Make more than your spouse? Here’s how to save money on taxes.

The only time my husband outearned me was during our first three years of marriage when I was still in residency and working 80-plus hours per week earning less than minimum wage per hour. Since then, despite graduating in a professional degree, we have made relocation moves that primarily help with my career growth, to the detriment of his.

In 2015, an NPR article quoted statistics showing that 38 percent of wives made more money than their husband. In most physician-women breadwinner household, that income disparity can be huge. In my case, I earn (depending on the year) 95 to 98 percent of our household salary; my husband has always worked part-time to enable me to work full time. This has huge tax implications, as my husband’s part-time $20,000 to $30,000 annual salary is now taxed at our higher combined tax rate of 39.6 percent (plus state income tax of 9.9 percent). We pay more for daycare and school fees than what he earns after taxes!

Optimizing taxes and deductions

Since I started working as an attending physician, we continued doing what when we did when we had no income disparity: we both put up to 20 percent of our income into our 401(k) (I maximize my 401(k) contributions within the first few months of the year), paid more than 50 percent of my spouse’s income in taxes and went our merry way. It was not until I got more interested in finance and investing (after wasting almost ten years and lots of $$$), that I realized there are much better ways to get around this.

Our first move was to maximize his 401(k) contributions to 18K per year. That meant, for most of the year, his final paycheck was $0. It also meant that his salary alone minimally increases our household salary, and as such, our tax bill.

To ensure there are no surprises come tax day, I also elected to reduce my dependence limit on my W2 as 1/1 to ensure we don’t get saddled with a large tax bill.

We also maximized the gift tax exemption of $26,000 per couple. This past year, we chose to support a local homeless shelter for teenage moms. In the future, depending on our future salary, I am considering a donor-advised fund to help off-set our tax bill. Obviously, once it goes into the fund, it will all be earmarked for donation. By opening this, it will allow us to get an immediate tax donation on our contribution, yet grant funding over time.

Depending on the snowball that life sometimes throws at us, it might be beneficial to consider filing taxes separately. While this has not applied to us, if your lower earning spouse incurs high medical or work-related expenses a particular year, it might be worthwhile filing your taxes separately. You can only take the deduction for such expenses if it amounts to greater than two percent of income, filing separately will lower this threshold.

Another way to lower taxes, if you qualify, is to maximize your health savings account (HSA) deductions. You will qualify for this if you have a high-deductible health insurance plan. This generally refers to health insurance with a deductible of $1,300 or greater.

Financial gurus refer to such accounts as “triple-tax advantaged”: no federal taxes on money contributed (effectively lowering your annual gross income), returns on investment are not taxed, funds roll over annually if not spent and at age 65, it can be withdrawn without penalty. Not all HSA accounts are created equal, so do your research before opening one: Going automatically with what is offered at your workplace is not necessarily the best option. You can pick a different HSA provider and have your work send a check directly to them. This move will save you on payroll taxes. If you choose to deposit it directly with your after-tax money, you will still get a deduction come tax time, but will be subjected to payroll taxes. If you intend to invest with these funds, be sure to pick a HSA company that allows investment in low cost (index) funds. In 2017, you can contribute up to $6,650 per family or $7,650 if you (or your spouse) are above 55 years of age.

Another popular option is to open a flexible spending account (FSA) if offered by your employer. Be aware though, that all money not spent by the end of the tax year (Dec 31st) is lost, so do not put in more than you will spend. Besides health care expenses (including over the counter medications), some employers offer dependent-care FSA as well — which you can use to pay for childcare, preschool, summer camps.

Here is a new strategy I heard of recently that I have yet to explore: bunching itemized deductions every other year. This applies to IRS deductions that need to meet a minimum amount (percentage) of your income before you can take a deduction. Examples are medical expenses, charitable contributions, property taxes and state income taxes.

How will this work?

Basically, you will opt to take an itemized deduction on the year you pay for your property taxes (i.e., paying the current year and the following year’s property taxes at the same time), maximizing your charitable donations — a donor-advised fund will be particularly helpful and maximize your medical expenses (going for an elective surgery or procedure).

On your “off” year, you minimize your expenses and charitable donation and take a standard deduction (varies yearly, but it is $12,700 for married filing jointly in 2017). While this will not help us much at our current income rates, it may be something worth exploring in the future for us.

There are also special tax-exempt bonds, put out by the Treasury Department called I-Bonds and EE-Bonds that may be beneficial under certain circumstances. I am still researching these options — depending on how the stock market is doing, the returns may not be worthwhile (even if tax-free).

Another option that is kosher under IRS rules is to consider volunteering both locally and abroad. You are allowed to deduct your airfare, meals, and lodging expenses. As physicians, this may be a good way to do some good while seeing the world and getting a tax deduction as well. Such volunteer trips need to be with registered 503(c) organizations to qualify.

Do you have any other ideas to share? If you come from a family with a high-income earner, did the lower income earner choose to continue working?

“Foreign BornMD” is a physician who blogs at her self-titled site, Foreign Born MD.

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