Starting residency, part II: tax tips for the first-year student

Starting residency brings a very welcome and much-needed source of income for many medical school graduates. But coupled with this income are taxes. Unfortunately, many residents are unaware of the tax credits and deductions available to them. Here, then, are answers to a number of frequently-asked tax questions. Are my tuition fees deductible? Tuition fees paid during medical school or a residency program are not deductible but are eligible for the "tuition fee credit." Obtain Form T2202A from your university to determine your allowable tuition costs. Keep in mind that, under recent federal budget proposals, the tuition tax credit is to be extended to include mandatory ancillary fees charged by post-secondary institutions (except student association fees). While not yet law, the change is proposed to be effective for 1997. Fees paid for admission, application, confirmation, use of library or laboratory facilities, examinations (including re-reading) and diplomas, as well as mandatory computer service fees and academic fees are considered eligible tuition fees. Other tuition fees (i.e. for ATLS courses and certain LMCC preparation courses) also qualify for the tax credit. Make sure you obtain appropriate documentation for these courses from administrators. Although full-time medical students can claim an education tax credit of $150 per month ($200 per month in 1998), this benefit is not currently extended to residents -- even though many residents are defined as "full-time" students by their respective universities. This policy is presently under review with Revenue Canada. What about medical and dental expenses? The first year of residency can be the best time to incur any medical and dental expenses that you avoided during medical school. Not only will some of these costs be partially or fully covered by your employer's health insurance, but also you may be able to claim a portion of these expenses as a "medical expense credit" and recover a portion of them in the form of a greater tax refund. Medical expenses in excess of $1,614 or 3% of your net income, whichever is less, are eligible for the credit. Since your first-year residency income will likely be the lowest of your career, the latter will likely apply for the 1997 tax year. For this reason, it would be wise to accrue all necessary medical and dental costs in 1997 to maximize your deductible medical expenses. Revenue Canada also allows the deduction of medical expenses for any 12-month period ending in the year. In other words, you can choose the 12-month period (e.g. June 28, 1996 to June 27, 1997 or November 30, 1996 to November 29, 1997) that maximizes your deductible medical expenses. Eligible medical expenses include various medical costs, dental fees, prescription eye glasses, prescription medication, medical insurance premiums, and a multitude of other expenditures. When in doubt, keep all receipts and check with the District Office of Revenue Canada or your tax advisor. Are my malpractice insurance premiums deductible? For an employee to deduct professional dues, the Income Tax Act requires that payment of the dues must be necessary to maintain a professional status recognized by statute. Even though CMPA dues are generally required as a condition of employment, this requirement has no bearing on the deductibility of the fees. In provinces other than Quebec, Newfoundland and P.E.I., CMPA dues are not required to maintain a professional status, and therefore would not appear to be deductible. Nevertheless, some Revenue Canada district tax offices have been known to allow the deductibility of CMPA dues as other employment expenses or union dues. Are my examination foes eligible for the tuition tax credit? Revenue Canada has stated that examination fees paid to the Medical Council of Canada (LMCC Part I and II) are for the purposes of being examined to qualify for licensure rather than being an integral part of a course of study. As such, they are not eligible for the tuition tax credit. Repeated attempts to claim them have been denied. Similarly, examination fees paid for the United States Medical Licensing Examination (USMLE Parts I, II, and III) have been disallowed. Examinations at completion of a residency program (e.g. FRCPC exams at the end of Family Practice Residency) are deemed to qualify an individual to practice in a particular specialty and have been allowed by Revenue Canada. Can I deduct books and instruments? Books and instruments are deductible against income earned from a business. Since income received during medical school or residency is income from employment, students and residents cannot deduct these expenses. When you begin a practice, you may transfer these items to the business at their fair market value. The business can then deduct or depreciate these items to achieve a tax benefit. The old adage, "When in doubt, keep all receipts," applies here. Can I deduct moving expenses? When you relocate to another city to begin residency you incur moving expenses that may be deductible when completing your tax return. Eligible moving expenses include travel costs, transportation costs for belongings, meals during travel as well as food and lodging for a "reasonable" period while you are waiting for a new residence (usually up to 15 days). Other allowable expenses include the cost of breaking a previous lease as well as real estate commissions on a former residence. To ensure no deductible expense is omitted, obtain Form T1-M (Moving Expenses) from Revenue Canada when completing your tax return. Until recently, Revenue Canada has generally only allowed the deduction of car expenses actually paid in the course of a move -- in other words, gasoline and little else. However, the Tax Court of Canada recently allowed a taxpayer to claim an automobile allowance of 34.5 cents per kilometre (McMillan et al v. the Queen). Based on this case, it would appear you can claim a reasonable allowance to reflect the operating costs of the car (gas, oil, repairs, insurance, etc.) that can be attributed to the move. The taxpayer had no receipts for car expenses relating to the move but was able to convince the court that the car made the trips in question. The taxpayer claimed a $1 per kilometre allowance (fully disallowed by Revenue Canada) but the Tax Court could find no justification for an allowance of that amount. Instead, it allowed the Government of Canada rate of 34.5 cents per km. Revenue Canada has chosen not to appeal this case. If your residency is in the same city as your medical school, you may still be able to deduct moving expenses. Many medical students remain "residents" of their home province for tax purposes while attending medical school in another province. Their attendance at medical school is deemed temporary and their permanent residency does not change. For these students, starting post-graduate training means a change of permanent residency. This makes them eligible to claim all allowable moving expenses that would be incurred by moving from their home provinces to the communities where they are completing residency. Although the deadline for filing 1997 tax returns is not until April 1998, you should obtain and store all relevant receipts while these expenses are incurred. This will maximize both your deductible moving expenses and your subsequent tax refund. Again, keep all receipts. Can I deduct travel expenses incurred during CARMS interviews? While fees paid to CARMS for residency selection are eligible for the tuition tax credit, travel costs incurred during interviews are not deductible for tax purposes. Only travel costs incurred to complete the final move to your new training location are deductible and classified as eligible moving expenses.