by dr. james m. dahle, founder of wci
there was a survey thread on sermo (an exclusive forum for doctors) that asked what percentage of your income you paid in taxes in 2011. the lowest option was <20%. I thought it was ridiculous (since I make an average doctor’s salary and paid about 8% in federal taxes, 3.5% in payroll taxes, and 4% in state income taxes), so I spoke up about it. after a few days it became clear that most doctors have no idea what they pay in taxes or that they pay too much in taxes. Of 58 responses to the survey, I was the only one who paid less than 20% in taxes. keep in mind that more than half of the doctors make less money than I do.
I thought it was funny that 4 doctors thought they paid more than 50% in taxes. I can’t figure out how to pull it off, even if you’re single, make a ton, take a standard deduction, are self-employed, and pay ridiculous state and local income taxes. really? more than 50%? either you’re wrong or you’re stupid. Let’s hope he’s wrong.
I was concerned that 38 of the 58 paid more than 30% in taxes. no wonder doctors can’t get by. where are the doctors who live in tax free states? what about employees (who pay less in payroll taxes)? And what about the poor $100k pediatricians? Why don’t any of these doctors have an effective tax rate of less than 20%?
Or is the problem simply that doctors have no idea what their effective tax rate is?
medical salary after taxes
Let’s run a hypothetical situation. Take a single Kaiser-employed doctor with no children who lives in California, rents his apartment, and only saves $15k on his 401(k) each year. Let’s say he makes $200k, which is about the average salary for a doctor. What does she pay in taxes? let’s take a look.
- adjusted gross income $185k
- taxable income $175,500
- tax due $42,812 (21.4% of your total income)
- adjusted gross income $80,500
- taxable income $38,300
- tax due $899 (<1% of gross income)
now your payroll taxes. last year it was 4.2% of the first $106,800 and 1.45% of all $200k, or $7,386 (3.7% of their total income).
now your state taxes. Forgive me because I have never paid taxes in California, I’m just bugging you because I know state taxes are pretty high. I estimate a tax due of $14,503, or 7.3% of your total income.
The grand total for what I consider to be a terribly unfavorable fiscal situation is 32.4%. it could be a little worse for a self-employed doctor who didn’t bother to get a 401(k) or for someone who makes a lot more money. but under no circumstances exceed 50%. you just can’t do it.
now, consider a texas employed pediatrician, married, father of 4, sole provider. he wins $100k and as he reads the white coat investor he maxes out his 401(k) at $16,500. he also owns a nice house and paid $20,000 in mortgage interest, property taxes, and contributions to charity. he paid another $3,000 in student loan interest.
Your federal income tax looks like this:
You pay another $5,650 in payroll taxes and no state taxes for a total of $6,549, or 6.5% of your gross income.
what is the moral of the story? the government pays you for certain activities and not for others. you should probably know what they are if you prefer to pay less tax. you may not want to do them all just to lower your taxes, but you should at least know the rules of how the game is played.
These are the big rules (a practical guide to lowering your effective tax rate):
- earn less money
- get married
- have children
- be an employee (employer pays half of your payroll taxes)
- buying a huge house with a big mortgage and property taxes. heck, buy two.
- give money to charity
- live in a state with no state income tax
- save money for retirement
- if you are self-employed, try to characterize all possible expenses in a business expense