Last Friday, Congress rammed through the Coronavirus Aid, Relief and Economic Security (CARES) Act. It is a MASSIVE bill, ($2 Trillion+) causing the president to remark that he had never signed anything with a “T” on it before. It was rushed through with surprisingly little debate and is loaded with all kinds of pork to get everyone on board with it. Libertarians think it will be the end of the Republic and progressives think it didn't go far enough. Nobody is entirely happy with it but they all voted for it because they felt something had to be done so now it is law.
This is actually Phase 3 in new laws this month in response to the pandemic:
- Phase 1 was the Coronavirus Preparedness and Response Supplemental Appropriations Act (March 6th). This was $7 Billion mostly to the Department of Health and Human Services, CDC, and FDA to fight the pandemic.
- Phase 2 was the Families First Coronavirus Act (March 18th). This expanded sick leave and family leave provisions.
Today, I'm just going to be discussing the CARES Act itself and what means for high-income earners like doctors. I'm sure to make some mistakes in the post as this is all brand new, I haven't read the entire thing, and I'm not sure anyone has yet read the entire thing. I'll correct my errors as fast as I can right here in this post. Thus, if something sounds weird, be sure to double-check it with a reputable source or at least check back in a few days for any corrections.
The Act is a big stimulus to the economy to counteract the effects of telling everyone to stay at home to fight the coronavirus. It breaks down as follows:
- $560 Billion to Individuals
- $500 Billion to Large Businesses
- $377 Billion to Small Businesses
- $340 Billion to State and Local Governments
- $154 Billion to Public Health
- $44 Billion to Education
- $26 Billion to Safety Net
Let's take each of these sections one by one, describe what they do, and discuss how they might affect my readership of high-income professionals.
Individual Stimulus
The centerpiece of the legislation is the individual stimulus. It is basically a $1,200 check ($2,400 married) plus $500 per child that should show up in your mailbox in about three weeks according to the Secretary of the Treasury. So a family of four will get a check for $3,400.
Many of my readers, unfortunately, will get nothing. This stimulus phases out between $75,000 and $99,000 ($150,000 and $198,000 married) in adjusted gross income. The initial check will be based on your 2018 tax return (2019 if you have already filed it) but in actuality, it is a pre-payment of a tax credit on your 2020 taxes, and so will be adjusted when you file those next year. But med students, residents, fellows, new attendings, low paid doctors married to non-earners, and others in similar situations will get it.
In addition, those who just got laid off and those whose businesses are getting creamed right now are also likely to get it, but not for a year. Planning aspects to take advantage are mostly about lowering your AGI for 2020–i.e. saving more in tax-deferred retirement accounts if your 2020 AGI will be anywhere near the phaseout limits.
In addition to this cash payment, unemployment benefits became much more generous. These are all run through the states, so what you get if you do claim unemployment will vary by state. Basically for the next four months, the benefit will go up by $600 a week and more people will qualify for unemployment benefits for a longer period of time (13 weeks longer). My recent polls suggest as many as 3% of doctors are newly unemployed so a few of you likely qualify for this benefit, too.
Normally, the self-employed don't qualify for unemployment benefits. However, the legislation starts a new program called the Pandemic Unemployment Assistance Program. You'll get the $600 per week, plus half the average unemployment benefit in your state. Remember all unemployment benefits are taxable income. So if you're an independent contractor out of work, you're in luck!
You can also raid your retirement accounts a lot easier. 401(k) loans are expanded from $50K to $100K and, if you want, you can just withdraw up to $100K without paying the 10% penalty, so long as the distribution is “coronavirus-related”, although it appears that exception is so large that nearly everyone fits into it. Obviously, I highly recommend against doing either of these if you can at all avoid it. RMDs are also waived for 2020.
Large Business Stimulus
While this might not help you directly and might even feel like a giveaway to big business, remember that big corporations are really just composed of people–people like you and me and anybody who invests in stocks via mutual funds and 401(k)s. Think of this as a stimulus to your retirement account and it won't bother you as much. This stimulus isn't a gift, it's a loan, and the corporations will have to pay it back.
$58 Billion is loaned just to airlines. That probably explains this:
While I hate seeing government picking winners and losers in the economy, I do want there to still be airlines when this is all over so I won't complain too much about this. Let's be honest, most airlines across the world get significant help from their governments, so I guess it's not that unusual to see US airlines getting help from the US government and its money-printing machine.
In addition to the loans, there is a fully refundable tax credit for businesses of all sizes that are closed or just “distressed” to keep workers on the payroll. It covers up to 50% of payroll on the first $10,000 of compensation including health benefits. The idea with this is that businesses won't fire employees, they'll put them on paid furlough or at least hire them right back as soon as they can. For large businesses (100+ employees) the credit is for wages paid when folks aren't working. Small businesses (<100 employees) don't even have to close to get the credit.
So how will these benefits help you? Well, it might keep you from getting fired and it'll certainly help your investments. If you are a partner in a group, the credit for not firing your employees should pass through to you.
Small Business Stimulus
In addition to the tax credit mentioned above, small businesses have a few other special benefits in the CARES Act. There is $10 Billion set aside for “emergency grants” to cover immediate operating costs, up to $10,000 per business. However, to get it you also have to apply for a Small Business Administration (SBA) Economic Injury Disaster Loan. Each small business can borrow 2.5X average monthly payroll expenses over the last year up to $10 Million, at an interest rate no higher than 4%, without any personal collateral or guarantee. Fees, principal, and interest is expected to be deferred for 6-12 months. The amount of that loan that is used for payroll, rent, utilities, and loan interest (including mortgage) for the first 8 weeks could be forgiven tax-free, provided workers stay employed through the end of June.
Wow! Did you hear that? Free money for small business owners! So the goal is to maximize payroll, rent/mortgage, and debt payments between now and the end of June. Talking about moral hazard. MANY of my readers are small business owners and I'm sure over the coming weeks we'll all come up with all kinds of creative ways to maximize this benefit. We run WCI, LLC debt-free, but this sort of benefit has got us thinking about taking out a loan just to get it forgiven. While I think we can borrow something like $250K, it looks like we'd only get something like $60K in actual loan forgiveness, but that sure beats a kick in the teeth. These loans are guaranteed by the government, so there's no reason for a bank not to provide them. I'm sure there will be additional posts coming on this topic but if you want to start thinking about it, the amount of forgiveness is basically 2 months worth of payroll costs up to a payroll cost of $100K/employee.
There is another $17 billion set aside to cover payments on previously existing SBA loans. There is a limitation on how much interest a business can deduct. The CARES Act raises it to 50% from 30%. Net operating losses from 2018-2020 can also be carried back 5 years, allowing you to refile your taxes for those years immediately to get that refund. You can also defer payment of the employer half of payroll taxes through the end of the year. They will be due 50% on December 31st, 2021 and 50% on December 31st, 2022.
State and Local Government Stimulus
This is simply a transfer of money from the federal government to state and local governments. The total is $340 Billion. $274 Billion goes to COVID-19 response efforts, most of which is just a big fat check sent to the states. There is also money specifically directed at Community Development Block Grants, K-12 schools, higher education, and child care centers.
Public Health Stimulus
This section of the CARES Act specifically helps health care organizations. $100 Billion goes to hospitals, $1.3 Billion goes to Community Health Centers, $11 Billion for tests, treatments, and vaccines, $80 Million to the FDA to approve new drugs, $4.3 Billion to the CDC, $20 Billion to the Veteran's Administration, $16 Billion to the Strategic National Stockpile, and the extension of a telehealth program.
Maybe some of this money will flow through to individual doctors, but mostly this section is about fighting the pandemic itself. I mean, if we're going to spend $2 Trillion, 
we might as well put 8% or so of that toward the actual war we're fighting, right?
Education Stimulus
Most of this could be included in the individual stimulus package. The biggest part is that all federally-owned student loans have both payments and interest waived from now through September 30th. Those of you going for Public Service Loan Forgiveness basically get 6 free payments toward your 120 qualifying payments. While this is a terrible development for businesses like The White Coat Investor, LLC and our student loan refinancing partners, it's certainly a great benefit for many, many doctors. 25-33% Of doctors have student loans and most of them are federal. We'll have some future posts discussing how this should affect student loan management, but the bottom line is if you were thinking about refinancing from federal loans to private loans, you will probably want to hold off a few months.
Other benefits including work-study payments are now just grants (free money). Undergraduates who dropped out of school due to the pandemic, you won't lose eligibility time for Pell Grants or subsidized loans. Arts programs, universities, and other institutions of higher learning are also getting “stimulated.”
Safety Net Stimulus
$8.8 Billion will go toward school lunches. $15.5 Billion will go to the Supplemental Nutrition Assistance Program, i.e Food Stamps. Indian reservations and non-state territories will also get nutrition assistance. $450 Million will go to food banks.
Miscellaneous Benefits
The legislation also does a few other things, such as delaying your tax return and tax payment date for 2019 to July 15th. 1Q estimated tax payments also due July 15th, but 2Q estimated tax payments are still due June 15th. Many states are also requiring pushing their tax due dates back. This is changing rapidly, so check with your own state taxing authorities. Required Minimum Distributions (RMDs) are also suspended for 2020. Employers are now permitted to pay your student loan payments, up to $5,250, using pre-tax dollars. Normally that is taxable income to you. Good luck talking your employer into adding benefits right now though…unless you're your own employer, in which case, this could be a worth a couple thousand dollars to you. It also requires insurance companies to cover COVID-19 treatments (debatable whether they really exist yet), COVID-19 vaccines (definitely don't exist yet), and COVID-19 tests. The Act also waives airplane ticket excise taxes for any trips done during the rest of 2020.
Real estate investors also have a new tax benefit. This is the one news articles are calling the tax break for the 1%. It used to be that you could only use real estate depreciation to offset up to $500K in capital gains per year. That's now unlimited for 2020 AND for 2018 and 2019 (but you'd obviously have to refile 2018 and maybe 2019 to get it.) I don't think very many of my readers are going to see much benefit here.
Charity supporters have a new tax benefit too. If you don't itemize, you can take up to $300 in charitable donations as an above the line deduction, although that money can't go into your Donor Advised Fund or Foundation. The limitation on how much of your income that you can deduct (normally 50%) is also eliminated, but just for 2020.
Money for everybody! How exciting! I have no idea if it is smart to spend all this money on stimulating the economy right now or not. I'll leave that question in the hands of the economists. I also have no idea whether the way the money is being distributed is fair or not. I'll leave that question in the hands of the politicians and voters. Where is the money coming from? Well, it's basically being printed by the government. Will that lead to inflation? Under normal circumstances, probably. In the face of a massive recession? Perhaps the inflationary and deflationary effects will simply offset each other. We'll see. In the meantime, make sure you get what you're owed and adjust your written financial plan as appropriate under these new laws.
Whew! There's a lot there. Obviously there will be some follow-up posts discussing specific strategies now available under the CARES Act. Also, check back on this post for any updates and corrections.
What do you think of the CARES Act? What provisions do you expect to be able to take advantage of? Comment below!
Thanks Jim. I’m in the camp that prefers current event-specific content right now, and this is a good write up. Good luck out there.
In Expat forums I have seen a rush of questions about how to file taxes for 2018 and 2019 from people wanting to get on the list for those $1200 checks (never realized how many US citizens abroad just don’t bother with filing taxes).
I don’t think any of those payments are coming my way, but this situation does illustrate a tax strategy Phil Demuth recommends in one of his books for how to have your children fund their education. Since a high-income couple is not getting any child tax credits or equivalents and won’t be able to qualify for need-based financial aid or credits like the AOTC when their kids are in college, it makes sense to start early in funding UTMA-like accounts for your kids so when they are college-age they are not your dependents under tax law (they are supporting over 50% of their expenses include college). Nothing changes under systems like FAFSA (still counts parental income, etc.) but that independent college-age student can qualify for tax benefits like AOTC and in this case qualifies for the $1200 since they were not eligible to be claimed as a dependent on anyone’s tax return. The CARES Act seems to miss any coverage of college-aged dependents regardless of household income.
Interesting strategy. $1200 beats $500 for sure.
You assert that:
Basically for the next four months, the benefit will go up by $600 a month
This is very confusing to me, but I think that unemployment benefit will go up by $600 per week.
You’re right, will fix. I’m sure this is the first of several errors.
It’s my understanding that most, if not all, states have a cap on how much unemployment you can collect.
Unemployment insurance compensation benefits are tiered according to your salary/ earnings.
I don’t believe this legislation waived the cap.
So your regardless of income, it sounds like everyone will get the max for their state.
is this everyone’s understanding? It’s not like you get unemployment plus $600 in every case .
I’m not an unemployment expert, but my understanding was the $600 was above and beyond what you would have otherwise received.
The loan to small business is forgiven tax free. That is, you don’t owe any tax on the amount forgiven. The banks want to do it because the loan is guaranteed by the government and it is risk free in most cases. Suggestion (1): focus on the Small Business Stimulus. That could make a nice post. Suggestion(2): We need a list of banks that can handle the application. Most banks don’t even know what it is yet. It would make a nice affiliate deal for you, and would point your audience to the banks that know what this is and are on the ball. It is only going to get busier and busier for the banks to handle the volume before the applicable deadline. Suggestion(3): Take the 60k loan and have it forgiven. It can help your charitable mission. The process of doing it will help your audience because you will become knowledgeable about the process of how it works. Great post, and timely too!
Thanks for the info on the forgiveness. Will update the post.
Personally I’m definitely focusing on the small business stimulus. I’ll post about what we end up doing once we sort it out. It’s on the agenda for today.
I don’t think I’m going to be able to get affiliate deals in place in time to take advantage of this from a marketing perspective, but if any banks are interested, please contact [email protected].
Just make sure you do it legally — the application requires you certify that the loan is “necessary”. Not worth committing fraud for $60k that could have gone to a real business in need
Sounds like it’ll be closer to $30K for us, but “necessary for operations” is pretty vague. Is it still necessary if the owner of the business can sell stocks low in his personal portfolio to make payroll?
You mentioned that those going for Public Service Loan Forgiveness may have payments waived for the next six months and that this will still count towards the 120 qualifying payments. However, my provider clearly states that these “free” payments will NOT qualify towards PSLF and that you must continue making payments.
I had the same question, Jered. I am seeing conflicting information out there about if these “free” payments will count toward PSLF or not.
A few other websites say that they will:
https://www.forbes.com/sites/zackfriedman/2020/03/29/coronavirus-public-student-loan-forgiveness/
https://www.forbes.com/sites/zackfriedman/2020/03/28/student-loans-payments-suspended/#630a4bc21b10
But my servicer says that they will not:
https://myfedloan.org/borrowers/covid/
Do others have thoughts or more insight?
Yes, I have FedLoan as well and saw the disclaimer that we must continue making payments for PSLF.
Same question. Fedloan was extraordinarily unhelpful on the phone. I discovered that what I can do for NOW is “suspend” my direct debit scheduled for the 2nd of this month, and I can still make an “on time payment” if I do it within 15 days of my due date (per the PSLF program requirements). So my current plan is to suspend that payment, and wait until the 14th to see if the DoE can get something online with fedloan in that time. Then if they don’t, I can still make my payment…
It’s never easy with Fedloan. The call center people they have working never seem to be able to help, or willing, or even have any sort of initiative to even want to help you. I figured all that suspend bit out on my own. You have to click on the “automated payments” tab to find the suspend button. The guy on the phone just hung up after saying “sorry, you have to keep paying, there’s no option to NOT pay on your due date and still have it count.” They just…don’t know how to help you.
The FedLoan website has not been updated with the CARES Act provisions; the statement that the skipped payments will not apply to PSLF is only for those who applied for the original emergency forbearance.
In the full text of the CARES Act (Section 4513-C): “The Secretary shall deem each month for which a loan payment was suspended under this section as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program authorized under part D of title IV of the Higher Education Act of 1965 (20 U.S.C. 1087a et seq.) for which the borrower would have otherwise qualified.”
https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-id87B2A4774FCF4B66AE8F5EBB38CF64EB
Give it a few days. It’ll likely become clear by then.
I’m not sure who is wrong on this, but I suspect we’ll get it sorted out at some point this week. I’ll update the post if I can find definitive information that I am wrong.
Attending about 83 payments into PSLF. Still making “fellow payments” about to transition to “attending payments”.
This section of CARES is undoubtedly confusing. FedLoan is been quite vague and unreachable about this. What is clear to me is that my interest rate for the present has dropped to zero… which is nice if I intend to pay off my loans, but I don’t.
My direct debit has continued my payments un-abated and it does appear that a chunk of interest was removed from my outstanding balance. While I think there is a chance that my payments MAY drop to zero and I get six months of free payments. I do not think this is happening. Less than 3 years to PSLF the payments are more valuable to me than the actual money in the payment itself.
I’m leaving it on autopilot. Unfortunately, I don’t see much benefit to attending earners. Those still in med school or early in residency may get the most benefit due to avoiding the early interest on their loans.
Give them some time. This law has only been in effect one business day.
Here is the link to the Fedloan page: https://myfedloan.org/borrowers/covid/, same info that has been posted for at least the past few days. According to them, 0% interest but regular payment amount must still be made. I don’t see how this is supposed to help anyone in the short-term. I work for an FQHC which is about to run out of money to cover payroll.
I can’t control the fact that Fedloan offers terrible service and misinformation to their clients. The only way I know of to get better service is to refinance with a private lender, but that obviously has its downsides at times.
Can a small business apply for the EIDL loan, get the $10,000 grant, and then decline the loan if accepted?
I’ll look into it this week and discuss in an upcoming post.
Even if it were to be allowed, that $10,000 would be deducted from the Forgiveness of the PPP Loan. Just something to remember.
What if you didn’t go for the PPP Loan, though?
Apologies if this is redundant, but I don’t see it resolved.
A letter from FedLoanServicing dated April 3,2020 suggests all accounts will in forbearance and all (non-) payments will count toward loan forgiveness, as the original post states. I think…
“Administrative Forbearance – We placed the loans identified in an administrative forbearance for the period March 13, 2020, through Sept. 30, 2020. During this period, you will not be required to make monthly payments on your loans. If your payments are made through auto debit, those debits will not occur while the forbearance is in place. We will report you as current to credit reporting agencies.
“Although you will not be required to make monthly payments during this specific administrative forbearance period, payments you would have been required to make between March 13, 2020, and Sept. 30, 2020, will count toward loan forgiveness provided all other qualifying factors are met.”
Thanks for sharing. Very helpful.
I just got off the phone with Fedloan and they confirmed that the next 6 months of $0 payments will count towards PSLF!
Yup. Pretty good for PSLF folks.
The small business stimulus comes in the form of 2 different loans. The SBA EIDL loan is different from the Paycheck Protection Program Loan. The $10,000 grant applies if one goes for the EIDL. This is administered by the SBA itself. The PPP loan is the rest of what you describe… 2.5x payroll expenses, etc. It is administered by about 1800 banks throughout the country, more likely to be added. Some of it is eligible to be forgiven, as you mention.
Thanks for the clarification.
I wrote a piece on the Loan aspects of the CARES Act: the SBA Economic Disaster Loans and the Paycheck Protection Loan Guarantee Program here: https://physicianfinancebasics.com/cares-act-loans-and-physician-practices/
Hope it helps… there’s a lot to purse out and not too much time since applying early may be key!
Thanks for sharing.
It’s a nice provision that RMDs are suspended for 2020. I’m trying to find out whether this is also true for RMDs on inherited IRAs. I’m finding conflicting information in different articles I read about the bill.
Good question. I’m not sure. Let me know if you find definitive information and I’ll update the post. An article in Forbes suggests that they are suspended. At any rate, just wait. It’ll be more than clear before the time comes you have to take it out.
I believe inherited IRA RMDs are waived also. The RMD waiver provision in the act (Section 2203) appears so broad that inherited IRAs would be covered. Michael Kitces’ Nerd’s Eye View has a recent, extensive write-up on the impact of the CARES act, which covers this issue.
I agree. Here’s the link to Jeff Levine’s article: https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic/
It was published before the Act became law, but I suspect not much changed in the House anyway so it is likely accurate.
I don’t believe that anything was changed in the house. If changes were made, the bill would have either gone back to the Senate, in the House’s form, for a re-vote, or would have gone to reconciliation and both the House and Senate would have voted on the reconciled bill.
This article from Forbes indicates that the $300 of above-the-line deductible charitable giving is only available to people who do not itemize deductions.
forbes.com/sites/anthonynitti/2020/03/25/congress-reaches-agreement-on-a-coronavirus-relief-package-tax-aspects-of-the-cares-act/#794e09a95f99
The article on WCI currently seems to indicate that the $300 above-the-line deduction is available to everyone. I have no idea which one is right, but just wanted to point out the discrepancy.
I appreciate your quick article on this – I didn’t know about the $300 charitable deduction before reading this. And I hope the tone of this post comes off as ‘respectfully, this might possibly be incorrect’ and not ‘HAHA I found an error that WCI made!’
I think you’re right. Will update.
Thanks for your thoughtful post. I really appreciate how receptive you are when people point out inconsistencies or errors. Thanks for breaking this down into understandable pieces. Much appreciated 🙂
I read in one article that a company can pay up to 5,250 of your student loans? Have you heard of this? Can I pay it to myself if I run my own practice?
Yes, that’s correct as noted in my post.
Good strategy. I don’t see why you couldn’t do it using your own company. I’ll update the article to suggest that strategy unless I find something that says it can’t be done.
Do you know if my company pays 5250 toward my student loans, would I then have to claim that as income? This would make it a wash.
No, it’s not taxable to you.
I asked this on another forum and received the following answer:
“Here’s the language that originally authorized this benefit:
(3)Principal shareholders or owners
Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer. (26 U.S. Code § 127 – Educational assistance programs)
My understanding is because you are a greater than 5% owner, you would not be eligible. Again, my understanding…”
Oh…bummer. That’s going to really limit the benefit for us.
Where did that come from exactly?
From SDN (https://forums.studentdoctor.net/threads/feds-suspend-interest-accrual-on-federal-student-loans.1402781/#post-21732587)
He doesn’t sound positive. I’m hoping a CA/tax planner can tell us for certain. I would love to take advantage of this benefit.
My CPA agrees that the student loan / education loan assistance wouldn’t apply to the self-employed individual based on language quoted above.
I’m curious about this as well. I’m an independent contractor and am curious to know if I can get this deduction.
If I’m employed and also do locums work, could I get $5250 each from my employer and from my own company? Or is it restricted to a Max total $5250?
Not 100% sure, but I bet you could get both because it’s a per employer/employee thing, not a per taxpayer thing.
It would be great to know the answer to this. Presumably, if you received a W-2 and 1099 for consulting, you could pay $10,500 pre-tax (not sure about State taxes). This is a considerable savings. How do we find out the answer to this important question? Also, is it for 2019 as well?
You could read the new law. It’s only 800+ pages. Alternatively, wait until somebody else does and answers your question for you on the internet. Or hire an attorney/CPA to find the answer for you.
I don’t think it is for 2019, no.
I currently work for my father (who is a dentist) as well. If he just writes a check to MYFEDLOAN under his business– it wont be taxed? How do I ensure I won’t get taxed?
Tha’ts my understanding.
Make sure that the business and you fill out your tax forms correctly.
I’m confused. I thought as you did that PSLF seekers got 6 free months of zero dollar qualifying payments. But Fedloan’s website explicitly says this is NOT the case. I’m going to call them today to make sure. If it does count, it means that I DO get some pork from the stimulus, and it shakes out to be just a bit more than if I got “the check.”
Have you looked at fedloan’s site? What’s your take on their stance?
Thanks, Jason! If you’re able to call FedLoan and figure this out, would you mind letting us know?
Here is the language directly from the bill, in case it helps:
“The Secretary shall deem each month for which a loan payment was suspended under this section as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program authorized under part D of title IV of the Higher Education Act of 1965 (20 U.S.C. 1087a et seq.) for which the borrower would have otherwise qualified.”
https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#id6e4d36d575014288b4c0a12fe058028e
Just got off the phone with Fedloan. Sort of. Either my call failed or they hung up on me. Not sure. Either way, the guy on the phone said “it was only passed Friday, so we don’t have anything in place to tell us what to do about this or not. Until the Dept. of Ed. comes out with a statement for us, you need to continue making your payments as usual. And you can’t change the due date of your bill right now because it was already generated.” I don’t know if I trust the language of the bill enough to just stop making my payments. The bill seems to say that I can just NOT pay, and it’ll still count. That doesn’t seem like a valid way to approach this situation, however.
With all the other giveaways in this bill why are you surprised that student loan borrowers get one?
Thanks for clarification.
Remember that Fedloan is staffed by
idiotspeople that may not know all the details of federal student loan laws. They are well known to give out bad advice, so I wouldn’t take what they put on their site as definitive…yet.Fedloan is still stating the language of an executive order signed by president Trump BEFORE the CARES act, see comments section on the article linked to by POF on Sunday special: https://www.studentloanplanner.com/stimulus-plan-student-loans/
Fedloan will update the CARES act law on their website at some point, hopefully before the pandemic ends given their level of competence 😉
I could not believe this giveaway for PSLF pursuers!
There are a lot of giveaways in the bill.
My concern is addressing the doctors who have loans with private lenders. Are we not the same doctors that won’t get a penny from this bill due to income caps and yet are working currently facing Potential COVID patients. The people with public loans are in any different position? I contacted my lender (SoFi) and all I got was to apply for Forbearance . That’s not very nice. I’m not looking for hand outs, in fact I asked if I can at least have my entire monthly payment go to the principal ; big fat no. It’s a bit disheartening that a company like SoFi and other private lenders can care less about what’s going on. Once this all settles I’m taking my loan else where. I hope the rest of you do too..
Where are you going to take it? All the private lenders are still charging interest and you can’t go private to federal, only the other way.
Not sure why you would expect a private company to work for free or deliberately not make a profit. Seems a bit unreasonable to me.
I respectfully disagree with you that this is unreasonable. There are private lenders I have spoken with that are in the process of having some kind of student loan help to their clients.. Discovery is allowing 2 month forbearance without interest, Sallie Mae said they can suspend monthly payments for time being on case by cases bases. There are other banks that are doing similar things . Again , I am not asking for loan forgiveness but a kind and nice and fair gesture would be something as simple as applying my entire monthly payment to the principal. I am able to pay this month but maybe not next month. it would be nice if some of these lenders were a bit understanding.
I also understand your position with respect to company like SoFi, as you receive some kind of monetary incentive for their advertisement or clicks or referrals. So I get you $$
The fun part about running your own business is you get to make your own decisions on what you are and aren’t going to do. Frankly, if I were a lender, I think it would be ridiculous for someone to ask me to waive their interest or payments in some way different than the contract were originally written. If there were going to be additional relief provisions in the event of economic downturn, I would have charged more upfront in fees or interest to make up for it. So I can empathize with any lender who wants to stick with the original terms. The only thing that should really make them want to offer something different is if it keeps someone out of default, which could be even more costly. For example, Discover loans were never as competitive as SoFi loans as far as rate. And I don’t know anyone who thinks Sallie Mae provides great service and rates. I offered Discover loans to my readers for years and almost no readers chose them. You’re asking for SoFI to be fair to you, but fair is what the mutually agreed upon contract says is fair. How would it be fair to their shareholders and their employees that may now be getting laid off due to people not paying as agreed? Look at it from the other point of view. At any rate, if you don’t like their terms, refinance with someone whose terms you like. They all would LOVE your business right now. But I’ve talked to some and none so far are planning on 0% interest for the next few weeks.
On a more philosophical note, Proverbs says the borrower is slave to the lender. Now you understand what was meant by that. If you wish to not be at the beck and call of a creditor, live super frugally, bust your butt to make more money, and get out of debt ASAP. When my “student loan lender” sent me to the Middle East for 5 months I decided I didn’t want to owe anyone anything and I lived accordingly.
I love that “student loan lender”. Mine told me it would not allow me to go into my specialty of choice, where I had to live for 4 years, and when I had to be away from my family for an extended period of their choosing. Haha
How is that fair to Sofi’s employees? They should get furloughed because some docs couldn’t pay their student loans? You agreed to a contract and you chose Sofi because they offerred you a lower rate. YOU are required to keep an emergency fund so you can continue to make payments during bad times.
Assuming banks are rich and can handle it is no different than your patients demanding they be seen for free because you are a doctor, you have money, and you can handle it.
I (and my partners) own a small medical practice with 120 employees including a few with annual income over $100,000
I’m trying to understand when applying for the SBA loans under PPP, do I
a. completely exclude these employees (docs included) from the loan amount?
b. include a portion of their salary, as though they make 100k annually?
this would make a big difference in the total
thanks for all your help
120 employees is a small practice?
I’m not authority on this, but my understanding is you only include their share of payroll up to $100K, so b.
Yes, anyone under 500 employees is a small business under the PPP. Agree with the up to $100k for salary/compensation.
I’ll also take this time to note that forgiveness includes 8 weeks of payroll, rent/mortage, and utilities.
Any idea if we can use the 401k withdrawal relief as a way to get after tax $$ into a roth ira if our plans dont allow for in-service withdrawals or rollovers?
I don’t think so, but I could be wrong. It’s a distribution, not a conversion.
i dont know the exact difference, but technically isnt it also available as a loan?
A loan isn’t a conversion either.
Did some more research, according to the bill
(3) AMOUNT DISTRIBUTED MAY BE REPAID.—
(A) IN GENERAL.—Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be.
(B) TREATMENT OF REPAYMENTS OF DISTRIBUTIONS FROM ELIGIBLE RETIREMENT PLANS OTHER THAN IRAS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to subparagraph (A) with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in section 402(c)(4) of such Code) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.
I think if im understanding this correctly you could rollover after-tax into a ROTH IRA. Would be a great benefit to those waiting who can not do in-service withdrawals, as its not a loan but a distribution that can be repaid.
I think you’re right, but I agree the issue is whether you can just withdraw after-tax money. I doubt it. I bet it has to come out pro-rata.
Even if pro rata you could still move some % of after tax. My understanding are the steps should be
1) request distribution
2) repay after tax to Roth IRA
3) repay pre tax back to 401k so not to affect traditional ira conversion to Roth
Works for me bc I have just around 100k
I’m not sure # 2 and # 3 are allowed.Isolating basis can be tricky. And this all assumes the 401(k) accepts after-tax dollars to start with. Many don’t.
Basis shouldn’t be a problem? You’ll get a 1099-R and your after-tax contributions distributed will be in box 5. Plus most plans generate this form immediately and or should at least show you what your after-tax contributions are prior to the withdrawal. This amount is the amount you repay to your Roth IRA and the rest pay back to your 401.
but correct, this assumes you have a 401k that allows after-tax contributions, but getting those after-tax into a ROTH ASAP is very valuable.
Right. But say you have $200K in the 401(k). Then you put in $20K after tax. You pull out some money. Let’s say $20K. So $18K is pre-tax money and $2K is after-tax. Now what? You want to do a Roth conversion? You’ll be paying taxes on $20K. Maybe if youc an pull $200K out and put $180K back in and the 401(k) specifies only pre-tax money can be rolled in. It really comes down to how the 401(k) is designed.
If the 100k is a distrubtion (penatly and tax free) and the repayment is considered as a 60 day rollover if done any time during 3 years from (B); how would this be any different from an in-service withdrawal where you roll over the pre-tax into an ira and the after tax into a roth? I dont understand why we would in your example pay taxes on 20k?
In your example what i think you should do is;
1) Withdrwawl the 20k (no taxes or penatly are taken up front and you know exactly how much is pre-tax and after-tax, should be easy)
2) Despoit the 2k into a ROTH ira (this will be treated as a rollover and not taxed)
3) Deposit the 18k into a traditional ira (this will be treated as a rollover and no tax) – ideally one should deposit it back into their 401k so basis for taditional IRAs is 0 for roth back door conversions or worse case rollover your once in the ira rollover back to your 401k
That sounds lovely. The question is whether it can be done legally.
To med students with fed loans:
1. No need to hurry and refi. Get the no interest offered by government. You can always refi when that incentive runs out. Low interest/lock in is all BS by private lenders I’m this environment. Low interest is worse than free interest. Keep fed loans and make principal payments.
Business owners :
2. Applied for SBA loan of their disaster relief link. Lets see what happens.
been a reader of your blog for a year now… a little dissapointed;
1) Seems you turned off reply
2) Nothing i said was illegal and all comes straight from the bill itself (ie i supported myself you simply are implying its illegal by questioning its legality without providing any evidence or rationality)
3) you are not more curious about looking into this as it is after a great benefit for those who contribute after tax
Fomerly-cn has a blog? Or are you talking to me? I didn’t turn off “reply” on these comments, nor did I block or delete yours.
Rules about rollovers are more complex than just what is contained in this bill. If you plan to use the emergency distribution allowed in this bill to do an otherwise not authorized Mega Backdoor Roth I suggest you run it by a retirement account expert. I’m concerned it may not be permitted and I’d hate for you to get halfway through your intended process and then realize it.
The money in this bill is being borrowed, not printed, by the government. Only the Fed prints money.
Is this a distinction without a difference? Not a sarcastic comment–I would genuinely like to know.
I agree, Dr Dahle, on not raiding retirement accounts for discretionary spending. However this may be a time for Roth conversions!!!!
Part of the CARES act, it seems, allows for in-service distributions without penalty from qualified retirement accounts (so long as you are “impacted by covid-19”). Normally my residency program’s DCP does not allow in-service distributions, so I am hoping to take this opportunity to perform an in-service distribution and roll over the money to a Roth IRA. This is a triple tax whammy: 1) account values are down so lower taxable amount, 2) lock in residency tax rate (for me), 3) CARES act also allows the tax burden of distributions to be divided over 3 years!!!
This is my understanding of what I read so far… correct me if I’m wrong! 🙂 But sounds like a dream!!
Edit: just realized there was a similar comment above me… woops
I don’t think you can do that, but I’d love to be shown I’m incorrect. I think in-service penalty-free withdrawals are allowed, but not in-service rollovers. If so, it’s a great way to do a Mega Backdoor Roth IRA.
But hey, ask HR. If they let you, they let you. And let me know how it goes.
AustinAnesResident – i agree with you, it looks like you can take a distrubution and repay it in anyway you want to an elgible retirement account. Only question would be if your 401k plan lets you choose to only take after-tax as the withdrawal.
Late update… Michael Kitces in his May 6, 2020 article “Using Coronavirus-Related Distributions To Reduce The Tax Impact Of Distributions From Retirement Accounts” states…
“…Another strategy can be used by clients who may benefit from moving less-accessible funds in an employer-sponsored retirement plan into a more-accessible IRA (e.g., if a client believes they may be subject to limited cashflow in 2021 or later, having funds in their IRA may be much easier to access in subsequent years than funds in their 401(k) plan that only allowed for Coronavirus-Related Distributions to be taken in 2020).”
My residency program adopted CARES act for retirement plan fairly late, so still working on this rollover. It appears you cannot do a direct rollover though. Must be a 60-day indirect rollover. Additionally, CARES act waives the 10% penalty and waives federal tax witholding. So I was able to perform in-service distribution on the whole account!! Excited for more Roth space!
I hear a lot of people talking about the SBA Loan and get what you are owed. Remember, this isn’t free $. It may seem free, but what they give now, eventually has to be paid back in higher taxes. If you don’t need the stimulus, are you going to apply for it anyway?
I am supportive of the stimulus for those that need it. But a little surprised by some folks that I don’t think do.
cd :O)
How is it any different from a charitable donation deduction or an earned income tax credit? Yes, we plan to apply for it even though we could make do without it. Just like most people who get a check for $1200 are going to cash it even if they have an emergency fund. I view the SBA loan forgiveness as my stimulus check. If Congress didn’t want that to occur, then it should write the laws differently. Every year Congress and the IRS says “these are the rules, now go play the game.” I play by the rules, but I certainly do play to win. And yes, I expect I will pay the higher taxes in the future to pay for this (or have my assets inflated away), so I might as well get it now.
This makes total sense. The only rebuttal I can think of is that the money is limited (as opposed to a traditional tax credit or deduction) and so there is a bit of a moral conundrum if my ER group accepting the PPP loan/grant will prevent some other small business (with employees that most likely make well under an ER doc income) from accessing those funds. There is some heated debate amongst my partners about whether or not to apply or accept this, ranging from it being “morally incomprehensible” to rationales that are more in line with what you said above. I’d love to hear some more opinions on this!!
You’ll hear a lot more on the post tomorrow.
Anyone have insight into single employee professional corp? Lots of docs have their own S-corp’s that employ only themselves. S corp gets 1099, individual is getting W2 and K1. Do we think these corps will qualify for a loan to support the income up to $100,000, or will none of the income qualify if annual compensation is >100,000 ?
I think you can get the loan but I’ll know more by the end of the week.
Self employed individuals and independent contractors are all included under the stimulus package. It appears your prorated compensation, up to $100,000 will be considered for the loan.
What about sole proprietors?
Yes, included.
Does anyone understand how this applies to an employed physician who is production based and is seeing 80% less volume? Are practice owners/small business owners obligated to pass along any of the tax breaks/forgiven loans to these employees? Can an employer use the previous average monthly income for that employee as part of the payroll amount when applying for the loan to at least give them 8 weeks of income? Thanks so much for any insight!
No I don’t think owners are OBLIGATED to do so, but they are incentivized to do so. The less they pay you the less they are given to have forgiven. Plus you’re costly to replace if you quit because they stopped paying you much. Certainly I would bring it up in your negotiations!
The loan is based on prior payroll. The amount forgiven is based on what they actually pay out over the next 8 weeks.
Thank you! And thanks for all you do, seriously–you have empowered so many of us to take control of our financial lives. Hope that you and your family stay healthy
FYI – I don’t think you can take out new debt and use the 7(a) loan program for it. According to the bill, the loan can be used for payroll, mortgage payments, rent, utilities, and “any other debt obligations that were incurred before the covered period.” Also, I think you’re getting the SBA Economic Injury Disaster Loan program (loans are given by the SBA) confused with the 7(a) forgivable loan (loans are given by banks and guaranteed by the SBA) – these are separate programs.
Thanks for the feedback. They are separate programs. But I don’t see anything that suggests you can’t take out debt now and have that debt forgiven. Otherwise, what’s the point?
Eva, I think you are right on both points:
1. You cannot use the loan towards new debt. Or rather, you can but that portion will not be forgiven
2. The expanded SBA’s EIDLs are indeed different from the Paycheck Protection Program Loans (7(a) forgivable loans). It’s the latter that have garnered all the hoopla, due to the forgiveness provision. The EIDL has only a $10,000 cash advance which is forgivable.
Regarding your comment: “While I think we can borrow something like $250K, it looks like we’d only get something like $60K in actual loan forgiveness.” How are you arriving at these figures? If max loan is 2.5 months of payroll ($250k?), then how are you arriving at only $60k eligible expenses (notably payroll costs) in the 8 week period after loan origination? Or do you have a large reduction in headcount?
The forgiveness is limited to $100K annualized per employee. I pay my folks (including me) better than that.
Your max loan has the same limitation.
Good point. Like I said, we’re spending this week trying to sort out what this means for our business and I anticipate a later post on this topic.
Can a small business apply for the EIDL loan, get the $10,000 grant, and then decline the loan if accepted?
I received an email from the SBA that you could receive the Advance even if the loan isn’t approved. So I would think the opposite could be the case. Especially since the Advance can come in as soon as 3-days, but the loan could take 10 – 14 to be approved. You could also just pay the loan back quickly, I suppose. And note the EIDL is a different program from the PPL.
We are in our first year of residency in the repay program. We are not required to make payments because of how much we make right now and family size but we are wanting to use our tax refund money and the money we will get to start paying off loans. Since the interest is suspended will the money we put towards loans during this time actually go to paying off the principal balance?? My original plan was to match the repay programs interest payments every month so that at the end of residency we basically break even. Wanting to take advantage of the situation but not sure what would be best (or should we just invest that money??). What would you recommend during this time?? We have about 6-10,000$ available in refunds depending on how much we get from this new bill.
Yes, all payments you do make should go toward principal.
Via email:
I posted this question to the comments section for this article, but it isn’t showing up. I didn’t want to just post again in case there’s a problem with the system.
You say that the individual stimulus is a pre-payment of a tax credit on our 2020 taxes, so we may owe it back next year if our income increases.
But the Washington Post says just the opposite in this article. They say:
What if my income is higher in 2020? You do not have to pay the government back. Technically a person’s 2020 income is what qualifies them for the payment. Since no one knows their total 2020 income yet, the government is using tax returns from 2019 and 2018 to figure out who qualifies for a check. If you get a payment and then your 2020 income is higher and thus merits a reduced payment or no payment, the money does not have to be paid back.
Do you know which is correct? I tried to find additional information, including looking at the text of the statute itself, but I don’t understand it.
This matters for us since my wife finished residency last year. So our 2019 income is below the threshold but our 2020 income will be above the threshold. So we’ll be getting a $3,400 check, but we don’t know what to do with it if we don’t know whether we’ll need to pay it back.
As noted in the post, this post was written before the law had even been in place for a single business day. So it undoubtedly contains errors. There is a lot of information floating around out there on blogs and traditional media about it right now that is not correct. The best source to figure out what is correct is to read the law itself. I appreciate that you tried to do that.
Why not hold on to your money until it becomes clear what happens with it?
At any rate, I’m pretty sure I’m right. Jeff Levine agrees with me: https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic/
but I confess I haven’t read the original text either, so it’s entirely possible that Jeff Levine, NPR, and I are wrong and the Washington Post is right, but it seems unlikely.
Thanks for your reply.
I finally got around to reading Jeff Levine’s article that you linked. He actually agrees with the Washington Post that we will not owe the money back. Quote from his article below:
“Perhaps surprisingly, there will be no clawback on the ‘excess payment’ when they file their 2020 return. Such (lucky) individuals get to keep their recovery rebate!”
And following that statement he give a calculation example of a couple’s income increasing but not having to repay the money.
My wife is a physician and I am a stay at home dad. My wife will not have income for the next 3-5 months. Under the Cares Act, I would like to withdraw 100k from my 401k to purchase a property (abroad with no debt involved). Am I correct in assuming that……
1) No 10% Penalty on the withdrawl
2) I have 3 years to put the money back in. I could put the whole 100k back in on the last day of the 3 year period and not have to pay any tax during the 3 year period.
3) Separately my wife could also take 100k from her 401k
That’s my understanding.
Does this apply to money you put the money into the 401k this year? If I max out my i401k and put in 56K (maybe 57 this year-I don’t know the 2020 limit), can I take it out later this year tax free and still get the tax deduction when I file my 2020 taxes? And then have up to three years to put it back-in essence, preserving my 2020 contribution if I didn’t want to contribute this year but had more funds in future years?
I don’t think you can take it out tax-free. It’s penalty free. So you’d have the tax deduction and then the income offsetting each other. You could borrow it tax free but not interest free though.
But it has to be related to coronavirus expenditures. Not sure MBD can justify that one to the IRS if audited.
Of course I could be wrong.
Excellent post WCI and input from PFB.
I earn a W2 from hospital and have an LLC for moonlighting/1099. All my moonlighting got canceled and I’m worried about hospital W2. I got married last year to a student who is an MSTP (she gets a small grant which is taxed as personal income). My 2019 1099 income was ~ 132k last year and we rent. I am going to apply for EIDL and considering applying for the PPP (is there an online application? I only see one for EIDL). Does applying for both make sense since expenses can’t be duplicated? I know the limit is 100k in payroll per individual. Should I make my wife an employee? We haven’t filed 2019 taxes. Thank you!
Everybody is still trying to get all that sorted out. The bank hasn’t been able to tell us anything all week. I’m not sure my payroll is even going to count anyway since it is mostly me.