WCI #360: Student Loans and Filing Your Taxes

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

White Coat Investor podcast number 360 still not sure what to do with your student loans? Overwhelmed with how to tackle that giant debt in an ever changing political climate, the the experts@studentloanadvice.com are here to help guide you through the best options to manage your loans. Our experienced staff have consulted on over $250 million in student loan debt and the averagestudentloanadvice.com client has saved over $190,000. You will receive a customized student loan plan using the principles of the White Coat Investor. Get answers to all of your student loan questions, gain clarity about your financial future, and start down the right path toward financial freedom. Book a consult today@studentloanadvice.com you can do this and the White Coat Investor can help. By the way, we have a whole bunch of communities here at the White Coat Investor, right? We've got social media, we've got Instagram and Twitter and you name it. If it's on social media, we're on it. But we also have these four communities. We have the WCI forum, we have the subreddit. If you love Reddit, we've got a White Coat Investors subreddit. We've got Facebook group, a private Facebook group. If you're into Facebook and you love that manner of interacting with others, you can join that Facebook group. There's almost 100,000 of you in it. And then we've got our newest one, our smallest one, the few financially empowered women that you can also join. They have an event about every month or so and also their own small private Facebook group, but that one's obviously all women and it's our newest WCI social community. So check those out, connect with others, discuss your questions, help others, learn from them. It's just great to be part of one big community helping each other. All right, I think the first thing we're going to do is we're going to bring on one of our advisors and let's talk with him about some of your questions and use that to springboard into some of the other questions that you guys have sent in to us on the Speak pipe. By the way, we love getting questions on the Speak pipe. You can leave those@whitecoatinvestor.com speakpipe and we'll get to as many of those as we can on the podcast. All right. I'm here with Wesley Bato, who is one of our sponsors, one of the sponsors of the White Coat Investories, one of our approved list of financial advisors. Welcome to the White Coat Investor Podcast, Wesley.

Thank you for having me. It's good to be here.

I don't think we've had you on here before, so let's introduce you to the audience a little bit. Why don't you explain to us all why you decided to become a financial advisor in the first place. Great.

Yeah. So I had the good fortune of my dad was a financial planner for 35 plus years, but I didn't directly know that I wanted to do this. Early on, he had the opportunity, obviously, to work with many successful people. And so as a kid, he came home and he talked to me about different people he met with. That led to my sister, my older sister, for example, becoming a pediatrician because that was within her interests for me. I liked numbers and he got me interested in the language of business or accounting, of course. And so he talked to me about how a lot of the successful people in business started with the cpa. And so when I was a junior in high school, I can remember I wrote a paper that said, when I finally get a job, I want to be a cpa, work at a big four public accounting firm. And that's exactly what I did. I did that for a few years, and it was good experience. But it wasn't long after starting there that it was pretty clear to me this is not where I want to spend my entire career. But even still, I learned a lot from that experience. It was good, but then I wanted to try something else. So I did some finance and accounting for small businesses. And it was at that time my dad said, hey, Wes, why don't you try to spend some time with me and some of my clients, See if you can add some value. So that's when I got my first taste. It wasn't long after that that I said, this is what I want to do. So, for example, I mean, I got to work with some clients of my dads that. That have known me my entire life. The funniest example of that is the ob GYN who was in the room when I was delivered is a client. And now I work with his. I still work with him and his wife. I work with his kids and his grandkids, setting up five to nines and everything like that. So that's just an example of the types of people that we work with and the deep relationships that we have with our clients.

Now, your firm is Hillcrest Financial Group. More information about that can be found@hillcrestfg.com obviously, we have you listed on the recommended page for financial advisors@whitecoatinvestor.com Tell us what's unique about your firm.

Yeah, so one of the things that's unique about us is that as far as recommendations, one of the things that I like when I listen to your podcast, what I hear you doing is trying to equip people with information so that they can make the decisions for themselves. Obviously, everyone listening to this podcast is very educated, very smart, able to make a lot of these decisions for themselves, but they might not fully understand the implications of one decision versus another. So what we try to do is equip our clients with information and then they can make it from there. Obviously, every once in a while you have someone that says, okay, Wes, it sounds like you're just laying out options for me. I want you to tell me what to do. And that's a little more rare. But for the most part, that's enough for them, is giving them the information. Hopefully, people get this from listening. I'm not very salesy. I'm more analytical type. And that comes from the CPA background. And so I think that that's a big thing that sets us apart.

Now, you have that CPA background, but do you do tax services? Do you do tax preparation or tax advising? Tax strategizing?

Good question. I don't. Right. Yeah. So I do not do tax prep. I always tell clients I pay someone else to do my taxes, and I recommend you do the same. But with that being said, one of the things that I do well is collaborate with clients, tax preparers. A lot of times, if you're talking with a tax preparer, sometimes they might not be thinking proactively. And instead I feel like that's one of our strengths, is that we're thinking proactively as far as tax planning goes. And then I can kind of translate some of the CPA jargon to accomplish what people are trying to do in layman's terms.

One of the hardest things, I think, for most financial advisors starting up a firm is deciding how they're going to charge for their services. So how do you charge for your services and why?

Yeah, so there's a couple different options. One is many of the white coat investors that contact us, it starts with a financial plan. And so that's a flat fee financial plan. Starts at right now, it's $3,000 and what that includes is basically everything in your financial life. Different people is obviously unique. It touches a lot of different things in their financial life. And what I always say is, it's not just putting together the plan and then, okay, here you go. Good luck implementing this yourself. But we actually included in that flat fee is multiple meetings, and so we will work with you to actually implement that. And oftentimes when I go through that part of it, it's that aspect of it where people's eyes get bigger. Oh, okay. Yeah, that's exactly what I want. Because many of the people that contact us are busy doing their daily thing and not doing this full time, and so they enjoy that aspect of it. So the financial plan, flat fee. And then as we go through that, some end up at the end saying, all right, Wes, that's great. I don't necessarily want to implement all of this myself. I want your help. And so we can manage the assets, and we do the AUM model when that comes into play. And I always say sometimes people are trying to make that decision at the front end. Do I really want to do it myself or do I want to outsource that aspect of it? I just say, you don't have to decide now. One of the things I like about something that you've said is that many people at some point should at least use a financial advisor to check in. I think the number that you said was, like, 80% or somewhere along those lines. I think that's good enough. So if they want to just take that one, take the plan, and then go and implement it themselves, that's great. And then you can check in from time to time. More than anything, what I want to do is provide good, objective advice at a fair price, like you say often, so we can even work in between there as well, and we can create something that works for people. At the end of the day, I want to get paid for my time at a fair price, and so those are the different ways that we do that.

Awesome. If you don't mind hanging around a little bit, let's answer a couple of reader or listener questions here. Our first one comes from Tomi, who has a question about pensions and portfolios. Let's take a listen.

Hey, Jim. This is Tomi from Seattle. I give lectures to our trainees at my institution about financial literacy and frequently refer them to your resources. So I just. I just want to thank you for everything that you do. My question is about how we should view pensions in our retirement portfolio. I know you have previously said that a pension should be viewed as fixed income. However, some argue that this is a substitute for bonds in their portfolio, which allows them to invest the rest of their portfolio into stocks. Can you talk about the pros and the cons of this approach?

All right, Wes, how would you reply to this? I mean, how do you look at a pension? Should it be folded into the asset allocation? Should it be kept out of the asset allocation? How do you consider pensions and I suppose other income streams such as Social Security, you could talk about as well, right?

Yeah. So probably like many of your listeners, when clients talk to me about Social Security and the assumptions that we make around Social Security, and the same would go for pensions, the level of confidence is not very high that Social Security is going to look the same way that it does now for someone like me in their 30s. And so as far as pensions, it's interesting that this person is even able to participate in a pension. That, that's cool. But it's very, very common. I would say it's highly likely that by the time this person retires, the pension is going to look different. I wouldn't be surprised if that pension ends up getting frozen and there's less accruals for that person in the future. So although they are right now, this person is probably Tomi is getting a projection for what that's going to look like in retirement. Very likely it's not going to be that exact amount. It's going to be a. I mean, I've got. I do have some clients that have a significant amount of pension income. Many of them, it's a very, very modest amount. I mean, hundreds of dollars a month. And it's because they participated and then that pension plan got frozen. So with that being said, I would do the allocation, not thinking too much about that because it may not be a big portion now as you get closer to retirement or even if you're in retirement. Tommy didn't give that information. But if you're in retirement, of course you're going to factor that in. If you get a $10,000 a month pension. Yeah, I would factor that in to your overall allocation. But when you're still working, if you've got many years left, I wouldn't bank on that too hard. What do you think about that, Jim?

You know, the big question people seem to have is, should this replace bonds in my portfolio? And I've always said no. I've always said look at your portfolio separately. And then when it comes time to calculate how much you need for retire, you know, Take whatever your spending is. Subtract out what you expect from Social Security. Subtract out what you expect from guaranteed sources of income like a pension or a single premium immediate annuity, you know, those sorts of guaranteed sources of income. Subtract that out from what you need the portfolio to provide. But don't try to put a dollar value on your Social Security. Don't try to put a dollar value on your pension and somehow fold that into your asset allocation when you're deciding, you know, 50% stocks and 20% bonds or whatever, rather than just leave it out and use it to reduce the amount of money you need from your portfolio. I think that's the academically proper way to look at it. But there's obviously, as you mentioned, lots of concerns about pensions these days. And very few people, I think even fewer, even lower percentage of doctors are looking at pensions. They're probably not going to have any. The only pension they're going to have is the one they provide themselves, right?

Yep, that's exactly what I've seen.

All right, I think we've beat that question to death. But that's a good way to view pensions. Congratulations. If you do have one, they are useful. They're not guaranteed completely though, right? Or really what you have. They're guaranteed, but you got to look at who's providing the guarantee. Just like with the spia. Yeah, it's guaranteed by the insurance company. If something happens to the insurance company, maybe not so guaranteed.

That's right. And real quick, Jim, in my area we have many GE employees. There was a time when some GE retirees were asking a lot of questions about how guaranteed is this really because they were worried about insolvency at the company.

All right, let's take a question from Michael. He's got a question about Roth Iras.

Hi Dr. Dali and the White Coat Investor team. This is Mike in Florida and I have a two part question about Roth IRAs and backdoor Roths. My wife and I max out our available retirement accounts every year, but now work for a new employer. That potentially opens up some of our options. I now have a 403 and 457 that I max out, but my employer also allows for after tax contributions to the 403B, which can then be automatically converted to Roth, which Fidelity actually does for me. This allows me to reach my maximum defined contribution of $69,000 for 2024. My fidelity advisor tells me that I can also still use an additional backdoor Roth through the usual pathway of placing money in a traditional IRA and then converting it to a Roth ira. I'm fuzzy on whether or not I can actually do this. However, part of the question pertains to my wife, who works for the same employer, but who makes about 100,000. It's not a problem for her to max out the 403 and 457, but the remaining money after tax won't quite allow us to put in that additional 46,000 into her accounts. I was thinking we could just have her not withhold any taxes from her paycheck up front, which would allow her to be able to have enough income to get to that maximum 46,000. Since we file taxes as married filing jointly, I could just contribute extra tax upfront out of my paycheck to make sure we've fall within the safe harbor. We think of our separate incomes as just one big pool of money. So does this strategy make sense? Are there any rules I'm breaking here? The first question about an additional backdoor Roth would apply to her as well.

All right, Wes, I think the first question is not too hard. Why don't we knock that one out of the way first?

I agree. So the quick answer is yes, you can do both mega backdoor Roth and the backdoor Roth. And the mega backdoor Roth being the contributing after tax dollars to the 403 and then converting that after tax piece to roth within the 403. Yes, you can do that in the backdoor Roth.

Yeah, absolutely. Absolutely. Separate contribution limits, your 401 or 403 limits and your IRA limits completely separate. Right.

And it's worth mentioning how cool that is that they actually have that. That's very unusual for particularly a hospital to allow after tax and then doing that within the plan. It's pretty rare to see mega backdoor Roth opportunities in general, but especially when they make it that easy for you. The one caveat too, that I would make sure to mention. Jim, I'm interested in your experience in talking with people that do backdoor Roth IRAs. I would say people are maybe batting maybe like 500 as far as doing it correctly. It's quite often now it's somewhat of a biased or, you know, it's somewhat selective as far as who reaches out to me because obviously they may be needing some help, but I just see a lot of people messing that up. So when he's talking about doing a backdoor Roth, I would be asking the questions, do you have any pre tax IRAs? And making sure that 403B rollover is actually staying within the 403B, not going to the pre tax portion, going to an IRA and those sorts of things. What's your experience in talking with people about doing it on their own and are they able to do it correctly?

Well, I think everybody who's been in the white coat investor community for a while has seen this problem. I mean, there are 3,000 plus comments on my backdoor Roth IRA tutorial on the blog and most of those are people who have screwed this up in one way or another. I keep thinking that I've seen all the ways people can screw up this process and yet every year somebody comes up with a new one. So apparently it's not that hard to screw up. There's lots of people that have. Usually they do it one or two years and then they've kind of got it down and they don't screw it up anymore. But you're right, a lot of people just reach out to me by email or blog comment or whatever wanting me to confirm that they've done it right because they see all these other people that did not do it right. I don't see that it's particularly complicated. If you just follow the tutorial, it's very easy to do, but there's a lot of people that mess it up for sure. 500. I don't even know if it's that high, to be honest with you. People doing it correctly the first time by themselves. Yeah.

I wouldn't disagree and I would give a plug for your tutorial. I think it's great, the many articles that are on there. I know that you recycle those a lot and it's because it's so relevant, but it really does a good job of walking through. So you're right. It's not overly complicated, but still easy to mess up somehow.

Yeah. Now Mike's second question is a lot more interesting to me. This idea of basically just setting the withholdings for his wife's paycheck to Zippo or as low as they can get it in order to be able to make a larger after tax contribution into a 403 which would then become obviously a mega backdoor Roth contribution. What do you think about that strategy?

Yeah, well, so first I'll give the caveat that of course you ought to talk to your tax professional about this. With that being said, I think it's a good idea. I mean it sounds like. So you do have a couple options as well. You could make estimated payments to cover the tax withholding there. You don't have to withhold any taxes if you make those estimated payments. Also the penalties associated, penalties, interest, I mean, it's good to avoid those. But it's back, you know, a couple of years ago, interest rates so low the interest was actually rather negligible. And so it's worth educating yourself on what the impact of that would be. Just talk with your tax preparer as far as how much you should do to get within that safe harbor. But I think it's a very good idea to be able to maximize that. Mega Backdoor Roth.

Now, obviously we know about the safe harbor rules. We know in April you're going to have to settle up with the irs. If you had too little paid or too much, you're going to have to settle up with the irs. If you're not in the safe harbor, you're going to have to pay some interest. But the question is, I think, the legality of deliberately reducing your withholdings at one employer, even though you're paying your taxes, even though you're staying within the safe harbor, is it legal to do this, to manipulate your withholdings in that way or is that somehow breaking any rules?

I don't see anything wrong with it. Again, I mean, there are some taxes that you will have to pay. I assume here he's talking obviously just about the federal income taxes, but there's the payroll taxes that will be coming out. So you do have to factor that in if you're trying to. That's going to be a problem with hr. If you're literally withholding nothing, trying to make your entire gross paycheck go to the 403B. That's not going to work. You're going to have to factor in payroll taxes at a minimum.

Yeah, I don't think there's any way of getting out of those, but it's pretty amazing how flexible you can be in some of these things. If you really push HR and you really think through the process, it's pretty impressive how often you can get, you know, your withholdings down for one person, you just withhold more for the other person or make quarterly estimated payments. So a lot of flexibility there to be able to max out those accounts. Right.

One other comment that I would like to make on this, and I'm interested to get your thought, is sometimes it's interesting when I'm talking with maybe a newer attending who has these opportunities, such as Mega Backdoor Roth, they're looking at all the different retirement plan opportunities. And sometimes even though those things are available, depending on what the balance sheet looks like, depending on cash flow needs, I would say maybe let's wait a year or two to fully max out all that. Because if you're adding up all of the different deferrals after tax. The mega backdoor Roth. The backdoor Roth, you're looking at over 100,000 easily of contributions. And if you're making a good salary but tying up all your money in retirement, it ends up where you actually don't have very much flexibility. And that's where someone might have to swipe the credit card and pay interest. So oftentimes I preach flexibility and having balance. So even though that's available to you, I would just be aware of that.

Yeah, new attendings, they have so many good uses for their money and limited amount of money. They probably still got credit card debt they're paying off. They may have a car loan, you know, their student loans are going to have to start making payments on soon. They probably don't have a real emergency fund. They may be saving up a down payment for a house and then they've got all these accounts they want to max out and you just can't do it all. I mean, you're not going to put, you know, $150,000 toward retirement accounts when you're making 275 and you're one year out of residency. It's just not going to happen. You got other uses for your money. And that's why I get so mad when I see people sold these high premium whole and universal life programs while they're still paying off, you know, student loans. And all of a sudden $40,000 a year is having to go to this whole life insurance policy. You know, they just have better uses for their money. And sometimes they have better uses than a mega backdoor Roth. That said, I hate to see people investing in a taxable account when they still have tax protected space available to them. So flexibility is good, but you also get an awful lot of benefit from a tax protected retirement account. You know, not only the tax benefits, but the estate planning features and the asset protection benefits. I see people passing that up too much just to get more flexibility. The classic case is people that want to retire before age 55 or age 59 and a half and they start wondering, well, should I save a bunch of money outside of retirement accounts? And I think that's usually a mistake because it's relatively easy to get into those retirement accounts in the case of early retirement.

Yeah, yeah, I wouldn't disagree with that. Certainly quite often I'M just so much in the habit of talking about retirement accounts being for the future, not trying to open up the idea. I feel like you can open up Pandora's box. I've seen before where if you say, all right, yeah, I'm going to tap the retirement account for this at age 40. Well, it's easy to just see that as a revolving, oh, I can just use that as another bank account. And of course that's the wrong way. I know you wouldn't think of it that way, but that can be a road that you go down. But I agree with you to the extent you can use all those retirement accounts. I always say the IRS gives you tax benefits. There are also, it's important to understand what the, what the strings are that are attached to that, to those benefits, with namely the biggest one being you can't touch it till 59 and a half. You know, after tax, you get some, a little more flexibility there. But yes, I agree with you, absolutely.

All right, Wes. Well, thanks for being on the podcast with us today. If you want to talk to Wes Moore, you can reach him@hillcrestfg.com that's his financial advisory firm. And thanks so much for sponsoring the White Coat Investor podcast.

Thanks for having me. I enjoyed it.

All right, now that we've let Wesley go, let's do a few of these additional questions that you guys have sent in for us.

Hello, White Coat Investor podcast. I am a third year medical student set to graduate in 2025. My question is about filing taxes in regards to the save plan. I'm currently married, my wife makes income and we have been told from multiple advisors to file separately for the sake of the save plan. That will be based off my income of $0 as a student and then once payments start, it'll be $0 payment. That said, if my wife and I are more debt averse and want to get rid of the debt, would it be better to just file jointly, reap the tax benefits that she won't have to necessarily pay, get potentially a tax return, a positive tax return, and then also get the educational credit as well. Please give me back your thoughts. Thanks.

Okay, great question. You know, starting a few years ago, we started getting questions like this more and more frequently. Sometimes a blog comment, sometimes an email, sometimes, you know, on the speak pipe for the podcast. But the truth is I can't answer your question. It's just not enough information, number one. Number two, I literally could not take the time to get with people, get all the information I needed to answer this question and really help you in that way. And we realized there was only one good way to do this and that was to start another company. And so we did. About three years ago, we started a company purely designed to help people like you with this type of a question. That company is called studentloanadvice.com and our head financial coach there, our head student loan guru there is Andrew Paulson. And he is an expert inside and outside of all this stuff. Not only did he go and get the CSLP certified Student Loan Planner designation, but he's now advised on, I don't know, it's not quite a billion yet in student loans, but it'll be there in not too long because these are complicated questions. How do you file your taxes? Married filing singly, Married filing jointly? Which plans save or pay? When do you refinance? Which type of retirement account do you use? Do you use a Roth account or tax deferred account? And there's absolutely no way to answer these questions without running the numbers for you, right? I have no idea what your spouse makes. I have no idea how much tax you're giving up by filing MFS for her. I have no idea how much other income you might have. So all I can talk about here is in generalities, if you really want specific advice for your situation, I'd book a consult. The student loan advice. Yeah, it's going to cost you a few hundred dollars, but it may make up for that by saving you tens of thousands, sometimes hundreds of thousands, particularly for those who are able to qualify for pslf. But here's the general guidelines, right? The year that matters is the year in which you're a third year and the beginning of your fourth year, right? So it's not 2023 taxes that matter for you, it's your 2024 taxes. So you can go ahead and file for 2023 married filing jointly. And then next year you might want to file married filing singly because that you'll be able to then show your income is zero. So your saved payments will be zero and whatever the interest is is basically going to be subsidized. And it's entirely possible that that subsidy is going to be worth more than the tax savings you would get by married filing jointly with both of your income. And that comes down to what her income is. You know, if she's an orthopedic surgeon, maybe not. It might not be worth it. On the other hand, if she's a part time nurse, maybe it is worth it, right? You just got to run the numbers. That's the only way to know for sure. But that's the point. You definitely should file taxes. You have to anyway, because your spouse has an income.

But.

But you've got this question now of whether to do married filing jointly, married filing singly or separately rather. And there's a good chance that that is the best option for you. Even if you're not going for pslf, even if you're not going for save forgiveness, it may still be the best option for you. On the other hand, there are other options, right? I mean, you could refinance and get a significantly better rate and just start working on paying stuff back. It sounds like you're planning to pay stuff back anyway, but given how complicated they've made the student loan situation, that's not necessarily the right answer for you. Hope that's helpful. As much as I can be, unfortunately. Okay, we have another question also related to student loans.

Hello, Dr. Daly, I'm a longtime listener and first time caller. I am participating in a non PSLF state governmental student loan repayment assistance program for underserved areas. IRS Publication 970, Section Student Loan Repayment Assistance lists three scenarios in which student loan repayment assistance is tax free. My questions are as follows. One, does this mean the repayment disbursement does not count towards your gross current income? Two, which tax form do you use to correctly report this on your taxes? And third, I have residency classmates who want the PSLF route and I'm including this question on their behalf. When TSLA forgiveness is received, how do you report it on your taxes? Thank you sincerely for all you and your team do. I'm a newer attending, just one and a half years out of training and having access to financial literacy has made a world of difference.

Well, that's gotta be a record. Three questions in 54 seconds, none of which are all that easy. Let's start with the first one. We're talking about non PSLF state programs. So I think you answered the question in your reference to Pub. 970. You found the answer. This is what it is, right? If you go to page 38 in Publication 970, you'll see a section that says student loan repayment assistance says student loan repayments made to you are tax free if you receive them for any of the following. First, the National Health Service Corps loan repayment program. Second, a state education loan repayment program eligible for funds under the Public Health Service Act. That sounds like what you're in to me. And the third one is Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage area as determined by such state. Now, it also puts a note in there that says you can't deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs. But that's not all that awesome of a deduction anyway. It's limited to $2,500 a year and most attending physicians make too much to qualify for it anyway, so that's not really much of a loss. But getting this forgiven tax free is pretty awesome, right? Or repaid tax free, whatever you want to call it. That's pretty darn similar to public service loan forgiveness. So that's great. When does it not count? Well, it's not taxable in those situations. So forgiveness is not taxable if it's pslf. It's also not taxable if you get an IDR forgiveness between now and, I want to say the end of 2025. Now, most people haven't been in those programs long enough to get that forgiveness. But if you're one of those select few who has that's currently tax free, I guess it's possible that could be made tax free in the future. But most of you going for pay forgiveness after 20 years or save forgiveness after 25 years, you better be saving up for the tax bond because you're probably not going to get that tax free. And then of course, these things that are listed here in Pub 970, right, NHSC loan repayment, any state education loan repayment done under the Public Health Service act or any other one basically that your state says is for an underserved area or a health professional shortage area. Those are often inner cities, they're often rural areas. But it's a pretty cool way to get that benefit tax free. So, yeah, sounds like what you're in qualifies to me. Your second question was how to report it on your taxes. Well, I think for the most part the answer to this question, as well as how to report PSLF is pretty much you don't, you don't report it on your taxes. It's not a taxable event. It's tax free. That's how it's tax free. You don't report it on your taxes. If you got IDR forgiveness after 2025, right, they're going to send you like a 1099, the amount forgiven, you're going to have to pay taxes on that they don't do that for pslf. They don't do that for this sort of a program. Right. So you don't have to pay these taxes on it. You're getting income. You don't have to pay taxes because they don't send you a tax form saying you had income. But there's not like a special other PSLF form you file with the IRS the year you get forgiveness. You just don't. It's just gone. Hope that's helpful.

Hi Dr. Dali.

I'm a first year medical student in the United States and I've started to work on my taxes for this year. As you probably know, the American Opportunity Credit can only be used for the first four years of post secondary education. However, I completed my bachelor's in three and a half years and I can't find information on the IRS website for my unique situation. Can I claim the American Opportunity Credit for one year of medical school?

Thanks for all you do.

Great question. I don't know the answer offhand. Typically these tax credits are used by undergrads. But let's read the rules. The IRS has publications on this sort of stuff and informational web pages on it. So if you go to this webpage they have on IRS.gov it tells you. The American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit up to $1,000 refunded to you. So $1,000 of it is refundable. The maximum credit is $2,500. The amount of the credit is 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of qualified educational expenses. Okay, so so far so good. You only use three years up as an undergrad, it sounds like, or you only were in school for three and a half years, so you should have at least another half year to use this. I don't think they count half years. I think if you've claimed it three times, then you're probably okay. If you've claimed it four times, you're probably not okay. Now it says who's an eligible student for it. It says you have to be pursuing a degree or other recognized educational credential. You have to be at least half time. And it says you have to not have finished the first Four years of higher education at the beginning of the tax year and you have to have not claimed it for more than four tax years. And you can't have a felony drug conviction, so not have finished the first four years of higher education. I don't think it says that has to be undergraduate. As near as I can tell, your first year of med school is your fourth year. So I think you're okay to claim it this year. I think I'd go ahead and do it. I found another website that talks about this. It declares this as a common misconception about the American Opportunity Tax Credit. It says misconception 1. The AOTC is only for undergraduate students. The truth is that the AOTC is available to both undergraduate and graduate students for pursuing a degree or other recognized educational credential. As long as you are enrolled at least half time in a program that leads to a degree, you may be eligible. Then misconception number three. It says the AOTC is only available for the first four years of college. It says while it's true that the AOTC is often associated with undergraduate education, it can actually be claimed for up to four years of post secondary education. This means that if you are pursuing a graduate degree, you may still be eligible for the AOTC as long as you haven't already claimed it for four previous years. So I think there's support for your position that you can claim it this year. I think I'd go ahead and do it.

Hi Dr. Dali, I have a question regarding using the tax status married filing separately versus married filing jointly for folks who are on the PSLF track and want to keep their payments as low as possible and are living in community property states. I live in California, I'm on the SAVE program and we have a single income household. It seems like I could get a really nice benefit by cutting my income essentially in half using the married filing separately status. But I'm trying to understand the tax consequences versus the benefit of bringing my payments down. Would appreciate your help in understanding this. Thank you.

All right, As I mentioned earlier on the podcast, when you get into these complicated scenarios, it's worth spending a few hundred dollars with studentloanadvice.com to make sure you're getting advice that is specific to your situation from someone who knows all the numbers involved in your situation and can help you to run them. So that's probably worth it in your case. But let's talk generally about community property states and this particular strategy. The main benefit of doing this is when your spouse has a whole Bunch of income, right? So you're a resident, you're going for PSLF, you're enrolled in the SAVE program, and your spouse is a plastic surgeon making $1.5 million a year. And if you report your income jointly, it's really going to eliminate any saved subsidy you're going to get. It's going to minimize how much PSLF you're going to get toward your loans, et cetera. And so that's why people go for married filing separately, is they figure it's worth giving up a little on the tax side to get more money forgiven. That's the general strategy. The problem in a community property state is this. When you do MFS in a community property state, you've got to put half of all community income and all of your separate income on your return. So it really neuters the strategy. Okay? And so often it no longer makes sense to put this sort of strategy in place for you to maximize your pslf. So which ones are the community property states? They are generally, and this is very interesting historically to look at this, but they're generally states that were under Mexican or Spanish control at some point, or French control. Not all of them. There's an exception, Wisconsin, that I can't quite figure out. But the rest of them, for the most part, were in the portion of the United States that was at one point part of Mexico. So we're talking about Arizona, California, Idaho, Louisiana, which is another exception, is kind of French, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you're in any of those states, your MFS strategy is not going to be nearly as powerful as it is in other states. If you need help running the numbers again, studentloanadvice.com is probably your best bet. But that's the problem you've got being a California resident is that this MFS thing that other people are doing in other states isn't going to work as well for you. Let's take our next question.

Hello, Dr. Dali. My wife and I recently opened a private practice in Ohio, and I heard you mention something recently on a podcast we were hoping you would elaborate on. You mentioned something about, I believe you said, ptacs regarding paying your state taxes or payroll taxes by credit card. I was hoping that you can clarify if there are any fees or exactly where to go to see more information on this topic. Thank you so much. Have a good day.

All right, I think you're a little bit confused. You seem to be blending two different topics together, so let's just address both of them because there's probably somebody out there with each of these questions. The first one is paying taxes by credit card. And you can pay your taxes by debit card or credit card. There's some digital wallet options. Now, what you will find, though, the people who want to do this usually are getting rewards back for doing so, right? So they're like, oh, I'll put on my credit card and I'll get 1% back. And I got a big tax bill, so that'll be cool. Well, what you find is that the fees for doing this are not insignificant. Like, I'm looking at the IRS website on this right now and the three options they have up the fees are 1.82%, 1.87% and 1.98%. So if you're only getting 1% back, you're definitely not coming out ahead. If you're getting 2% back, which is about as good as it gets most credit cards these days, you're really not getting enough back to be worth this hassle. So as a general rule, paying your taxes by credit card is not going to be some awesome thing for you. So don't bother. Hope that's helpful on that topic. However, I think what you're referring to is pass through entity tax or ptet. And this is something that's allowed in more and more states. And let me give you the background information for this. Starting in 2018, the tax cuts and Jobs act, right? The trump tax cuts basically put a bunch of cool tax cuts in place, right? Mostly for corporations and other businesses. Well, in order to pass this in the manner they did, which is through a process known as reconciliation. And this is the only way to get it passed without like a veto proof majority, which they did not have. They have to make it balance over like 10 years. So one of the things they put in place to help this balance is a cap on SALT taxes. Okay, and what do they mean by SALT taxes? Right, what they mean by that is state and local taxes, State and local income taxes. That's the SALT tax deduction. And it used to be that if you paid a whole bunch of money in state income tax, you could deduct it all on your taxes. You didn't have to pay federal income tax on the money you used to pay state income taxes, and that included your property taxes. Well, starting with, in 2018 with the tax Cuts and Jobs act, you couldn't do that anymore. It was capped at $10,000. And if you have a house in a relatively expensive area, your property taxes are probably more than $10,000 by themselves. So that meant all of those state, state income taxes you were paying, or in the case of New York state and local income taxes you were paying was no longer deductible. And a lot of people viewed that as politically motivated. Right, Because a lot of the blue states tend to have high property taxes and tend to have high income taxes. And so it became this big political football that goes back and forth. Well, what a lot of states have done to get around this is they've tried to put in new laws that allowed you to get around not being able to deduct this. And some of them were not successful in the beginning. You know, they were trying to give you charitable deductions for it and all kinds of other things. Well, the one that does seem to be successful is this ptet, a pass through entity tax. So for a business owner, this works out very well, right? If you're a medical practice owner or something, if you own a business like the white coat investor or something, this works out very well. And so basically what I do here in Utah and this has been legal for about, I don't know, three years or so, I think two years, I don't remember exactly. But basically I pay my state taxes through the business. So WCI pays my state taxes and that's a tax deduction for wci. So, voila, because it's my business is a pass through entity, voila. I get this credit on my state taxes for these taxes that my company has paid for me on my behalf. So in essence, what was not deductible on my federal income taxes has now become deductible on my federal income taxes is basically a business deduction for white coat investor. So that's what you can do if you own your own business, if you own your own practice and you're in one of these states that allows this, look up the specific rules for your state. But basically you're able to take something that is not currently deductible for most of us, at least not fully deductible, and make it deductible. And that's the point of the pass through entity tax. Hope that's helpful for answering that question. All right, I think we're coming now close to the end of our podcast. I haven't given you the quote of the day. Megan found this great one from Warren Buffett said games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard. When you take care of business, amazingly, business will be taken care of. Thanks so much for all you guys do out there. It is not easy doing what you do. It's a hard job. It's a lot of education and a lot of times those of you in medicine, it's dealing with death and dying on a daily basis. A lot of people are like, well, I don't get stressed out. Nobody dies if I screw up. Well, that's not necessarily the case in medicine. If you screw up, people do die and that can be stressful. So thanks for taking that on. Still not sure what to do with your student loans? Overwhelmed with how to tackle that giant debt in an ever changing political climate, the experts@studentloanadvice.com are here to help guide you through the best options to manage your loans. Our experienced staff have consulted on over $250 million in student loan debt and the average studentloanadvice.com client has saved over $190,000. You will receive a customized student loan plan using the principles of the White Coat Investor. Get answers to all of your student loan questions, gain clarity about your financial future, and start down the right path toward financial freedom. Book a consult today@studentloanadvice.com youm can do this and the White Coat Investor can help. Don't forget to check out our WCI social media platforms as well as our communities. It's basically all titled White Coat Investor. Go to your favorite platform, search White Coat Investor. You'll find it. Thanks. For those of you leaving us five star reviews and telling your friends about the podcast, our most recent one comes in from John Lund who said not just for docs. This is a down to earth, easy to understand podcast. The blog and the podcast both give extremely useful investment and life advice. Thank you for working so hard to bring this invaluable advice for free. Five stars. Well, thank you very much John for that great review. All right, our time has come to end this podcast once more. Don't worry, we'll have one out on Monday, one of our milestones podcasts and next Thursday we'll drop another regular podcast. Till then, keep your head up and shoulders back. You've got this. We'll see you next time on the White Coat Investor Podcast.

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