Can you deduct it? Income tax hints for residents
By Charles Solcher, JD, CPA
A resident is paged while waiting in line at the university bookstore. He sets down his six-book purchase, pulls the cellular phone from his pocket and calls the hospital's emergency department where he works nights. It's not a unique situation. But it raises a question many residents may not have thought of: Is any of it deductible?
Knowing what is--and isn't--eligible for deductions will make tax time easier for residents who are typically already time- and money-strapped. But before getting down to specifics, it's important to examine why the system creates such confusion and frustration.
The 16th Amendment to the US Constitution, passed in 1913, provides that: "Congress shall have the power to lay and collect taxes on income from whatever source derived ... ."
This amendment does not say income tax collection must be fair, reasonable or is limited by any defining standard; nor does it say that we are entitled to any deductions. Congress has the authority to exclude certain types of income from taxation and to allow deductions from income as Congress deems appropriate. To properly omit income or deduct expenses, we must find in the tax code the authority to do so.
From the beginning of income tax, Congress has allowed deductions for business or professional expenses. "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. ...," states Internal Revenue Code Section 162. For residents, problems arise with defining "ordinary," "necessary" and "carrying on any trade or business."
Another complication is determining in what capacity your expenses were incurred--as an employee of the teaching hospital or as an independent professional being compensated on a contract basis (e.g., moonlighting). You can deduct expenses incurred as a hospital employee if you itemize. But there's a limitation: Congress then reduces your otherwise deductible costs by 2% of your income. For example, if you and your spouse have a combined income of $40,000, then you can only deduct expenses exceeding $800 (2% of $40,000).
There is no limit to the amount of moonlighting expenses you can deduct against your moonlighting income. This deduction reduces both your income tax and your social security tax. However, it is difficult to ensure your deductible expense can withstand an Internal Revenue Service (IRS) challenge that the expense is related to your moonlighting income.
For 1995, you may choose to take a standard deduction--$6,550 for married taxpayers--or to claim itemized deductions. Itemized deductions include interest on a home mortgage, real estate property taxes, charitable contributions and certain employee expenses that exceed 2% of your income. (To exceed the standard deduction, most taxpayers need the interest and taxes associated with buying a home.) Here are some potential employee deductions:
Communication expenses
Most residents use telephones, cellular phones, computers, faxes and/or on-line services to communicate with hospital and medical personnel. Some of these expenses are deductible.
Residential phone costs: The IRS does not consider your residential telephone a deductible business expense. The theory is that you would have a residential phone even if you were not a resident so it is a personal cost. Consequently, the basic cost of telephone service is not deductible either. However, if you can show services, such as call waiting, call forwarding and caller ID, have been added solely because of your professional activities, these could be deducted as trade or business expenses.
Cellular phone costs: The IRS will again apply the personal use standard here. But a communication system beyond a residential phone usually is directly related to your profession. After making a clear cost connection between a cellular phone and your business, you must next prove the cost "ordinary" and "necessary."
The IRS next requires you to allocate the communication costs into three income areas: personal, hospital employee and moonlighting. Review a representative monthly bill to allocate the cost based on use.
Personal calls, such as calls home, are not deductible. Calls to and from the hospital would be allocated to hospital employment and are partially deductible, but only if you itemize. And calls related to moonlighting income from the emergency department are fully deductible with no limits on the amount even if you do not itemize.
Is the pain worth the gain? For the deduction traced to your moonlighting income, the answer is yes. But if you do not have non-employee earned income, the answer is likely no.
Educational expenses
Can you deduct the costs incurred by purchasing books or paying fees and tuition for courses offered by the university or professional organizations? Although you can deduct educational expenditures that improve skills or allow you to maintain professional skills--meeting the "ordinary" and necessary" criteria--there are two exceptions.
First, you cannot deduct costs incurred for education necessary to meet the position's minimum requirements. This means you cannot deduct medical school expenses. (In contrast, you can deduct fees paid to attend a seminar involving your specialty).
Second, you cannot deduct expenses for education that will help qualify you for a "new trade or business." For example, the IRS said that an epidemiologist who held a Ph.D. could not deduct the cost of medical school. The taxpayer contended she was getting a medical degree to improve her skills as an epidemiologist. The IRS said that her motive and intent in pursuing the education was irrelevant and medical school qualified her for a new trade or business.
The only way to deduct these costs is to tie them to your employment or moonlighting work. For example, in one case the taxpayer was a licensed physician and a second-year resident in a hospital-based psychiatry program. At his own cost, the physician underwent psychoanalysis. The program did not require its residents to do so nor was psychoanalysis required to become board-certified. The deduction was allowed because the psychoanalysis clearly maintained or improved the skills required of a licensed physician treating psychiatric patients.
Each case must be considered on its own merits, but generally if the education is part of your self-employment (moonlighting) income, then the cost is fully deductible.
Moving expenses
If you had to move more than 50 miles from your medical school to the teaching hospital, you may qualify for a deduction. You must have established a home where your medical school is located and have worked as a resident for at least 39 weeks one year after moving. You can deduct the cost of moving your household goods and personal effects to the new residence, plus the cost of travel (9 cents per mile and lodging while en route) to the new location.
This is not an itemized deduction, but a deduction from your income. As a result, this deduction will always reduce your tax.
If you have moved and have not claimed a deduction, you have three years to file for a refund. For example, claims for deductions of moving expenses in 1992 must be filed by April 15, 1996. A refund request requires filing Form 1040X.
Charles Solcher, CPA, is an attorney and member of the teaching faculty at the University of Texas at Dallas. He specializes in federal income taxation.
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