The House of Representatives passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act Friday, March 27th. This is a beast of a bill as it is officially a $2 trillion bill that can potentially be leveraged up to $7 trillion with loan forgiveness. This amount of money is almost incomprehensible. The total US budget for 2020 was $4.89 trillion.
Fortunately, both political parties understood that the bill was necessary to help the American people and businesses. We are going to focus on how the bill impacts the ability of individuals to access money or save money. There are many other potential benefits regarding RMDs, charitable contributions, healthcare and small business support.
Above is an amazing graph that I pulled from a PBS piece written by Kelsey Snell. Click here to read.
Quick Money with IRS Tax Rebates
It is understood that people need money ASAP to cover daily living expenses associated with living in quarantine. Therefore, congress included a tax “rebate” for individuals with a $75,000 adjusted gross income (AGI) per year on the most recent tax return. If your AGI is greater than $75,000 you’ll lose $50 for every $1,000 over the threshold. The threshold for married couples increases to $150,000 AGI. To expedite the process the IRS is going to use your 2018 or 2019 taxes to calculate your check. Obviously, your earnings are probably going to take a hit in 2020. So, if you didn’t qualify in previous years, but would qualify in 2020 you’ll get it when you file your 2020 taxes….better late than never.
Families will get an added benefit to compensate for the cost of raising children. Every child younger than 17 years old will qualify for an additional $500 tax rebate. If your children are older than 17 and are being claimed as a dependent, they will not qualify for the rebate. Also, you can visit the Washington Post website to estimate your rebate. It’s complicated so please call me if you have any questions.
The IRS will try to send your rebate to you via a few different methods that are as follows:
· Social security recipients: Your rebate will be sent to the same account you receive your social security payments
· Electronic refund account: If you received a tax refund for 2018/2019 your payment will be deposited into the same account
· Address of record: All other payments will be mailed to the last known address of record. We strongly encourage you to File Form 8822 if you have moved from the address noted on your previous tax return. Click here to download the form from the IRS website.
Unemployment Benefits
Due to government ordered shutdowns, businesses are understandably fighting for survival. The CARES Act has given them many favorable financing options; however, certain companies and industries have no choice but to lay off employees. Last week 3.3 million people applied for unemployment and another 6.6 million applied this week. The Act contains many unemployment benefits.
· Pandemic Unemployment Assistance: Self-employed individuals are generally eligible to file for unemployment compensation benefits. The Act gives them 39 weeks of unemployment benefits.
· First week’s coverage: Traditional unemployment does not cover the first week. The Act eliminates this waiting period.
· $600 increase in benefit: The average unemployment benefit is under $400/week. The Federal government will increase the benefit by $600/week. That’s a 150% increase! This is part of the bill that caused the Senate to stall passing it. The argument was that some people will make more claiming unemployment than actually working.
· Increase unemployment benefits by 13 weeks: For example, California normally allows for 26 weeks of unemployment. Now the state will offer 39 weeks of unemployment benefit.
Tapping in Qualified Accounts
Individuals are not typically allowed to pull money out of their qualified accounts such as IRA and 401(k) prior to turning 59.5 years old without incurring a 10% penalty on top of their ordinary income tax. This rule is being circumvented in a similar fashion as Federally declared disaster zones due to fire, hurricanes, earthquakes, etc. You are still required to pay income taxes on the money you withdraw; however, you can decide to pay it in one year or over three years. Typically, you would be required to withhold 20% of your draw for Federal taxes but the act drops this amount down to zero.
Many individuals borrow from their 401(k) accounts in times of need. The CARES Act made a few adjustments to the rules for 2020.
· Maximum loan amounts were increased from $50,000 to $100,000.
· 100% of the vested balance may be taken as a loan up to $100,000. Previously, the limit was 50% of the vested balance once the account was greater than $20,000.
· Payments can be delayed for up to one year.
Delay Paying Federal Student Loans
All Federal student loan payments may be suspended through September 30, 2020. The suspension is much different from a typical deferment as interest will not accrue on the balance. The loan suspension is voluntary, and participants need to reach out to the loan servicer to defer the loan. If you choose not to pause your payment, 100% of the payment will be applied to the loan balance. This will allow you to pay off the loan quicker.
If you are in the process of loan forgiveness, you definitely want to defer the payments. These months will continue to count towards any loan forgiveness programs.
All involuntary debt collections are suspended until September 30, 2020. Wages and tax refunds will not be garnished.
Mortgage Forbearance
If your mortgage is a federally backed mortgage, you have a few great benefits, as shown below. Lenders are being strongly encouraged to work with homeowners if their loans are not federally backed. Call the loan servicer and ask for assistance.
The lender or loan servicer may not foreclose on you for 60 days after March 18, 2020. Specifically, the CARES Act prohibits lenders and servicers from beginning a judicial or non-judicial foreclosure against you, or from finalizing a foreclosure judgment or sale, during this period of time.
If you experience financial hardship due to the coronavirus pandemic, you have a right to request a forbearance for up to 180 days and one extension for another 180 days. Contact your loan servicer to request a forbearance. No documentation is required to qualify your claim to have a pandemic-related financial hardship. During the forbearance period you will not incur late fees, delinquencies will not be reported to credit agencies, and all foreclosures/legal proceedings will be suspended.
Renter Eviction Protection
Federally backed housing must provide 120 days of eviction relief. You cannot be given an eviction notice until July 25th and they must give you 30 days to vacate the property. You are required to pay the rent; however, they may not charge you late fees or penalties.
Conclusion
The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a massive spending bill that was passed in haste. Both parties understood that if they didn’t pass the bill, the country’s financial position would deteriorate quickly. Almost everyone in the country will benefit from the bill as both parties stuffed it full of goodies. They didn’t really have a choice as they are the ones shutting down the country (rightfully or wrongfully).
This is not a comprehensive summary. Please let me know if you have any questions or concerns. Please consult your tax preparer to verify any tax ramifications.
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