• Margaret Curtis, MD

The AMT, or how I became financially literate

We got hit with the Alternative Minimum Tax two years running.

The Alternative Minimum Tax (AMT), if you are blissfully unaware, is a parallel tax code that removes some deductions for high earners. Calculate your taxes under both the regular tax code and the AMT, and pay whichever is higher. The AMT is the sucker punch of tax law.

The first year of the two years I was working at a new job that only offered a SIMPLE IRA. My office manager took a full year to actually set up my contributions to the IRA, despite repeated requests from me and our financial planner. (She was later fired for incompetence)[1]. I should have been more insistent. Actually, I should have sat in her office until she actually created the payroll deduction into the IRA I had already started at Fidelity. I didn’t, because I didn’t understand how much this deduction would mean to us (and because I was busy, you know, seeing patients). I also didn’t know then what I know now, that I could have used alternate tax shelters, including a back-door Roth and a solo 401K. So, I missed out on entire year of retirement savings and we missed $12,500 worth of deductions (more, if you count the absent solo 401k). Although my husband maxes out two employer-sponsored defined contribution plans, those deductions still weren’t enough, and we ended up with a federal tax bill that was larger than my gross salary.

My second year I was bound and determined not to make the same mistake. I contributed the max to my SIMPLE IRA, and even dug through the plan document to find that the practice should have been matching me at 3% six months prior (the new office manager wrote a check promptly). I still didn’t know about other tax shelters, though, and my husband’s surgical specialist salary put us over the top again. I was starting to wonder if, after taxes, commuting and childcare I was even breaking even at this job[2].

At that point I made it my mission to make sure we would never pay a 30+% tax bill again. As luck would have it, changes to the AMT in the 2017 tax law have made it unlikely that we will pay it this year or ever (or until the law changes). Even knowing this, I now had religion.

I started borrowing books on tax strategy from the library. I searched online for “high income tax shelter” and “how to avoid the AMT”. What I found was information not only on tax law, but on frugality, retirement, investing and living below your means.

This last one struck the strongest chord with me. Because the challenge I found, as I dug into our budget, was not finding tax-sheltered accounts to stash our money. It was setting aside enough money to save. My husband and I had secretly prided ourselves on having no debt other than a mortgage and driving used cars (that we paid cash for). Our lifestyle creep came in the form of too much real estate, and three kids in private school.

We moved when I started residency (with three kids already. I will explain later).

We kept our old house and rented it out. We put the kids in the sweet private school across the street because we wanted them in a nurturing environment while I was working all hours. Tuition was reasonable and my mother helped.

Eight years later and we are still here. The old house is rented out, but we missed some tax deductions. The youngest kid is now in fifth grade, and wouldn’t you know the tuition grows along with the kid. My mom died five years ago, and while I miss her a lot more than I miss her money, I will admit that her help sure made a difference.

I am not complaining and I am not crying poverty. We make more money than most people can dream of and we will be able to retire in comfort one day. But, we had done what I swore I wouldn’t do: we let our lifestyle catch up to our income. I always said, “If you can’t make ends meet on two doctors’ salaries, you have a problem”, and lo and behold – we had a problem.

We had managed to avoid carrying credit card debt or borrowing. We were still driving beater cars (but now it’s because we can’t afford to replace them ). We paid our bills on time and keep maxing out our work retirement plans. But we had no other regular savings and no leeway. We had to scramble to pay any unexpected bills.

So we made changes. We cut the fat out of our budget. I started a sole proprietorship for some per diem income, so I can take advantage of a solo 401K. We are capturing tax deductions on our rented house. We are starting a backdoor Roth this year. And maybe the best thing to come of our brush with – not financial disaster, but financial iceberg-on-the-horizon – is that I have well and truly taken our finances in hand.

I know our budget to the tens of dollars. I have vetted our insurance. I am (much more) conversant with the different tax-sheltered and taxable savings plans out there. I have made an investing plan and put our retirement accounts into index funds with the correct asset allocation. I haven’t ventured into doing our taxes (yet) – I have relatives who have been audited and would very much like to avoid that. If personal finance were medical school, I would be a third-year: not polished yet, but I’m up on my feet.

We are slowly turning the ship of state around. We could not be more fortunate.


[1] When I told the physician owner of the practice that there was a problem getting my IRA up and running, he said “We don’t have a IRA. We have a SIMPLE”. Financial literacy was not a strong suit of that practice.

[2] I haven’t done the math. Please don’t do the math for me.

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