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Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience:  EA, CEBS - 35 years experience providing financial advice
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I am a medical physician resident in Texas with an annual salary

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I am a medical physician resident in Texas with an annual salary of 60,000 in texas. I do locums work in New Mexico as an ER physician and made already an additional 60,000 since August 2012. I already put away 40% of all the locums work I've made (24,000) for taxes. I don't have a corporation. What can I do with this saved money that I've put away for taxes for my work in New Mexico to pay less taxes at upcoming tax season? I've heard I can setup a retirement account to decrease my taxable income but don't know which one I'm eligible for. I've also heard that dec 31st is the deadline for these sort of tax breaks. I am married and my wife works in sales and made only about 25,000 this year. I am calculating a combined gross annual income for both of us of about 150,000. Please help. Thanks.
Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

Thank you for your question. I'd love to help you with your tax planning tonight. It's true that a retirement account can lower your taxable income. The first place to look is to your employers, to see if they have a 401(k) plan you can participate in. This would provide the best tax benefits for you. Your employer will put some of your pre-tax dollars into your account, and then at the end of the year you will have less taxable income.

There is an IRA account that can do the same thing, but your income level is in the phaseout zone, so I'm afraid that it would not give you much of a tax benefit. In addition, the deduction would only be up to $5,500 so while that's good - it's not great.

To lower tax, you can make energy efficient upgrades to your home, or start a home based business. Children are also good tax deductions.

Thanks again for your question. Please let me know if you need further clarifications.

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Another expert here:

If you are being paid as an independent contractor (you will receive a 1099-MISC instead of a W-2) for the locums work, then you will be reporting the income as a sole proprietor and can establish a retirement plan for that business income. Assuming you don't already contribute to a 401(k) through your salary as a resident, then you could establish a solo 401(k) and contribute $17,000 as an elective deferral and another approximately 20% of your net profit on Schedule C as an employer contribution. However, in order to do this the plan document would have to be executed and established by 12/31/12. The entire funding of the plan can be up until your tax return filing deadline plus extension.

If you have already contributed the maximum $17,000 to a 401(k) plan through your resident employer, then you could establish a SEP IRA instead and contribute approximately 20% of your net profit on Schedule C. This plan does not have to be established by 12/31/12. It can be established and funded up until your tax return due date plus extension.

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience: EA, CEBS - 35 years experience providing financial advice
Bill and 2 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thank you
I don't have an employer 401K. So, if I open a solo 401K and fund it with the maximum of 17,000 it would basically decrease my taxable income by 17,000? What do you mean by elective deferral? How much taxes should I expect to pay with my base income as a resident of 60,000, my locums of 60,000 on a Misc 1099 and my wife's 25,000 annual salary supposing we file jointly.
I guess my best bet would be to open a solo 401 K and decrease my 1099 taxable income as much as possible? I heard 1099 get taxed about 40% is that correct?

There are 2 types of funding in a 401(k). One is considered an employee elective deferral (up to $17,000 if you are under age 50) and the other is considered an employer contribution. If you are a sole proprietor, then you are considered both an employee and the employer of the sole proprietorship. Hence, you can contribute $17,000 as an employee elective deferral and approximately $11,500 - $12,000 as an employer contribution (based on $60,000 of net profit). So if you contribute the maximum amount, your federal taxable income will drop by about $29,000 saving you approximately $7,250 in federal income taxes. Even though your federal income tax would be decreased by this amount, you will still owe self-employment social security taxes on the $60,000 of locum income so this will be about $6,800.

The 40% tax rate is a rough estimate when you add federal, state, and self-employment social security taxes.