Understanding How the Program Works is Key to Not Getting Left Out
Rather than the month or quarter end investment review I usually do on the first of the month, I am going to walk through some of what I’ve learned about the CARES act – that $2 trillion cash bonanza that, when passed by Congress, fueled a 3 day 15% rally in the stock market. What is in it, and what does it mean to ordinary folks. Here is some of the most important elements. After all, if you are a regular reader, you know I have already spoken my peace on the topic of investments. And will continue to do so as the market continues to try to figure out this completely alien economic landscape.
There is a whole lot to unwrap, so I am going to just focus on the individual portion of the bill (which most people are interested in) and leave the small business assistance programs for another night. Only so many hours in a day. Even then, I am also just scratching the surface with what I outline here.
Individual Payments. If your AGI was less than $150,000 (couples) or $98,000 (individuals) you will be getting a $1200 check for each adult, and $500 for each child under the age of 17. The mechanics are a little messy – but here’s the deal. The income qualification will be made based on your most recently filed tax return. If you haven’t filed for 2019 yet, they will look at your AGI from 2018. If you have filed 2019, they will look at 2019 AGI. But here’s the thing. Maybe you qualified based on 2018 income, but not 2019 due to higher income. In that case – DON’T FILE YOUR 2019 RETURN. Put it off, file an extension, whatever! Or file right away if your income in 2018 was too high, but was lower in 2019. IF YOU RETIRED IN 2019 BUT HAD HIGH EARNINGS IN 2018 THIS MEANS YOU!!!!!
Even if you subsequently file a 2019 return showing higher income - you don't need to give the money back.
Adult kids who are dependents – no checks for them, sorry. BUT – here’s a twist. The actual payment is a tax credit for tax year 2020 which is being paid out in advance. So I think it is possible that if the youngster becomes independent (you provide less than ½ of support) for 2020, then will get their $1200 check in 2021 when they file their 2020 tax return. Something to think about! I won’t swear to that, but something to ask your accountant about. And again, if you receive a credit based on 2018 or 2019 income and then report a much higher income in 2020 (maybe a toilet paper salesman???) you won't have to give the money back even if you don't qualify.
IF YOU DON’T FILE A TAX RETURN and haven’t filed one for the last couple of years – because your income is low for instance – file a 2019 tax return pronto. Otherwise the IRS has no information with which to process your checks.
IF YOU HAVE MOVED OR RECENTLY CHANGED BANKS – this may cause problems. The IRS intends to use direct deposit for the checks to speed the process, and it intends to use the most recently provided direct deposit bank info the taxpayer provided. So if you changed banks, frankly, I don’t know what will happen, but it will certainly mean a delay. If you did not provide any bank info to the IRS (haven’t received a refund) then you will have to wait until they mail you a check. But what if you moved since filing your 2018 return and the mail forwarding order expired? RETURN TO SENDER. That would be bad. Cure is to file your 2019 return ASAP with new address (like yesterday) or file a Form 8822 change of address notification, which I believe can be done online.
Time is of the essence on this because Washington is trying to get the money out as quickly as possible. When I think of all the things that can go wrong, and the understaffed bureaucracy of the IRS trying to figure it all out – it isn’t pretty. So make sure your ducks are in a row so that the money is sent to the right place.
Required Minimum Distributions are Not Required for 2020.
Whether it is a regular IRA, a 401k, or even a Beneficiary IRA, you do not need to take an RMD this year. This may provide opportunities for some retirees to do some creative planning, maybe do a Roth conversion instead, etc. Or with the market being down, you might find it more advantageous to harvest some losses from your taxable account rather than liquidate investments in an IRA where you receive no benefit from investment losses. Or maybe you just don’t need the money – so why pay the tax? Let us know if we can help on this.
401k distributions / loan provisions etc.
The CARES act provides for easier penalty free access to 401ks for those experiencing financial hardship by liberalizing the loan provision and allowing special penalty free distributions with tax spread over 3 years. Sorry, I am not crystal clear on all the details, but if anyone is curious let me know I will find out. Or ask your 401k administrator for details.
Unemployment on Steroids
Some people might actually be happy to lose their jobs when they hear about this one. The federal government is adding $600 / week to your unemployment check for up to 4 months. New Jersey already had a fairly generous unemployment payment – so in sum it looks like an unemployment check will be worth $50,000 per year in income. Wow. That will ease the burden on a lot of people. It’s only 4 months so being unemployed is still no picnic, but it sure will help folks keep the rent paid! Apparently this money is already on its way and NJ residents may be seeing it in their checks shortly.
Student Loan Payments.
Payments may be deferred on student loans, and interest will not accrue. And this is important: This time of deferral still counts toward future forgiveness if you are in, for instance, the Public Service Loan Forgiveness program. So what that means is if you are enrolled in the PSLF program and expect your balance to be forgiven eventually – STOP YOUR PAYMENTS IMMEDIATELY and don’t start them until the deferral period is over. On the other hand, if you have the ability to pay and expect to pay your loan in full, then you might want to keep making loan payments because you will accelerate paydown during this time.
We're here to help.
There is SO MUCH to this bill it makes my head spin. Thinking about where all the money comes from makes my head spin even more. But if you are wondering what applies to you and how to make the most of the planning opportunities afforded under the Act, please reach out and we can figure it out together.