Dr., guest columnist Ronald Dritz invites young anesthesiologists to join him for a series of articles focusing on the lifecycle of financial health, from wealth accumulation to retirement planning. In this installment, he tackles the federal income tax—how it’s calculated and what you owe.
The federal income tax is a graduated tax; that is, the tax rate increases in a stepwise fashion. As your taxable income increases, so does your tax rate. That does NOT mean that when your taxable income passes the threshold for a higher tax rate all your taxable income is taxed at the higher rate. Only your taxable income above the threshold is taxed at the higher rate.
Notice that I have been careful to use the term “taxable income.” There is an important distinction to be made between “earned income” and “taxable income.” Federal taxes do not apply to all of your earned income. Your taxable income is derived by subtracting all your tax deductions from your earned income. Earned income is referred to as “gross income,” while taxable income is referred to as “adjusted gross income” or “AGI” by accountants. The 2024 and 2025 federal tax tables shown above reveal how the tax brackets are increased annually based on inflation. Thus for a married couple filing jointly in 2024 a 10% tax would be paid on the AGI from $0 to $23,200, while in 2025 the 10% bracket extended to $23,850. For a quick overview of federal tax bracketology watch this short (3 minute) video.
Tax Deductions: Getting from Gross Income to AGI
Federal tax deductions fall largely into two main categories. The first category is a choice, either a standard deduction or an itemized deduction. Itemized deductions include property tax, mortgage interest payments and a portion of charitable donations depending on your AGI. The 2017 Tax Cuts and Jobs Act* (Also known as the Trump Tax Cuts) capped state and local taxes (SALT) deductions, of which property tax is the main component, to a maximum of $10,000 and limited mortgage interest deductions to the first $750,000 of the value of a mortgage for those filing jointly. However, it also increased the value of the standard deduction. The result was to push most tax filers towards choosing the standard deduction.
Contributions to 401(k), 403(b), and 457(b) retirement plans, 529 education accounts, and health savings accounts make up the second largest category of tax deductions. A sound understanding of the basic mechanisms of federal income taxes is essential to creating a rational and effective strategy to fund and manage your tax advantaged retirement accounts. In next month’s blog we’ll look at how these savings instruments work.
Profits made from the sale of capital assets (i.e., capital gains) are taxed with a completely different set of tax brackets. Capital assets include stocks, bonds, real estate and certain tangible items like cars and boats. To qualify for this tax bracket a capital gain cannot be harvested before it has been held for one year. Capital gains held for less than a year are called short term capital gains and are taxed as ordinary income. But as you can quickly see from the table below, capital gains offer significantly lower tax liabilities than ordinary income.
Capital Gains Tax Brackets
As the accompanying table shows, in 2025, for a couple filing jointly, the first $96,700 of capital gains will be taxed at 0% — that is, tax free! The same couple would only get the first $30,000 of ordinary income (the standard deduction) tax free. Additionally, as you can see, capital gains are taxed at much lower rates than ordinary income.
*The 2017 Tax Cuts and Jobs Act (TCJA) is due to expire on December 31, 2025. Congress is currently deliberating legislation called The One Big Beautiful Bill that includes language that would largely maintain and, in some cases, enhance the TCJA tax provisions. Those modifications would take effect on January 1, 2026, in their current form. Were this legislation not to pass and TCJA allowed to lapse, the Tax Code would revert to pre-TCJA status. When there is clarity (i.e., new legislation is passed) I will create an addendum to this blog.
Ronald Dritz, MD, FACA, practiced anesthesia for twenty-eight years in northern California. He held numerous positions of leadership including Chairman of Anesthesia, President of the Medical Staff, hospital and health system board membership and served as Finance Chair of an IPA medical group. He is happily retired and lives with his lovely wife in Emeryville, California.
