While most of my blogs are written about the philosophy or strategy behind the role that money plays in your life, this is strictly informational and will provide the details of most of the major changes that the government has ordered in response to the coronavirus. My assessment of these programs:
- They are really smart. I lived through the unknowns of 2008, followed by the very creative solutions from the Fed and other government entities to shore up the US financial system. Some of the 2008 programs have been dusted off and reinstated, while other programs - like the ones outlined below - have been dreamt up out of thin air. Well done, Washington DC. You just did something constructive for the country.
- They can get manipulated, and some people will benefit more than others. Given the magnitude and urgency of the crisis, this is probably to be expected.
- They will be easy to Monday Morning Quarterback. Yes, these laws are imperfect, took far too long to write, and now are far too long to read. However, the Democrats and Republicans just came together, and in less than two weeks agreed to release $2 trillion of stimulus to make sure our economy doesn’t crater. Let’s say thanks and hope they are working on the next package.
We ask that you send this blog to anyone you know that may benefit from one of the changes below, especially small business owners. The goals, after all, are to backstop employers so they can keep employees stable and keep their businesses afloat, to allow workers to get through this time, and for all of us to spend money while the economy is otherwise on standby.
We have also created a webpage here to provide resources for clients, business owners, families, and those looking to help the community. Please check on it regularly, as we will continue to update it.
I will start writing again about philosophy and strategy next week, but in the meantime, let’s get down to business.
INCOME TAX CREDIT (aka YOUR GOVERNMENT REBATE)
The CARES Act provides $1,200 for each adult ($2,400 for a married couple that files their tax return as such) and $500 for each child under 17 years old who is a dependent. Best part? These funds are not subject to taxes.
The benefit phases out for individuals with $75,000 income, heads of household with $112,500, and married couples with $150,000 income. For those with no children, the phase outs are $99,000 (individual) and $198,000 (married). People with no or little income will still qualify, including retirees. If you filed a tax return for 2018 or 2019, you are in the system and don’t need to take action. The IRS will use the income from your most recent filed tax return (2018 for most of us) to determine if you’re eligible.
Any adult with a Social Security number can qualify, as long as they aren’t a dependent of someone else. These payments are expected to be sent out within three weeks, and will be automatically sent to your bank account if you have direct deposit information on file with the IRS. If you don’t have banking information on file, the check will be sent to your home. If you did not file a return for 2018 or 2019, you will need to register with the IRS. Check out www.irs.gov/coronavirus for updates.
The CARES Act helps those who are no longer employed also. Unemployment benefits are normally paid for 26 weeks, but will now be paid for 39 weeks. In addition, eligible displaced workers will receive an additional $600 per week until July 31, 2020. A very important change here is that the expanded unemployment insurance includes gig economy, self-employed, and contract workers who don’t normally qualify.
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide up to two weeks of paid sick leave to employees, if the reason for the leave is related to COVID-19. The act also requires employers to provide up to two weeks of paid leave at two-thirds of their regular pay if the employee needs to take care of an ill family member or a child who is home from school. Employers must also provide employees up to an additional ten weeks of pay at the two-thirds rate if the employee is unable to work to stay home with children whose schools are closed. Small businesses that employ fewer than 50 people can request an exemption. The poster that employers are required to post can be found here, and the Department of Labor’s FAQ can be found here.
PAYCHECK PROTECTION (SBA) LOANS
The CARES Act also provides Small Business Association loans for businesses with fewer than 500 employees. The loan amount is based on 2.5x the average monthly payroll of the previous 12 month period. Since this is payroll, it includes income up to $100,000, benefits, and taxes. When you as the business owner receive the loan, you can use it for payroll, rent, utilities, and loan interest. The loan can be for up to 10 years, and will have interest capped at 4%. If the proceeds are used by June 30, 2020, the loan will be forgiven. My recommendation to all of my small business clients is to apply for this loan.
*The Paycheck Protection Program has a unique and admirable “Sense of the Senate” directive to prioritize loans to veterans and members of the military, underserved and rural markets, and businesses owned by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.
If you are a small business owner, here is the application to the Paycheck Protection Program, which should be submitted to your SBA Participating Lender:
REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
Required Minimum Distributions are waived for 2020. If you do not need the money, you may consider not taking a withdrawal from your IRA this year. Your RMD is based on your December 31, 2019, account value, which was presumably higher than it is now. If you keep the money invested, it will have a greater chance of recovery when the market gains ground. This waiver also applies to Beneficiary IRAs and anyone who delayed their first RMD in 2019 to the 2020 tax year.
THE 10% PENALTY IS WAIVED FOR RETIREMENT PLAN WITHDRAWALS UP TO $100,000 FOR THOSE UNDER 59 1/2
Pre-59 ½ withdrawals normally incur a 10% penalty. That penalty is waived for withdrawals up to $100,000 if the funds are used for a coronavirus hardship (i.e. losing your job). The distribution would normally be taxed as ordinary income. However, a clever exception was created so that if you can return the funds to the IRA within three years, the tax bill can be avoided. And in another boost of support, if you can’t return the funds to the IRA, the ordinary income tax that is due on the distribution can be spread out over three years.
Everything due to the IRS has been delayed from April 15 to July 15, including your tax return, taxes you owe for your tax return, prior year retirement plan funding (i.e. SEP contributions for those who are self-employed), HSA contributions, and estimated quarterly payments.
*Texas residents don’t have state income tax. However, for those of you reading this from another state, you should confirm your tax deadlines for your state.
Nonprofits need your help now more than ever. Their revenue is drying up, but their clients need exponentially more help. There are now some incentives for you to give if you can. Even if you use the Standard Deduction, you can take a deduction for up to $300 in charitable donations. If you itemize, the amount of your deduction is subject to your entire AGI.
All federally qualified student loan payments are suspended through September 30, 2020.
Also, employers can contribute up to $5,250 to an employee’s student loans, and the employee will not need to include that contribution as taxable income.
Employers with fewer than 100 full-time employees will receive a 50% payroll tax credit for wages paid to employees if operations were partially or fully suspended due to an order related to the virus, or if their gross receipts declined by more than 50% in the same quarter in the previous year. This credit will cover $10,000 of compensation (including health benefits) for wages incurred March 13 - December 31, 2020. Employers with 100+ employees can include wages paid to employees furloughed or with reduced working hours.
A few other one-off but important updates:
Both employers and self-employed individuals can delay the Social Security employer contribution of 6.2%, with half due December 31, 2021, and the other half due December 31, 2022.
2018, 2019, and 2020 Net Operating Losses can be carried back five years.
The CARES Act also created a $500 billion Exchange Stabilization Fund, 10% of which will provide direct lending to the airline industry (with lots of caveats about CEO comp), with the remainder going to general business (with equal amounts of caveats about stock buybacks).
As always, if you have questions, please send them to us at firstname.lastname@example.org. We are all in this thing together, and we are grateful to be by your side.
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.