Taxes for New Interns
Real Job and
Your new internship likely represents your first real job. We can debate whether either “real” or “job” are the best descriptions for internship, but at least you are getting paid. But getting paid also brings along taxes and since it’s your first job, most of you have no clue what “taxes” actually means for you.
If you don’t know how to estimate your taxes now, you have no idea how much you can spend during residency. Taxes are part of putting together your budget. But, wait, how did you decide on housing already if you don’t know your budget!? Ok, bygones. We are not hear to lecture, we are here educate!
How to use
Review our 10-minute “Curbside Consult” if you only have a few minutes to find out how much of your salary may be lost to taxes. But then, come back later to read more. Note that we will only address the most common tax situation for interns: unmarried with no children, no other substantial income, and who will use the standard deduction rather than itemized deductions.
To get a quick estimate of how much of your salary will go to taxes, scroll down to Table 1. Look-up your total wages on the left, and you can read across to see the various taxes you will owe on those wages. Your “take home” represents the total annual “after-tax” income which is available to you to spend (i.e. your wages minus all the taxes). This is the amount you should plan to live on during your residency.
You should be aware of one additional point: If you are an intern this year you will likely get a hefty tax refund when you file. Perhaps several thousand dollars. But in following years you will likely not get a large refund, and may owe additional tax. Do not assume you’ll get similar refunds from year to year, even with the same W-4!
After reading the “Curbside” go onto the next section for additional information and a walkthrough of taxes intended for graduating medical students with only 6 months of income (e.g. the first first 6 months of residency), as well as additional details and information regarding tax brackets and other important tax-related issues.
You’ll be happy to learn that due to items such as moving expenses and taking the Lifetime Learning Credit (for your tuition on the last semester of medical school), new interns may not owe any federal tax at all when you file in the spring!
Intern Taxes Curbside Consult
Definitions and Explanations
To start off and in order to understand the table below, you’ll need some definitions and explanations.
And remember that as with all curbside consults, you rely on this information at your own risk!
What are “Wages”?
In this case, wages represent your salary minus items which are tax “deductible”. These typically include health/vision/dental insurance premiums (if any) which come out of your pay. Other deductible items include any healthcare or dependent care contributions to a “flexible spending account” you may choose to make. We are assuming you are not married, and with no children/dependents, and thus you won’t have any “dependent care” contributions to deduct.
Also note: You may be eligible to and choose to make deductible 401k/403b contributions. However, for the purposes of the table, do NOT yet subtract those from your wages when consulting the table. Instead, read the section after the table to learn how to calculate the decrease in your taxes and take-home pay if you make deductible 401k/403b contributions.
Social Security and Medicare Taxes
Also known as “FICA taxes” or “payroll” taxes; these come directly out of your pay, at fixed percentages (6.2% for SS and 1.45% for Medicare) of the wages during each pay period. For typical medical resident salaries, your tax obligations for social security and medicare tax are fully satisfied by the amount which is directly taken out of your check.
IRS, State, and City Taxes
Also known as “income” taxes: these will also be removed from your paycheck, but the amount which comes out varies from person to person, as determined by what YOU INSTRUCTED your employer to take out (i.e. to “withhold”) of each check via form W-4.
This brings us to a very important point that many people do not realize: do not assume that the income tax withholding which comes out of your paycheck will total up to the actual tax you will total owe at the end of the year. It might be less, it might be more. This concept is made clear in the next section where we walk you through a set of sample intern taxes. But please note that the income taxes in Table 1 represent the actual tax you’ll owe for a year which goes from January to December. Whether you have to pay additional money when you file your taxes the next spring, or instead get a refund, will be determined only after comparing the tax you owe to the withholding you have already paid. Withheld too much? You get a refund. Too little, and you will have to pay some extra. Withhold WAY too little, and you’ll pay extra tax + penalties + interest. If you want to learn more about tax withholdings, check out our W-4 page.
Tax Table 1
1) This table applies when there is a full 12 months of income during the tax year.
2) The income taxes are based on 2016 taxes, but will be roughly similar for 2018.
3) Take home pay is rounded down to the nearest $1000.
4) State and city taxes are listed for one who works or lives in New York City. There are more housestaff in NY than any other state by far, with the majority in the city. If you live/work in another location, you can look up your state tax rates here and be sure to take into account county or city taxes, if any. [Note that we do not specifically agree or disagree with the opinions of the entity providing this list of state taxes. They just made a nice list.]
A note on 401k/403b contributions. Deductible 403b/401k contributions (but not “Roth” 401k/403b contributions) which come out of your pay will lower your income taxes, because you will not owe income tax on the amount you contributed.
For the entire range of incomes in the table, the federal tax bracket is 25%. Thus, each $1000 contribution will save you $250 in taxes (more, if you have state income tax). Of course, you still have $750 less spendable money because $1000 went into your retirement account. However, if you can swing it, saving for the future starting now is a great idea.
And if you are on an income-driven repayment plan and anticipate PSLF, these contributions will decrease your income, lower your payments, and increase your loan forgiveness! Win-win.
Digging into the Basics
In this section, we want to walk you through a complete sample set of federal taxes, which apply to the typical tax scenario of an intern (e.g. a half-year of being student and a half-year with salary). Then we’ll summarize the end results of taxes due for a full year’s salary (e.g. calendar year 2 of residency) so that you can plan ahead. Spoiler alert: Your taxes will go up after the first year.
If you don’t have the time go through this example now, come back for reference as you are preparing your taxes. However, we strongly suggest you (at minimum) skim the rest of this information so that you can understand what to expect in the upcoming months.
Tax Scenario: Medical Student plus First half of Internship
As noted in Table 1 above, the taxes in the chart represent those due on a full year of income. While Social Security and Medicare taxes are certain, the typical intern may not actually owe any federal tax when filing taxes in April. Which means that most of you probably already (unintentionally) filled out your W-4 such that you’ll get a big refund the first year. But then if you do nothing, you will owe money the second year. We have seen this many times, where people are caught unable to pay their taxes or other bills because they assumed that “doing nothing” would continue to result in refunds. But not you. You will be prepared.
So let’s go through a full set of federal (i.e. IRS only, not state) taxes. Follow along with this sample “1040”, which is the main form where you list all items which affect your taxes. Open it in a new window, or better yet, print it out and follow along.
Parts of your 1040
The top section on the first page is consists of demographic information, marital and filing status, and a list of dependents (which affects your “exemptions”, explained later). We are assuming you are single with no children, so nothing really interesting here.
The income section is where you’ll list your income, naturally. After the end of the year (typically in February), you’ll get a W-2 form from your hospital, which reports to both you and the IRS your taxable income. Box 1 of the W-2 will go directly on Line 7 of your 1040. In this case, we’ve assumed that your PGY-1 salary is $60,000, that you worked exactly 6 months during the year, and your total health/vision/dental insurance premiums total $1000 for a full year. Thus, $60,000 salary minus $1000 in deductible insurance premiums equals $59,000 per year in taxable wages. But you only had a job for half a year, so your W-2 will report $29,500 as you can see on Line 7.
The rest of the income section (lines 8 to 21) will be blank for most interns, and thus your total income in your first year remains as $29,500 (line 22).
Adjusted Gross Income
The next section of the 1040 is where you can take subtractions (called “deductions”) against your income. This is labeled “Adjusted Gross Income” because these deductions reduce your actual income to come up with your “AGI” on Line 37. Anyone hoping for PSLF need to be very familiar with each/every item which can either increase or decrease your AGI, because your loan payments (and this your future forgiveness) depend on your AGI.
There are two lines in this section which are likely relevant to you.
Moving expenses are deducted on Line 26. If your (new) hospital if more than 50 miles from your previous home, you can deduct expenses related to the move. Publication 521 describes who can deduct moving expenses, and which expenses are eligible. For this example, we’ve assumed $1000 in moving expenses.
The other relevant line in this section relates to any student loan interest you paid during the year, which gets reported on line 33. If you start paying towards your student loans as soon as you graduate (which anyone hoping for PSLF should certainly do), most/all of your payments will be towards interest. The maximum deduction for his this $2500. Note that some on an income-driven plan may be making payments of “zero” each month (but still getting credit towards PSLF!), and thus you won’t have any interest to deduct. And of course, if you have no loans, this does not apply to you. But we’ve put the maximum loan deduction on Line 33 for reference, as many of you (unfortunately) will get used to seeing this on your taxes at some point during residency and fellowship. At higher incomes, you’ll lose the ability to deduct student loan interest.
There is a line in this section which you might think applies to you: Line 34 (Tuition and Fees). Yes, you can deduct some (up to $4000) of your medical school tuition from your last semester. However, you can choose instead to take the “Lifetime Learning Credit”, described later, which is more valuable to you. So Line 34 stays blank.
Line 37 then lists your total AGI, and this number gets taken to Line 38 at the top of the second page of the 1040, which is the “Tax and Credits” section.
Tax and Credits
Line 40 (“Itemized deductions or your standard deduction”) can be very confusing for first time (and even long-time!) taxpayers. We have a page which explains itemized deductions in more detail. But for now, we’ll just define the standard deduction, which is what most likely applies to you. For 2016, the standard deduction was $6300 (it’s $6350 in 2017). This deduction is a deduction against income that (just about) any resident can take for “no reason”. This amount is eliminated from your taxable income and you don’t have to do anything special to earn it or justify it. It’s just “standard”. One may choose, instead, to take an “itemized deduction” against your taxes. Typically you would do this if the itemized deduction is larger than the standard deduction. But for just about any single medical resident (who does not own a mortgage), the standard deduction will be larger, and this gets listed on Line 40.
The standard deduction then gets subtracted from your AGI and the new total is entered on Line 41.
Next, “exemptions” (Line 42) can be thought of as a type of standard deduction, in that exemptions also get subtracted from your taxable income. Each exemption is worth $4050. In the simplest explanation, you can “take” one exemption for everyone in your “family”. In this case, you are the only one in your family (go back and look at Lines 6a-6c on page 1), and thus you can subtract an additional $4050 from your taxable income, with the new total now represented on Line 43.
The tax on your taxable income is on Line 44. Which in this example is $1888. You would think this would be the last line. But for reasons we won’t get into, there are still more lines between tax and “total tax” (Line 63). So how did your tax get calculated on Line 44? This is where the concept of “tax brackets” comes in, which all of you should have already learned through your medical school financial aid department (kidding!). We won’t cover tax brackets in detail. But just know that as your taxable income increases, the extra income can be subject to a higher tax rate. In this case, the first $9275 of the $15,650 in taxable income is taxed at 10%, which is $927.50. That leaves $6375. This remaining amount is in the 15% “bracket” with a tax on this of $956.25. Together with the amount from the 10% bracket, the total tax is about $1884. The actual tax is shown as $1888 on our sample 1040, because for incomes under $100,000 there can be some rounding. If you are curious to see what the current tax brackets are, here it is.
Ok, deep breath. We’re almost to the end.
Remember the tuition and fees deduction from way back on line 34? The one we said you shouldn’t take? Well, this is where you get credit (literally!) for your tuition. Almost all interns can get a $2000 “credit” for the tuition they paid for the last semester of medical school. As opposed to a deduction, which lowers your taxable income, a credit directly lower your tax. Credits are more valuable than deductions. In your case, you are eligible for the Lifetime Learning Credit, which maxes out at $2000. Why is the credit only $1888 in our example? Because the tax was only $1888, this is not a “refundable” credit. Which means, you can’t take more in credit than your tax.
Educations deductions and taxes can be confusing, because you may be eligible for more than one. In addition, tax software does not always do a good job at explaining which one you are eligible for, and which to take if you are eligible for more than one. So we will simplify it for you: all of you will want to take the Lifetime Learning Credit. Ignore the American Opportunity Credit (this is for undergraduates only), and ignore the tuition and fees deduction as previously explained.
But there are two questions which we get each year. First, the “1099-T” form which reports your tuition paid to your medical school is not always accurate. You can’t rely on it. You may need to get a copy of actual account payments for the tax year. Second, it doesn’t matter who paid the tuition. You can still take the credit. That is, you were the student, the school billed you, and the tuition got paid. Whether you took out a loan to pay it, or your parents or other family paid it, you can take the credit. The only exception is if you had a full scholarship for tuition and fees (e.g. MD/PhD students or other scholarship recipients). In that case, you cannot take the credit because no tuition was paid. Instead you can think of it as tuition which was never charged in the first place.
Now look at Line 63 (“total tax”). It’s zero! As a result of only partial year income, moving expenses deduction, student loan interest, and the education credit, you don’t owe any taxes! Congratulations. Enjoy it. Because (if you are lucky), this will be the last time in your lifetime you’ll owe no taxes. Incidentally, if you had no moving expenses and no student loan interest, your total tax would be $38. For those who had a full scholarship for 4th year of medical school, your total tax is $2038.
Finally, we get to the payments and refund section.
If you filled out your W-4 as we advised here the withholding on our sample salary of $60,000 over six months comes out to about $4450. That is you had $4450 withheld for federal taxes. But you do not owe federal taxes. So the IRS says thanks for the loan and will deposit $4450 into your checking account. Don’t spend it all in one place, unless that one place is a Roth IRA or your 401k. Yes, we know, we are party poopers.
But this example is perfect for illustrating that the potentially un-linked relationship between your taxes withheld (which are based on the W-4 you filled out) and your actual taxes owed.
Full Year Tax Summary
Here is the punchline on our upcoming page on “full-year” taxes. For the same example wages of $59,000, but earned for a full year (e.g. half of your PGY-1 year and half of PGY-2) your taxes due when you file are $52 (if you filled out the W-4 as per the instructions) or $961 (if you filled out the W-4 as per our W-4 “Curbside Consult”).
As always, if you have any questions or comments (or wish to report errors, typos, broken links) please feel free to shoot us an email!