What the CARES Act Means for Doctors – The White Coat Investor – Investing & Personal Finance for Doctors

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:

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, and the way it was sold to Americans, was that they would each get a check in the mail in the next few weeks so that those who never bothered saving up an emergency fund don’t starve to death and get kicked out onto the street and so those who do have an emergency fund will continue to spend as usual to prop up the economy rather than hunkering down and cutting spending to weather the storm.

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 do claim unemployment will vary by state. Basically for the next four months, the benefit will go up by $600 a month 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 individual 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.

Details include a ban on stock buybacks with the money, public reporting requirements for the loans, a special inspector general to keep an eye on all this, and a ban on members of the administration or Congress from benefitting from this in any special way.

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, 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. It’s not clear to me if the forgiveness is tax-free or not, but that just affects how much free money you get, not whether you get it. It’s also not clear to me why a bank or other lender would make loans under these terms, but I suppose it is because the government will guarantee it to them or something. 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. 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. Even 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!