The tax code is more complex than simply applying a set of tax rates to your taxable income. As your income increases, various additional taxes, phase outs of deductions, and reductions in tax credits come into play, significantly impacting your overall tax liability.  

Earned has compiled this comprehensive list to highlight the various tax implications that high-income earners may face, illustrating how your tax burden can change as your income rises. This includes new taxes that may be levied, reductions in available deductions, and phase outs of credits, all of which play a crucial role in determining your final tax bill.

For investing physicians: according to a joint survey that Earned conducted with Physicians on Fire, over 90% of physicians have investments in their brokerage accounts. For physicians with substantial investment income, the following taxes can add up quickly:

• Capital Gains Tax Rates: Your tax rate on long-term capital gains and qualified dividends increases from 0% to 15% to 20% as your income goes up.  In addition to the rates below, you may also be paying the 3.8% Net Investment Income tax describe in #2 below.

• Net Investment Income Tax (NIIT): A 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 for single filers and $250,000 for married filing jointly. Net investment income includes earnings such as interest, dividends, capital gains, and rental income. However, it does not encompass income derived from operating a business or capital gains from the sale of business property. One way to potentially reduce NIT is through tax loss harvesting. This strategy involves selling securities at a loss to offset capital gains tax, and it can result in significant tax savings. In addition, any capital losses that you don't use to offset gains in the current year can be “banked” to offset gains in future years.

For high salaried physicians:  

• An additional 0.9% Medicare tax on wages and self-employment income exceeding $200,000 for single filers and $250,000 for married couples filing jointly. Employers start withholding this tax on wages over $200,000 regardless of filing status.

• Phase out of Itemized Deductions: While the Pease limitations are suspended through 2025, high earners would typically see a limit on itemized deductions when these rules are active. The limitation would start for those with AGI exceeding roughly $261,500 for singles and $313,800 for married filing jointly (based on 2017 thresholds, adjusted for inflation in future applicable years).

• Personal Exemption Phase out (PEP):  Also currently suspended, but traditionally started to phase out at $261,500 for single filers and $313,800 for married filing jointly (based on 2017 thresholds).

For practice owners & independent contractors:

• Qualified Business Income Deduction (QBID): For those in the healthcare field, phaseout begins as your taxable income reaches $191,950 for single and $383,900 for joint.  Other limitations based on W-2 wages paid by the business and property used in the business apply.

For physicians with families:

• Child Tax Credit Phase Out: The credit begins to phase out at $200,000 for single filers and $400,000 for married couples filing jointly. The phaseout reduces the credit until it reaches zero.

For physicians who are saving for retirement:

• Direct Roth IRA Contributions:  Contributions to a Roth IRA begin to phase out at $125,000 for single filers and $198,000 for married filing jointly in 2021. Although these thresholds start below $200,000, they are relevant for those in this income bracket as they extend above $200,000.

There is a workaround called the Backdoor Roth. This is a two-step process where you make a nondeductible contribution to a traditional IRA and then roll it over to your Roth IRA. The catch is that having pre-tax IRA money (traditional, SIMPLE, SEP, or rollover) will cause part of the transaction to be taxable.  An easy workaround to pre-tax IRA money is to roll the balances into a 401(k) plan, sometimes called a reverse rollover.

• Deductible IRA Contributions:  This comes into play when you or your spouse is covered by a retirement plan at work. If that’s the case, your deduction is phased out at $228,000 MAGI for married filing jointly and $83,000 MAGI for single for the 2023 tax year.

Understanding the various taxes and phase outs that come into play as your income rises above $200,000 is crucial for effective financial planning. By being aware of these tax implications, you can better navigate the complexities of the tax code and make informed decisions to optimize your tax liability. Whether it’s leveraging retirement contributions, managing investment income, or maximizing available deductions and credits, proactive tax planning can help mitigate the impact on your finances. Earned is available to help you understand how to better take full advantage of the strategies available to high-income earners.

The above information is for educational purposes only. Individuals should seek the counsel of a properly licensed professional prior to taking any action. Earned Wealth is an investment adviser and does not provide accounting advice or services.

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