by Justin Ash
The risks and rewards of becoming a physician are both numerous and daunting. Becoming a medical doctor can take between eleven and sixteen years from the time of high school graduation depending on whether the physician chooses to specialize. Of course the compensation of physicians is one major reason to become a medical professional. Regardless of the economic benefits there are still severe shortages of physicians in the United States, most of them occurring in rural areas. One such under-served area is Otsego County, NY. To alleviate this doctor shortage there are programs that provide grants to medical doctors who agree to relocate to an under-served area and work in their chosen field for a minimum time commitment. Two of the major grant giving organizations are Doctors across America, and Doctor’s across New York. These organizations provide up to $100,000 to physicians to be applied against their student loans in exchange for their services in an under-served area. This is a welcome incentive considering that most physicians are $500,000 in the hole before they hit their early thirties.
The receipt of these grants begs the question, “What are the tax consequences of a DANY grant?” The IRS has issued guidance regarding these grants that exclude them from income as long as the physician applies them against student loans and completes the term of service stated in the agreement between the doctor and
the grant-giver. However, the treatment of these grants by State taxing authorities is a bit more vexing.
In NYS there is almost a complete lack of guidance as to how to treat these grants for NYS income tax purposes. NYS is a pickup state, meaning that it starts with Federal adjusted gross income and makes adjustments to it, in order to reflect NYS law. The correct treatment depends on how the physician uses the funds. As long as the funds are indeed applied against the physicians student loans (which must be substantiated) and the physician completes the agreed upon term of service, it should not be added back to taxable income on the NYS return. In other words, as long as the doctor holds up their end of the bargain, then these funds are tax-free on a Federal and NYS level. Please note that every state has different rules.
There are numerous other issues that can affect the taxability of these types of grants and that could also affect planning opportunities further down the road. If you are considering accepting a DANY grant or if you have included these types of grants in your income in the past three years we may be able to amend your return and request a refund of the tax paid. Please contact us so that we may fully analyze your unique situation and advise you as to the best course of action.