Physicians! The Tax Cliff That Could Cost You Thousands
How I Lost the $4,000 Child Tax Credit—And How You Can Keep Yours
I experienced this firsthand—I lost the $4,000 Child Tax Credit due to a single mistake.
During the pandemic, a temporary tax provision allowed people to withdraw money from their retirement accounts penalty-free. I took advantage of this opportunity with the intention of buying rental properties. However, this withdrawal pushed my income above the threshold to qualify for the $4,000 Child Tax Credit. At the time, I didn’t realize the downstream consequences of withdrawing money from my retirement account.
Thankfully, I caught my mistake the following year, returned the money to my retirement account, and amended my tax return to lower my income in order to reclaim the $4,000 Child Tax Credit in the previous year.
This could happen to you if your salary is around $400,000. I want to share what to watch out for so you don’t lose this valuable tax credit, which is only available while your children are 17 or younger.
How the Child Tax Credit Works
As a parent, you are entitled to receive the Child Tax Credit (CTC) of $2,000 per dependent child who is 17 or younger. If you are married filing jointly, your modified adjusted gross income (mAGI) must be $400,000 or less to receive the full credit. Once your mAGI exceeds $440,000, you lose the credit entirely.
If you are a single parent, the income thresholds are much lower—your mAGI must be $200,000 or less to receive the full credit, and no credit is available once your MAGI exceeds $240,000.
For example purposes, I’ll use the married filing jointly status in the following hypothetical scenarios.
Here are two common situations where you could unintentionally push yourself out of the income range for the Child Tax Credit.
Scenario 1: A Physician with a Base Salary Around $400,000 Who Picks Up Extra Shifts
When I was a new ED attending, I was eager to pick up extra shifts—just like Dr. Martindale. I didn’t care how much money I had already made; my goal was simply to earn as much as possible.
If you’re like me, consider being a bit more mindful—especially if your base salary is near $400,000. In the fourth quarter of the year, take a moment to review your pay stub and estimate your projected year-end salary. This way, you can make an informed decision about whether to pick up extra shifts and how many, knowing that once your modified AGI exceeds $440,000, you will lose the Child Tax Credit.
Remember, as long as your modified AGI remains below $400,000, you are entitled to a $2,000 Child Tax Credit per child if you file jointly with your spouse.
Scenario 2: A Physician with a Base Salary Exceeding $440,000
If your W-2 income exceeds $440,000, your mAGI will also be above $440,000, given that most W-2 physicians have no adjustment deductions to lower their mAGI. This means you will likely receive no Child Tax Credit - unless you take strategic action to reduce your mAGI income.
W-2 physicians have limited options for reducing mAGI, but one effective strategy is investing in oil and gas, which can generate adjustment deductions that can bring your mAGI below $400,000.
Example: Lowering mAGI with an Oil & Gas Investment
You are projected to earn $460,000 from your W2 job.
You invest $80,000 in oil and gas.
Roughly 80% ($60,000+) is deductible in Year 1 due to intangible drilling cost (IDC) deductions and other available depreciations.
New mAGI: $460,000 - $60,000 = $400,000.
Result: You now qualify for the full Child Tax Credit!
Options for Business Owners
If you own a business, you have more flexibility and options for lowering mAGI by increasing adjustment deductions, such as:
Prepaying next year’s expenses before year-end.
Utilizing accelerated depreciation strategies such as bonus depreciation or Section 179 deduction.
Spending on necessary repairs or maintenance to create deductible business expenses
Final Thoughts
If you earn around $400,000 as a married couple filing jointly and have young children, be mindful of your modified AGI (mAGI) to ensure it stays below $400,000 so you can qualify for the full Child Tax Credit.
With strategic tax planning, you can keep more money in your pocket and maximize your tax benefits!
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