The Intern Thread

[akwho]

Intern year is a unique year in the path to becoming a fully fledged doctor in many ways, but it is remarkably distinct financially.  I graduated medical school June 2016, and will work six months of 2016 year as an intern.  This means half the year I qualified as a student and the other half the year I'm earning an income.  Therefore my income in 2016 is less than half what it will be my other years in residency.  I expect to earn about $26,000 in 2016, putting me squarely in the lower income bracket, which opens up some unique tax opportunities as well as loan payback mechanisms.

 

 

Taxes

• The Lifetime Learning Credit is your biggest friend intern year.  You can claim $2000 in educational credit (not deductions, CREDIT!) by completing form 8863 and submitting it with your 1040 or 1040a when you file taxes.  Note you must have valid educational (read tuition) expenses in Spring 2016 to claim this credit.


• Savers Credit either 10%, 20% or 50% of your first $2000 invested in a Roth IRA is returned to you in credit form.  That's right you could make $200, $400 or even $1000 just by doing what you should do anyways, and invest in a Roth.  The amount you get back is dependent on your taxable income (any even bigger reason to ensure you take your max deductions).


• Student loan interest payment deduction the first $2,500 of student loan interest is deductible.  Make sure to make one $2,500 payment some point in the first half of intern year 2016 to lock in this deduction.


• Moving expenses deduction - Certain people may qualify to deduct moving expenses from their taxable income.  Check form 3903 to see if you're one of them.


• State specific credits/deductions California has a nonrefundable Renter's Credit that is good for $60 back in state taxes.  Check your local state tax laws to see if you may qualify for a credit/deduction.

Loans

• The majority of single or married filing jointly with lower income interns should be in REPAYE.  Take advantage of the low repayments, subsidized interests, and payments counting towards PSLF.  Indicate your interest in the PLSF program and you may get grandfathered in when the program inevitably gets cut when the government realizes how much loan liability they are actually taking on.


• You should consolidate in June, 2016 before starting intern year.  That way you can honestly report your income as $0 with no substantial changes in income.  This will allow you to start your payments in the REPAYE program at $0/mo.  This is a huge deal for several reasons.  1) you do your one time capitalization of interest early, saving you from 6 additional months of capitalized interest over the course of your loans.  2) you start getting the interest subsidy 6-months early. 3) You may sign up for auto-withdrawal of the 0$ payment from your debit account 6-month early securing you 6 additional months of additional loan interest discount.  4) finally if you do PSLF, you have 6 additional months of qualifying payments on the books and will finish in the program 6-months earlier.


• Student loan interest deduction you should pick one month, November or December likely to make a $2,500 payment on the interest your loan has accumulated so you qualify for the previously mentioned deduction.

Investing

• Roth IRA should be your default investment vehicle intern year, if you haven't already, you should open an account with Vanguard.  Max out your $5,500 limit for 2016 before it is too late and you lose this tax/asset protected space forever.  At our age you should invest in a broad U.S. based index, likely a Vanguard ETF index fund (no transaction cost, low E.R., broadly diversified, no $10,000 minimum to invest).  If you are an old school investor like my grandmother and prefer to own individual stocks, consistent blue chip dividend paying U.S. companies are a safe bet.  My portfolio that she constructed using these stocks since 2008 has had a 16.3% annual return.


• Emergency fund build an emergency fund of about $7,000 intern year.  If you are renting cheap and have a $4,000 car.  This will more than cover any emergency expense you will have.  Everything else after this should be invested.

Insurance

• Disability insurance should be locked in intern year while the price is as cheap as it will get, and your health is as good as it will get.  I am in the process of getting own-occupation insurance from Ameritas, it will cost $1,800/year and provide $5,000/mo in coverage to age 70, with 6% COLA and several other nice benefits.  Get a knowledgeable insurance broker who knows how to apply all the discounts you qualify for.  I recommend both Lawerence Keller and Joe Capone found them to be extraordinarily helpful.  If I went through the guy that showed up to my intern orientation I would have paid $2,600/year for and inferior insurance product through Guardian, it pays to shop around.


• Auto insurance I got nice high personal liability insurance $100,000(person)/$300,000(max), not because I have any assets to protect but because if something does happen I don't want to have my credit ruined by bankruptcy and adding additional coverage changed my payments from $52/mo -> $58/mo.  More expensive collision and comprehensive insurance are obviously unnecessary with a $4,000 beater car.  I would choose 3-4 of the top insurance providers, call them, and have them apply all your discounts to see which is cheapest, I was able to do this in an afternoon.


• Renters insurance everything I own is worth less than my emergency fund.  Unnecessary in my opinion.


• Term life insurance with no kids, no marriage, unnecessary in my opinion, my debt will die with me if I go before my time.


• Umbrella insurance with no assets and no property, extremely low chance of a suit.  Unnecessary in my opinion.

Expenses

• Minimize your fixed costs and fixed aggravations intern year.  My rent for a one bedroom in LA is $1,600/mo in a nice safe neighborhood 12 minutes from work.  I split this rent with my girlfriend so actually paying $800/mo.  Do you really need to live 40 minutes away on the beach for $3000/mo or in a downtown highrise for $2500/mo when you have $150,000 or $200,000 in loans?  Doesn't make much sense to me.  Do you need a cable package when you can stream everything on the computer these days?  Doesn't make sense to me.


• Travel - I am saving for an amazing travel opportunity afforded by a scheduled block of 4-weeks off in a row, no kids, no responsibilities.  This experience is worth splurging four or five thousand in my opinion and will be my big expenditure intern year.

Thoughts, comments, criticisms?  I already maxed my Roth this year. I'm going to help my girlfriend max her Roth for the year and then probably start saving for a ring.  What investment space should I use after our Roth's are maxed out?

[Lithium]

Excellent first post.  I was very fortunate to graduate medical school without debt, so I don't have too much to add on that front.  However, before investing in a Roth IRA, investigate whether you have a 403(b) or 401(k) at your program with a match.  This was something I took advantage of.  I would also argue that an HSA is a slightly more useful investment vehicle than a Roth IRA, as it is triple-tax-free.  All in all, as a resident once I started moonlighting I saved as much in tax-advantaged space as I do now as an attending.

I think it is definitely worth it to learn how to do your own taxes.

[jfoxcpacfp]

I haven't read the whole blog post, but I would like to clarify your information about the Saver's Credit. It is not limited to Roth IRA contributions. TIRA, 401k, and 403b contributions also count toward the credit. Given that the credit decreases as income increases and that it is difficult to afford to contribute much to an IRA or 401k/403b when you are barely eking out a living, very few people get the maximum credit, at least in my experience.

Will read through the rest as i have opportunity as you put a lot of time in putting this information together.

[Modulus]

akwho wrote:

 

Taxes

• The Lifetime Learning Credit is your biggest friend intern year.  You can claim $2000 in educational credit (not deductions, CREDIT!) by completing form 8863 and submitting it with your 1040 or 1040a when you file taxes.  Note you must have valid educational (read tuition) expenses in Spring 2016 to claim this credit.


• Savers Credit either 10%, 20% or 50% of your first $2000 invested in a Roth IRA is returned to you in credit form.  That’s right you could make $200, $400 or even $1000 just by doing what you should do anyways, and invest in a Roth.  The amount you get back is dependent on your taxable income (any even bigger reason to ensure you take your max deductions).

Click to expand...

Can a current student qualify for both of these credits?  I am fortunate to be in the situation where I am a MS2 but have a part-time job on nights and weekends (paid via W-2).  I did my 2015 taxes by myself via TurboTax and I only recall getting the lifetime learning credit.  A quick glance at the IRS website seems to indicate that in order to be eligible for the Savers Credit, one needs to be NOT a full-time student.

By the way, thank you for this great post!  I will definitely be referencing back to this in a few short years.  Perhaps you should consider writing this up as a guest post for the main blog.

[akwho]

https://youtu.be/Pr8u2gdwXPQ

"I'm going to give you a physical you won't ever forget" should be the motto for intern year.  Some thrive, some survive.  No matter what it only lasts a year, so keep your eyes on the prize.

 

Thank you for your comments so far

1) Lithium: Agree HSA vs. saving mechanisms with the employer are likely to be fruitful secondary targets after a Roth.

2)  JFox:  Interns are uniquely positioned to take advantage of Savers Credit because their annual salary is ~$52,000, they often get health and food benefits, but it only looks like they make half that to the government because they only work half the year.  Not to mention they often have large tax deductions available to them from being a student half the year.  I mentioned Roth first because I believe everyone should max their Roth out first if it's available to them unless doing so would leave an employer match sitting on the table.

3) Modulus: Savers Credit doesn't apply as a full time student as you know.  Wish I would have held a job down in medical school so I could have maxed my Roth and gotten the Lifetime Learning Credits during those years.  But then again, crushing medical school to get the type of residency you want, in the location you want, is probably the most important objective of those years and I don't know if I could have balanced doing well in medical school with a job at the same time.  Kudos to you.

[East coast]

Hoping a pro can clarify this, but my understanding of the savers credit is that essentially, if u graduated in May or later, you are not eligible. Thus most (if not all) can not legally take the credit.

 

[akwho]

East Coast -- on closer reading of Form 8880 it appears they define full time student as 5 or months enrolled full time.  Sadly this definition will make Saver's Credit unavailable to the majority of interns.  Thank you for the correction.    :lol:

[East coast]

I'd also add that if you consolidate in June as you suggest for a $0 payment under repaye and you have the average debt load (180,000 depending on where you look) with somewhere in the 6+% range (before subsidy) you likely should not make the $2500 payment for the interest deduction that first year. By my math that's only worth $375 at the 15% federal bracket, which is likely to be less than the subsidy you get that month for not paying anything. Of course, each should run their own numbers.

[ticker]

I appreciate the post.  One note: Renter's insurance covers liability as well as assets.  Your emergency fund will be insufficient to cover things when your candle falls over and burns down the neighborhood.

[FutureDoc]

Man, now I'm glad that my school moved up graduation.  Graduated in April, so should still qualify for the saver's credit since we were only in classes for 4 months.  Although getting a dual resident household down to an AGI of 37k from 51k took some work.

[East coast]

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[jfoxcpacfp]

akwho wrote:

2)  JFox:  Interns are uniquely positioned to take advantage of Savers Credit because their annual salary is ~$52,000, they often get health and food benefits, but it only looks like they make half that to the government because they only work half the year.  Not to mention they often have large tax deductions available to them from being a student half the year.  I mentioned Roth first because I believe everyone should max their Roth out first if it’s available to them unless doing so would leave an employer match sitting on the table.

Click to expand...

I believe we are in complete agreement.

[jfoxcpacfp]

FutureDoc wrote:

Man, now I’m glad that my school moved up graduation.  Graduated in April, so should still qualify for the saver’s credit since we were only in classes for 4 months.  Although getting a dual resident household down to an AGI of 37k from 51k took some work.

Click to expand...

Yes, you should qualify if you were not a full-time student any part of 5 months of the year. Curious as to how you got your AGI down $14k, can you clarify?

[FutureDoc]

Sure thing Johanna, unless I messed something up it looks roughly like this. Combination of things

 

Income: $51500 from dual resident salaries for half a year.

$3000 into residency 457 (no roth option at this point), roth is probably a better option, and I might open a roth IRA at vanguard before year's end.
$5000 in a childcare FSA,
$3000 into a HSA (would do more but have very generous employer matching for almost 3k)
$4000 deduction for education expenses from 4th year medical school
$1000 approximately for moving expenses ( matched in a different city so moving for work)

Sum total of deductions: $16000

 

51500 - 16000 = 35500.  Which should get us down below the 37000 cutoff to take full advantage of the 50% credit for contributions.

 

 

[akwho]

Again agree with East Coast.  I ran my numbers for the student loan interest deduction.  Hardly worth it for intern year $375 in tax savings vs giving up $340 in interest subsidies, therefore pretty much a wash for my loans (150k loans, REPAYE, $0/mo @5.41% interest). I'm very glad we are having this discussion.

Just bought my vacation tickets.  Looking forward to two weeks in East Asia, then Christmas with the family. Something to get me through my upcoming ICU month.

 

 

My employer mandates 4.5% of my paycheck be direct deposited into a 457 which they match at 3%.  I just read the fine print. They are investing it in a fund Invesco Stable Asset Fund. ER 0.27%.  Annual return a disappointing 1.54% over the past 5 years.   No way to change which fund I'm in through their online portal, going to call the office and see if I can get into something better. https://www.invesco.com/portal/site/us/dc/collective-trust-funds/product-detail?productId=87

Reminder to check your 457 and other employer sponsored plans to see what default fund they have you in.