Today we’re going to look a little bit at how physicians need to plan ahead in order to properly account for An upcoming tax bill using an example dating back to 1698.
The year is 1698. Emperor appear the first of Russia also known as Peter. The great was a six foot eight inch Russian czar with a vision to westernize his Homeland of Russia. Part of his vision included cleaning up the quote unquote unkempt nature of his countrymen’s facial hair in trying to push his country towards European fashions. He found beards surprisingly to be offensive and not part of the future of Russia. Thus, he somewhat famously instituted what was known as a beard tax. This decree forced men who wanted to wear beards to pay an annual fee, and it empowered local law enforcement to publicly shave men who dodged this tax. Once you pay the tax, which was based on your social status, the amount was ratcheted up or down, depending on how much money you made. You were granted what was called a beard token. So you pay the tax, you get this token, which is a talisman to ward off those pesky razor, toting police officers. If you were confronted and asked why you had a beard, you procure your beard token and say, Hey, I paid my taxes and you were granted amnesty until the next year. The challenges that citizens face with abrupt tax payments has endured through the centuries. As you can see today, we’re going to look a little bit at how physicians
Justin (01:28)::
Need to plan ahead in order to properly account for it. An upcoming tax bill. Hey, it’s Justin Harvey. Thanks for tuning into the anesthesia and pain management success podcast. With APM success, we take a close look at important topics pertaining to business, practice management, personal finance, and careers for anesthesiologists and pain management physicians. We work hard to take your critical questions straight to the experts. Thanks for listening these days, you will not be publicly as shorn like a sheep on the street corner. If you don’t pay your taxes, this is obviously a
Justin (02:05)::
Humorous example, but the concept is it’s very real. That taxes require proactive planning in order to not have your life. Upended taxes are still used to shape culture today. The same way that Peter, the great used them back in the early 17 hundreds, think about a carbon tax, for example, or a tax on car ownership with an annual registration fee in the high hundreds, or sometimes thousands of dollars or taxes on alcohol or cigarettes tax policy can be predictable and is a tool used by legislators. But a large percentage, probably the biggest percentage for most of the people listening to this podcast is related to your income. The tax burden you’re going to bear is related to the amount of money that you earn. This is not going to be however, a wonky tax policy episode. We’ll keep it more high level because let’s be honest, listening to a podcast about taxes is probably not on your list of things you want to do right now, especially if you just wrote a big check to uncle Sam last week.
Justin (03:03)::
So I want to talk about building tax awareness into your life. And today’s episode is pointed toward specifically anesthesiologists pain management physicians experiencing a big change in income imminently, especially residents and fellows who are about to take their first job as an attending. So for myself and my family, we’re getting ready to move to Oregon where my wife is going to be taking an attending role out there. And I was shocked to find out, I didn’t know much about Oregon tax policy prior to my subsequent keen interest. When I realized I was going to be living there Oregon is actually one of the worst income tax jurisdictions in America. For a couple of reasons, the first is that the tax rate is very high. As far as state income taxes go at 9.9%. And the second reason is that it gets to the top marginal bracket very quickly, anything above 125 grand is taxed at 9.9%.
Justin (04:00)::
So when you’re moving into a new state or, or locale within a state, and especially when this move is accompanied by a big bump in income, we’re not programmed to me to be able to understand what that means in terms of dollars in your checking account, especially as a resident or fellow, when really you’ve never made physician income, real physician income to be able to understand the magnitude of these numbers and the magnitude of the tax bill, it’s a little bit, it feels like monopoly money. There’s not sufficient context to be able to make real life decisions based on sort of the way you currently abstractly think about those numbers prior to actually running the numbers and understanding what it will mean for you in a real world kind of way. You’ve got federal income tax, you’ve got state income tax. Some places like Philadelphia, where I currently live, you have an extra 4% city wage tax on top of the state, additional taxes for self-employment can also apply at the federal.
Justin (04:59)::
And at the local level, you’ve got social security and Medicare, all of these different taxes make up a huge percentage of the income of physicians. So just because you’re moving far away to take a job with a big number in terms of your gross pay, that does not necessarily translate into nearly as much money as you may think. And it’s important to really internalize that reality before making important lifestyle. So here’s what I want to equip you to do today. Understand net income after taxes, build a lifestyle thoughtfully around that number in a way that is comfortable for you in a way that prevents stress and anxiety and gives you the way I like to describe it. That
Justin (05:40)::
Big, that big gap between you
Justin (05:44)::
And financial challenges, financial hardship, if you have a big cash buffer and you live beneath your means, and you have quantified these variables, you don’t need to be stressed about financial insecurity. So having said all that, there’s a mistake that I see. It’s very common. I see it among sometimes clients among friends, and I’ll be honest. I am not immune to this. I have felt this impulse myself, the impulse of, Hey residency is almost over. Let’s loosen up the leash a little, let’s let loose and have some fun and treat yoself Tom Haverford in Pawnee style. This is without calculation in advance. Obviously not a great idea. Making decisions without full information is you know, building your life on assumptions. We all know what happens when you assume if you are earning self-employment income meaning you have income from your own business. Maybe you do 10 99 consulting or locums work. In addition to your main gig, the tax burden is going to be even more. And the, the need to pause and to understand is even greater for people who have a significant portion of income coming from self-employment.
Justin (07:05)::
If this is you, you have to pay both sides of social security 7.65% for the employee, 7.65% for the employer. If you were both the employee and the employer, as you are, if you’re a locums anesthesiologist, then why this is important. So here’s what I, this is I’m going to keep this really short. We’re almost at the end. Here’s what I want to do is for anybody who’s getting ready to move, getting ready to make important lifestyle decisions on how much can I afford for rent? How big should my mortgage be? How much car payment can I afford other travel or lifestyle expenditure decisions first, before you do any of that, just do me this favor. This is a very blunt tool, but it can be helpful in helping you understand the, how this is going to apply to you. There’s a great tax calculator.
Justin (07:54)::
I really like it is only an estimator, but it is useful to allow you to take the first step in this journey. I’m going to post it in the show notes. So if you go to APM success.com/ 99, or go to the resources page on the website, APM success.com/resources, it will live there in perpetuity. This calculator as currently posted is only accurate for 2020 taxes, meaning last tax year. So there may be some changes with the Biden administration, depending on how tax policy evolves. Obviously this is not precise but it will help you begin to understand the impact of when you have a big bump in income, a percentage of your taxes that you paid. Uncle Sam also goes up significantly. It’s a smaller percentage when you make less, it’s a bigger percentage when you make more. And if you have self-employment income coming into the picture, it’s an even greater differential.
Justin (08:50)::
It’s also important to note this calculator doesn’t look at property taxes, doesn’t look at self-employment taxes and many other things. It’s just meant to start your brain thinking in this direction. So to wrap it up, if you make 400 K and you just signed a contract and maybe even got a signing bonus, congratulations, first of all, second of all, you don’t actually make 400,000. Maybe you make two 50, maybe two 20. That’s the amount that is actually going to come to you after tax withholdings. It depends on marital status. It depends on the tax jurisdiction and a bunch of other variables. So if you’re making decisions in these areas, it’s so important to look at your net income. And also remember that when I’m talking about net income, I’m talking about money in your checking account, estimating that on a monthly basis also requires you to back out a retirement plan savings if you’re making them, which hopefully you are back out insurance premiums for any health insurance that is employer provided that you’re paying for.
Justin (09:51)::
Those are coming out of your paycheck before you even see it. Maybe if you have a dependent care FSA or any other sort of government, or any other employer sponsored programs, you’re paying for all that before the money’s in your checking account. So, you know, in many cases, by the time you deduct deduct, deduct, and also send to uncle Sam, what is his do? You’re only going to have about half of your gross income coming to you, which again is hopefully a really big, healthy number enough for you to live very well on for many years, but make sure that you understand this dynamic before you start making these lifestyle decisions. So for any migrating residents and fellows out there, congratulations on crossing the threshold, this big culmination of so many years of hard work. You should celebrate it. You should absolutely indulge party it up. Do I, if you’ve listened to this podcast, you know that I’m a big fan of commemorating really worthwhile really momentous occasions and finishing residency or fellowship is definitely one of them. But keep this dynamic in mind as you were making this exciting transition so that you can be positioned for financial strength on the other side. Thanks for tuning in. Look forward to speaking to you again next week, when we’ve got our Centennial episode,
Justin (11:10)::
Number 100, who to thought that we would make it into the triple digits,
Justin (11:15)::
Thanks for your ongoing support of APM success. If you liked what you heard this week, I don’t over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you want to leave a review in iTunes, that also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.
Podcast: Play in new window | Download
Subscribe: RSS