, you know, going up to the second floor, playing with a yo-yo. So you're playing with a yo-yo. It's going up and down, up and down, but you're on an escalator going up, right? So that's the market. Long term, we're going to go up. That is the end result. That's what's going to happen. That's historically what's happened long term. But along the way, we're going to see some ebbs and flows, ups and downs. That's why, like, you look at your statements and there's a different value, you know, month to month or quarter to quarter, outside of, like, what you've contributed. That's because the market's fluctuating. And so what we can do is we can take advantage of when a fund, like, that you're invested in isn't doing as hot. Maybe it's lost some money or lost, you know, in the market so far. What we could do is we could sell that position and immediately reinvest it in something different. So we're still invested, but we sell that position to take advantage of the loss. Because why? Well, the whole point is here, you can write off losses. So just like we earn money on gains and we have to pay taxes on those gains, we can write off losses up to $3,000 a year. So it's not a huge amount of savings, but it's still it can really add up because you can bank these losses over time and have it count against any kind of capital gain in the future. So if you sell a house, you make a ton of money on the house because of, you know, inflation, appreciation within that property, you can use this to count against those capital gains, which is pretty cool. So this is a really kind of strategic way to save money on taxes. You can do this yourself as an investor, or you can work with a certified financial planner or someone in the financial space, investment space, to help you with this. But it could be a really great way to save money on taxes and deduct, like, capital losses long term. The last thing on here, before we talk about things student loan related more so, is may not be relevant to everybody, but let's say you've got some moonlighting income or some contractor pay, so 1099 pay from some additional work that you're doing, or that's just all you're doing. You're a 1099 contractor altogether. You might be asking, well, should I set up a business entity? And I think the answer is yes. But then you could also decide to set up an LLC. You could set up an S-corp, a solo corporation. You could also have an LLC and elect to file taxes as an S-corp. So you could chat with the CPA about what the best plan of action is there. But regardless, an S-corp election could be beneficial to you because an S-corp helps you save money on self-employment taxes. And that's a way to reduce your tax bill overall. And that, you know, this starts to make sense once you make about $100,000 or more of income in 1099 income, I mean. So this should be something to consider. And then another kind of side benefit to this is if you're a contractor, sole proprietor, or this type of business entity, you can set up a solo 401k. And that's just like what it sounds like. It's a solo 401k plan just for you. You can't have any employees, but you can contribute to it. And you can contribute to it as the employee as long as you're not contributing to any other 401k or 403b at another employer. We could only do up to the maximum, which this year is $23,000 for an employee. But you can contribute as the employer if you're in this bucket here. If you're a contractor, you have an S-corp, you are electing to file as an S-corp, you're solo, you can contribute as the employer, which gives you a bigger bucket to contribute to for retirement, which also reduces your taxes today and also reduces your student loan payments today. So that's a pretty handy way that you could go about saving money on both taxes and student loans if you're in this bucket, not a W-2 employee. Next up here, I wanted to chat about student loan specific related ways to save money. And a lot of this comes down to tax filing status, too. So tax filing status, you might be thinking like, why does that even matter when it comes to my student loan plan? But it does. Weirdly, it does. The legislation tells us that if we file taxes married jointly, and we're on an income driven plan, that student loan payment is going to be based off of joint income. So I know that is stinky. That's confusing. That's lame. It's all the things. But that's how it's set up. That's how the legislation was written. So that's why we talk about filing taxes married separately a lot. You know, should we be considering filing taxes separately for student loan purposes? And a lot of times the answer is yes, because it can keep the payment off of just your income, especially if your spouse doesn't have student loans. And it's you working towards loan forgiveness, for example. You want that payment as low as possible. So reducing that payment as much as possible can be helped by filing taxes separately. So we have a calculator on our website. I'll link it down below in the description as well. Filing taxes separately is not cheaper than joint. So that's kind of the conflicting part here is like filing jointly is going to save you more money on taxes. But we have to figure out the crossover point here. Can we file taxes married separately and save ourselves enough to warrant the cost difference between joint and separate? And a lot of times the answer is yes, because there's a pretty significant difference in the payment if our spouse earns income or especially significant income. So there's a calculator on our website that can help you decide. You can chat with the CPA about this or your financial planner about this, but this is something that definitely can help reduce the cost of your student loan plan. And then along those lines, next here I've got amending tax returns. This can help you save money on taxes because you can amend your tax return from separate to joint as far back as three years. That means if you lost some money on filing taxes separately, you know, maybe it cost you $2,000 or $2,500 or something compared to joint, but you saved a ton in your student loan payments where it made sense. You can then go back and amend that tax return when you don't need it anymore from separate to joint and recoup that lost tax savings. So that's something that you can consider. It's extra work, but if it did cost you a lot to file separately, it could be worth the extra attention. And last up here that may not be relevant to everybody, but community property states. If you live and work in one of these states, so this is Washington, Idaho, California, Arizona, Nevada, New Mexico, Texas, Louisiana, Wisconsin. I didn't put these in alphabetical order because I was looking at a map, you know, thinking about how it goes along like the Pacific coast to the Mexico border. And then randomly like Oregon and Wisconsin have switched places. Like they, you know, Oregon is not a community property state. But if you live in one of these states, what's really interesting is when you file taxes married separately, they divide your household income in half between the two tax returns. So for example, if you are the physician, you're the breadwinner, you earn $400,000 a year and you live in California. Let's say your spouse is a stay-at-home parent. They don't make any income. Well, they're going to look at you as a household and add your income together. So 400 plus zero is 400. And then they're going to divide it in half between the two tax returns. So your tax return is going to show $200,000 of income and your spouse's is going to show $200,000 of income. Pretty interesting because then if we file separately, that separate payment is going to be based off of $200,000 even though you're the the breadwinner. We call this our breadwinner loophole when we're doing student loan planning around this. So pretty cool. It can't hurt you though. That's the good news is like if you're the lower income earning spouse, you live in a community property state, but you're trying to file separately to keep the payment off of just your income. It can't hurt you because it will still show the higher income on your tax return when you're filing separately. But you can submit alternative documentation of income to keep the payment truly off of just your income. So that's a big win. You can still keep it off of your income even if you're the lower income earning spouse. So pretty cool ways to save some money on taxes and on student loans and on student loans and taxes. So I hope you're able to grab a couple nuggets from this conversation today. We do have one-on-one consultations where we sit down and we walk through a specific plan for you and your specific situation because so many people's financial situations are very different from one another. Even if we're looking at two colleagues at the same hospital, like your family situation, your money situation is going to be totally different than your colleague. And so your plan might be a little different than your colleague's plan. So we do these customized student loan plans for folks. So definitely check it out if you need some additional attention or just want some help navigating this and saving the most money because we are jazzed about this stuff. We will help you save as much money as possible. But thanks for hanging out with me today. Catch me on the next video in the future and I hope you have a great day.