90%+ of Physicians Don't Know This Essential Tax Formula!
A Simple Yet Powerful Tax Formula Every Physician Should Memorize!
Look at how much federal income tax you paid last year.
You can find this information on page 2 of your Form 1040, line 24. It’s may even be in the six figure!
Imagine all of the money you earned from working painful shifts from January to March going straight to Uncle Sam!
My Take on Taxes
Taxes are among the most common topics I hear discussed in the doc’s box when I work shifts. Thankfully, there are many tax strategies that can help lower overall tax liability. However, to effectively utilize these strategies, it is crucial to first understand how individual taxation works.
The reality is that practically none of us received any tax education during medical school. Once we start practicing, our lives become so busy that most of us remain uninformed about how taxes work.
I hope to change that by simplifying basic tax principles into bite-sized, digestible concepts that you can easily understand.
Individual Taxation 101
To keep things simple, I distill individual taxation into a basic tax equation:
Gross Income – Adjustments = Adjusted Gross Income (AGI)
AGI – Deductions = Taxable Income
Pretty simple, huh?
Let’s break this down
Starting with Gross Income
The first question is: What is gross income?
Simply put, any money that ends up in your pocket (before taxes) that you have control over is considered gross income, based on a long-standing Supreme Court opinion.
So, if you’re a W-2 physician, your salary from the hospital, dividends from your stock portfolio, interest from your savings account, capital gains from selling your Doge, and even a $100 bill you find on the street (yes, the IRS considers found money taxable income—really!) all contribute to your gross income.
Gross Income → Adjusted Gross Income (AGI)
To get from gross income to AGI, you apply adjustments (also called “above-the-line deductions”). Unfortunately, W-2 physicians have very few, if any, adjustments.
Examples of Adjustments:
Business expenses (for independent contractors, not W-2 employees. Bummer!)
Retirement contributions for business owners
Student loan interest (subject to income limits, most attendings won’t qualify)
So, most W-2 attendings do not qualify for adjustments. Meanwhile, 1099 physicians can deduct their business expenses as adjustments (wohoo!), which is why having a side gig or earning 1099 physician income can open the door to tax strategies focused on lowering AGI through adjustments.
Why Is Lowering AGI a Big Deal?
AGI is crucial because the eligibility for many tax credits and deductions are based on it.
For example, eligibility for the EV credit and education credits such as lifetime learning credit depends on AGI (to be precise, based on modified AGI, which is a form of AGI)
To qualify for the $7,500 federal EV tax credit for their Tesla Model Y purchase, a married filing jointly couple must have an modified AGI below $300,000. $300,001 will disqualify them. Ouch!
In general, the lower your AGI, the more tax benefits you qualify for.
AGI → Taxable Income
Once you have your AGI, you can further reduce your taxable income through deductions. There are two types of deductions:
1. Standard Deduction – A fixed amount based on your filing status.
2. Itemized Deduction – The total of eligible expenses across six categories.
You can choose whichever deduction is higher to reduce your taxable income.
Filing Status & Standard Deduction (2025)
Your filing status determines your standard deduction:
• Single: $15,000.
• Married Filing Jointly: $30,000
• Married Filing Separately: $15,000
• Head of Household: $22,500.
• Qualified Widow(er): $30,000
If your itemized deductions exceed the standard deduction, you can take the higher deduction.
Itemized Deduction Categories
Itemized deductions are the total of six categories:
Medical and dental expenses: Only the portion exceeding 7.5% of AGI.
State and local income taxes (SALT): Capped at $10,000.
Personal interest payments: e.g., Mortgage interest payments.
Charitable contributions: e.g., Donating cash to your hospital.
Casualty and theft losses: e.g., A house burn down in a California wildfire that wasn’t covered by insurance (only deductible for federally declared disasters).
Miscellaneous itemized deductions – Mostly suspended until 2026.
Each category above has a limitation, which I’ll cover separately.
Example of Standard vs. Itemized Deduction
A married couple filing jointly has the following deductible expenses:
• Medical/dental expenses: $0 (not applicable)
• State income tax paid to California (Category #2): $25,000 (but capped at $10,000 due to the SALT deduction limit)
• Mortgage interest payment (Category #3): $50,000
• Cash donation to their church (Category #4): $2,000
Their total itemized deduction is:
$10,000 (SALT limit) + $50,000 (mortgage interest) + $2,000 (charitable donations) = $62,000
Since their itemized deduction ($62,000) is greater than the standard deduction ($30,000) for 2025, they would itemize deductions to lower their AGI to taxable income instead of using the standard deduction.
This results in a greater tax benefit, reducing their taxable income by $62,000 instead of $30,000.
A quick note: There is another type of deduction available temporarily (is expected to expire in 2025), called the Qualified Business Income Deduction (QBID), which applies only to business owners. Since it is quite complex, I’ll skip it for now.
After Deductions: Taxable Income
After applying deductions to your AGI, you get your taxable income.
In my opinion, this is the most important figure because it determines your tax liability based on federal tax brackets. I’ll discuss how to apply tax brackets to taxable income for calculating taxes in more detail in a future article.
Real-Life Example: Why Understanding This Formula Matters
I recently consulted with a high-income EM physician in Arizona making about $800,000 in 1099 income.
He wanted to lower his taxable income while keeping his AGI as high as possible to qualify for a mortgage on a ballar attending home.
That meant we needed to focus on tax strategies that reduced taxable income without reducing AGI.
Our Approach:
• Since business expenses reduce AGI, we deferred utilizing strategies that would create business deductions.
• Instead, we focused on strategies that would increase his itemized deductions, such as charitable contributions, which lowers his taxable income.
If he didn’t understand this tax formula, our strategy might not have made sense to him. That’s why understanding this basic formula is crucial.
Final Thoughts
This might seem like a boring topic, but it’s one of the most important tax concepts for physicians to understand.
I would bet that 90%+ of your colleagues do not know this basic tax formula - so by learning it, you’re already ahead.
Remember this equation:
Gross Income – Adjustments = Adjusted Gross Income (AGI)
AGI – Deductions = Taxable Income
While there are nuances that slightly modify this equation, this is the foundation of how your taxes are calculated.
Master this, and you’ll have the fundamental knowledge to start implementing strategies to keep more in your pocket and send less to Uncle Sam!
