It’s been three years now since I originally wrote about how it’s possible to pay $0 in federal taxes and $0 in student loan payments as a travel therapist. That article has gotten a lot of attention and questions over the years, and a recent question about how the numbers have changed over the past three years made me realize that it is past time for an update! Below is the original article with updated numbers and graph as well as some other minor changes.
Managing student loans as a new grad therapist, or even as a seasoned clinician, is one of the most common concerns that we hear from our colleagues and followers. In addition, paying down student loans is also the most common reason that we’ve encountered for why new travelers choose to take travel contracts. Some of my most popular articles of all time on our FifthWheelPT blog have to do with how I’ve chosen to manage my student loans, and this was also the topic of a 2018 post on this site, Travel Therapy: Paying Off Student Debt… or Not?
Today I want to talk about how it’s possible to pay $0 in federal taxes while also having a $0/month student loan payment while on an income driven repayment plan as a travel therapist. This is something I’ve personally been able to accomplish during most of my years as a travel therapist, and I know others can too. For the purposes of this post, I will ignore state taxes, since this will differ for each individual based on the state in which they work and the state in which they have their tax home. I will also ignore FICA taxes since they are owed on every dollar of income earned regardless of income level and can’t legally be avoided.
Some of the terminology and ideas in this post may get complex, so if you’re confused, check out the post linked above on Student Loans, as well as some of the links contained in that post for more background info.
Before I start, I do want to say that this is not meant to be personal advice for your individual situation, as I am not a financial advisor or accountant and have no formal training on these topics. This is information that I’ve learned from reading and researching over the past few years and implemented in my own situation, but everyone’s situation is different and tax laws change regularly. If you’re interested in doing anything similar, then do your own research or reach out to a licensed professional for help, as this post is meant for illustration and entertainment purposes only!
Alright, now with that disclaimer out of the way, let’s look at how I would plan to keep my federal taxes and student loan payments both at $0 for the foreseeable future as a full time travel therapist!
Example Situation Information
Let’s say that I’m a 26 year old new grad traveler, single tax filer, without any kids or dependents. I’m a DPT who’s home state and tax home is in Virginia. My primary goal as a travel therapist is to earn and save as much money as possible in order to increase my net worth as quickly as possible, to get to a point where I can transition into either part time work in a single location, or taking fewer travel contracts each year to have more free time for family, other hobbies, or leisure travel (semi-retirement). To do this, I invest heavily in tax deferred retirement accounts to decrease my tax burden and my student loan payment, which both allow me to save even more for the future. I have student loan debt amounting to $100,000 with an average interest rate of 6%. After reading more about the various income driven repayment plans, I’ve decided that REPAYE will make the most sense for me financially, and that I plan to eventually qualify for student loan forgiveness. I also understand that half of my accumulated interest is subsidized each month while on the REPAYE plan, so the lower my monthly payment (ideally $0), the lower my effective interest rate will be!
Income, Taxes, and Student Loan Payment
As a traveler, I work about 48 weeks per year while spending a month at home each year as a vacation and to spend time with family and friends. My taxable pay on contract is $21/hour, with tax free stipends received for lodging, meals, and incidentals while on assignment traveling. In this situation, assuming I work 40 hours each week, my yearly taxable pay would equal $40,320. (21 x 40 x 48 = 40,320) The 40 hours a week is a safe assumption since I always make sure to have a 40 hour guarantee in my travel contracts (as we recommend that other travelers do)!
If I were to not try to optimize this situation at all, I would have a federal tax bill of approximately $3,153 for the tax year of 2021. I would also have a monthly student loan payment of $175, which is equal to $2,100 for the year. That’s definitely not bad, but I want to do better. I’d rather keep that $5,253 in my own retirement accounts to grow and improve my net worth than pay it to the IRS and my student loan servicer! Below are diagrams showing both the taxes and the student loan payment for this scenario. The student loan table was generated using the federal student loan website’s repayment estimator and the tax chart was generated using Nerdwallet.com.
The key to paying less in taxes and having a lower monthly income driven student loan payments lies in reducing your Adjusted Gross Income (AGI), as this number is what both the IRS and the federal student loan program use to determine taxes and student loan payment, respectively. One of the easiest ways to do this is to contribute to tax deferred accounts such as a traditional 401k, a traditional IRA, or a Health Savings Account (HSA). These accounts are very advantageous because not only do they reduce your tax liability, they also benefit you in the future through the money growing in the accounts over time (provided the money is invested wisely). For my purposes, I want my AGI to be low enough that I don’t owe anything in federal taxes and I have a student loan payment of $0. However, the two numbers to achieve these goals are unlikely to be the same, so this takes some research on my part.
In 2021, the standard deduction is $12,550, which means that any income up to that amount is taxed at 0%, but you can actually go higher than this amount before owing any money in federal taxes. For my situation in this optimized scenario, by contributing to retirement accounts, I also qualify for the saver’s credit. This means that as long as I contribute at least $2,000 to a retirement account and have an AGI below $19,750, I get a $1,000 tax credit that will completely wipe out any federal taxes owed at that income level. As far as federal taxes for a single traveler without kids who contributes at least $2,000 to retirement accounts are concerned, $19,750 is the sweet spot to owe nothing. This is assuming that no other deductions or credits are available to be claimed, which in the scenario above would be true.
Differing from when I originally wrote this article in 2018, to have a student loan payment of $0, then $19,750 is actually low enough to achieve that. In fact, in the scenario above, the highest AGI to still maintain a $0 monthly student loan payment is $19,919. Below is the student loan comparison table using an AGI of $19,919.
This means that if I’m able to reduce my AGI from $40,320 down to exactly $19,750, I will achieve my goal of paying $0 in federal income taxes while also having a $0 student loan payment!
Reducing your AGI by almost $21,000 may sound difficult, or even crazy. For most people who make only $40,000/year, that would probably be the case. However, travel therapists are different.
Since we receive tax free stipends which usually cover most, if not all, of our living expenses, then living on a taxable income of $19,750/year isn’t nearly as hard. In fact, Whitney and I have each lived on much less than this each year since we began traveling, and we have met and mentored many others that do as well. If you live an expensive lifestyle in a high cost of living area, then this might not be possible for you. But if your primary goal is to keep as much of your money as possible, while saving and investing for the future by living a modest lifestyle to achieve financial independence as quickly as possible, then this is 100% doable!
Implementing this strategy is fairly straight forward. Utilizing the tax deferred accounts mentioned above, I would need to contribute $20,570 per year to my tax deferred accounts to reach the $19,750 AGI amount talked about above. Here’s the course of action that I would take:
Since an HSA is an extremely valuable account to save for future medical expenses, or even to use as an extra retirement account, that is the first account that I would want to contribute to. I choose to utilize a high deductible health insurance plan specifically to have access to this amazing account! The contribution limit for a HSA for a single individual is $3,600 for 2021. So I would contribute the full $3,600 to my HSA. This leaves me with $16,970 I still need to contribute to my other tax deferred accounts to reach my goal of lowering my AGI ($20,570 – $3,600 = $16,970 still to contribute).
The next $6,000 (the contribution limit for IRAs in 2021) would go into a traditional IRA account. I prefer maxing out an IRA before a 401k due to the increased number of investment options available in the IRA compared to a 401k. Having more options for where to put the money will ultimately mean lower fees paid and more money in retirement. ($16,970 – $6,000 = $10,970 still to contribute).
At this point, I would have $10,970 left that I would put into the 401k plan offered by my travel company. I refuse to work with any travel company that doesn’t offer a 401k because of how valuable I find being able to contribute to these tax deferred accounts to be. A 401k has the largest limit of the accounts talked about above at $19,500 for 2021. I wouldn’t even need to max out the 401k completely since contributing just the $10,970 would get me to my goal, but if my income happened to be higher for some reason (possibly working overtime on a contract, or having other sources of income) then there would still be some wiggle room to contribute more and still achieve the magic AGI amount of $19,750.
As a traveler, it’s possible to have both a $0 federal tax bill and simultaneously have a $0 income driven student loan payment. Subsequently, this will allow the traveler to utilize the money saved to invest for the future and almost certainly achieve financial independence more quickly.
The key to achieving this is the traveler reducing his/her AGI by contributing to tax deferred accounts (401, traditional IRA, HSA). The magic AGI number needed in the scenario above to reach this goal is $19,750, with anything below that amount being unnecessary. In the scenario above, using this strategy and putting the $20,570 needed into the tax deferred accounts would save the individual $5,253 between federal taxes and student loan payments, which is a 25% savings on the amount put into the accounts in the year contributed! Instead of that money being paid to the federal government and the student loan servicer, it would be invested and subsequently compounding tax-deferred over the years for you to use in retirement.
Being able to do this is relatively unique to traveling healthcare professionals, since many of our expenses are reimbursed tax free while traveling, making living on the much lower AGI completely feasible; whereas, someone without the tax free stipends as part of their compensation may struggle to achieve this goal. Whitney and I here at Travel Therapy Mentor have taken advantage of tax deferred accounts to reduce our tax burdens while traveling, which we believe is a smart way to not only save money on taxes but also to set yourself up for a financially comfortable future!
Thanks for reading and making it through all of that!
Do you take advantage of tax deferred accounts to reduce your income taxes and student loan payment while traveling? Let us know in the comments below!
Reach out to us with any questions or for clarification on anything mentioned above. If you’re just getting started with travel therapy and you need help finding a good recruiter/travel company, then we can help you with that here!
-Written by Jared Casazza, PT, DPT