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The CARES Act: What the Coronavirus Relief Package Can Do for You

Posted by admin on 05/01/2020 12:00 am  

It was President John F. Kennedy who famously said, “Ask not what your country can do for you, ask what you can do for your country.”

As the current global health crisis has made clear, the compact between the U.S. government and its citizens works both ways. As the COVID-19 pandemic was thrusting hardship upon individuals, families, communities and businesses across the American and global landscapes, the U.S. government was hastily enacting the CARES (Coronavirus Aid, Relief, and Economic Security) Act in an effort to help its citizens meet the escalating financial challenges they are facing as a result of the unprecedented crisis.

What exactly can the CARES Act do for individuals, families and businesses? And in situations where you are eligible to take advantage of a CARES Act provision, is doing so a wise move?

“The first step to determining who should take advantage of new government programs, is to understand what the programs are, and are not,” said FPA member Sean M. Pearson, a CERTIFIED FINANCIAL PLANNER™ professional based in Conshohocken, Pa. “Except for the Economic Impact Payments, the only way to avail yourself is to ask the questions and apply to the appropriate agency or organization.


The payments to which Pearson refers are among about $2 trillion worth of financial relief included in the CARES Act. Here, he and other members of FPA offer their insight on those benefits and the best candidates to take advantage of them. For more details, visit the U.S. Treasury Department’s website.

 

 FOR INDIVIDUALS AND FAMILIES

Economic Impact Payments: As of mid-April, the Treasury Dept. had begun issuing cash payments directly to citizens via check and electronic transfer, although many people aren’t likely to receive their payments until May or perhaps beyond. The payments are based on adjusted gross income (AGI) in the 2019 tax year (or the 2018 tax year for people have yet to file their 2019 federal returns), as detailed in the chart below. Adults are eligible for up to $1,200 ($2,400 per couple), and parents are due to receive $500 per child age 16 or under. No action is required by taxpayers to receive the payments.

Note: As part of the CARES Act, the U.S. government postponed the 2019 federal income tax filing and payment deadline from April 15 to July 15, 2020. More on the ramifications of that move for taxpayers can be found in a separate article from FPA.

 Filing Status

Rebate Reduced by 5% of AGI in Excess of

AGI Level Where Rebate Is Completely Phased Out (for Taxpayers Without Qualifying Children)

 Married Filing Jointly

$150,000

$198,000

 Head of Household

$112,500

$136,500

 Other Individuals

$75,000

$99,000

(source: T. Rowe Price)

What the financial pros say: How to put the payments to constructive use? People whose finances have been severely impacted by the pandemic — job loss, deep drop in income, straining their ability to cover basic household expenses — should prioritize covering their basic needs first.

For people whose cash needs aren’t as urgent, FPA member Scott A. Bishop, CFP®, executive vice president at STA Wealth Management in Houston, TX, suggests keeping that money as part of a cash reserve/emergency fund “until we see with greater clarity where all this is going to go.”

A strong cash reserve, with enough money in it to cover household expenses for three, six or even nine months to a year, provides critical protection in case of a drop in household income.

Increased unemployment benefits. An estimated 22 million Americans filed for unemployment benefits during a four-week stretch in March and April 2020. People who collect unemployment benefits in the 2020 calendar year will find those benefits have been enhanced in several ways. For one, eligibility has been expanded to include the self-employed, independent contractors, people with limited work history (those new to the workforce), and people who have been furloughed or are unable to work as a result of the coronavirus. The duration of benefits has been extended to last up to 39 weeks (depending on state laws). And benefit amounts have been increased by $600 per week through July 31, 2020.

What the financial pros say: If you’re among those eligible for benefits and become unemployed, be sure to file as soon as possible with the state in which you reside. Do so even if you aren’t sure whether you qualify. Use the money to cover your living expenses and necessary bills, and once those are covered, use the remainder to build your cash reserve, suggests Bishop.

Access to retirement account assets. The CARES Act gives people who have been directly impacted by the coronavirus the ability to access funds in their workplace retirement accounts [such as a 401(k)) and/or IRA via loans or withdrawals. If you, your spouse, or a dependent is diagnosed with COVID-19, or if you have incurred negative financial consequences as a result of the pandemic, you may be eligible to take a retirement account distribution of up to $100,000 without an early withdrawal penalty. Income taxes still will apply to withdrawals from tax-deferred accounts like traditional IRAs, but people can opt to spread those taxes over three tax years. They also can treat the withdrawal as a loan (if the retirement plan in which they are enrolled permits loans); if they repay the loan within three years, they may be eligible for a rebate of any taxes they paid on the withdrawal. This loosening of retirement account rules lasts until September 23, 2020.

What the financial pros say: As a general rule, financial professionals suggest that people tap their retirement accounts early only as a last resort, to cover necessary expenses. The pandemic certainly has thrust more people into dire financial circumstances. Bishop suggests people continue to treat these withdrawals as a last resort, and if they do tap retirement funds, to use the withdrawals only to cover necessary expenses. If you have the financial means to cover necessary expenses without depleting retirement plan assets, he recommends doing so.


Relief from RMDs. People who would have been obligated to take required minimum distributions, or RMDs, from their retirement accounts in 2020 won’t have to do so.

What the financial pros say: If you need the RMD money to cover necessary expenses, take the distribution. If you don’t need the money, or if you need less than what you would otherwise be required to take as an RMD, then you have the flexibility to take less of an RMD, or none at all. You’ll likely pay substantially less in 2020 taxes as result, since RMDs typically are taxed as ordinary income.  As Bishop notes, this added flexibility also provides an opportunity to convert assets in a traditional IRA into a Roth IRA. Be sure to consult a tax and/or financial professional for advice on the merits of such a move, and how to go about executing it. Most financial and tax professionals are working through the COVID-19 crisis and are available by phone, email, video conference, etc. To find a CERTIFIED FINANCIAL PLANNER™ professional in your area, check out FPA’s searchable national database at www.PlannerSearch.org.

Student loan relief. The CARES Act suspends payments on federal student loans through Sept. 30, 2020, without any interest accruing, an important reprieve for people with student loan debt.

What the financial pros say: Here’s another instance where people under extreme financial duress can use these funds to cover necessary expenses. People who aren’t under financial duress should consider continuing to make payments, especially if they do not expect the loan balance to ultimately be forgiven.

Charitable contributions. For the 2020 tax year, people can take a tax deduction for up to $300 for eligible charitable contributions, even if they don’t itemize their deductions. For individuals and businesses who previously itemized their deductions, limits have been raised or suspended so more contributions are deductible this year. These contributions must be made in cash directly to a charitable organization, according to Bishop. Besides aiding taxpayers, these provisions are designed to encourage people to support charitable organizations in need during the crisis. Here’s another instance where it’s important to get guidance from a tax professional.

What the financial pros say: “If you’re looking to give cash to support an organization, this is a good year to give it,” says Bishop.


FOR SMALL BUSINESSES

 The CARES Act established the Paycheck Protection Program (PPP) to provide small businesses with loan guarantees and grants to help them hold onto employees and remain viable through the pandemic. Loan amounts can reach up to 2.5 months of a company’s average payroll, and can be used to cover payroll and other expenses like benefits, mortgage, rent and utilities. The loans are available via the U.S. Small Business Administration (SBA; www.sba.gov) through any SBA 7(a) lender or through any federally insured depository institution, federally insured credit union or Farm Credit System institution that is participating. They carry interest rates that are capped at 4%, and may be partially or fully forgiven if the business recipient keeps all its employees on the payroll for eight weeks or more and the money is used for payroll, rent, mortgage interest or utilities. The Paycheck Protection Program is slated to last through June 30, 2020. Note: As of mid-April, PPP funds had been depleted and federal lawmakers were considering measures to replenish the program.

What the financial pros say: “Business owners and even independent contractors are eligible for the program. It’s a lifeline that can help keep them afloat.”

 

FOR EMPLOYERS

 The CARES ACT includes various forms of relief for businesses of all sizes, according to Pearson, including:

  • Allowing businesses to forego payments of the 6.2% Social Security tax in 2020; they can instead make those payments in 2021 and 2022.
  • Increases the ability of companies to deduct net operating losses.
  • Companies can earn workforce retention credits for retaining employees during the public health emergency.
  • Accelerated recovery of alternative minimum tax (AMT) credits.
  • Giving employers an enhanced ability to deduct business interest expenses.

 

With the COVID-19 crisis still raging throughout the United States, and economic conditions worsening as a result, there may be more help forthcoming from Uncle Sam in the months ahead.

 

May 2020 — This column is provided by the Financial Planning Association® (FPA®) and FPA of Nebraska, the principal membership organization for Certified Financial PlannerTM professionals.

FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide members with tools and resources for professional education, business support, advocacy and community, FPA advances financial planning practitioners through every phase of their careers, from novice to master to leader of the profession. Please credit FPA of Nebraska if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.


Taking Advantage of the Federal Tax Filing Extension

Posted by admin on 05/01/2020 12:00 am  

The pandemic-stricken American public had reason to emit a deep sigh of relief this spring after the U.S. Treasury Department announced a timely — and in many cases urgently needed — postponement of the deadline for filing 2019 federal income tax returns.

As part of the CARES ACT enacted in late March to provide individuals, families and businesses with emergency financial relief, the U.S. government postponed the 2019 federal income tax filing and payment deadline from April 15 to July 15, 2020.  As welcome as the extension is for taxpayers, particularly those experiencing a high level of financial strain as a result of the COVID-19 crisis, there’s more to it than meets the eye — and, perhaps, more benefits to be reaped by people who understand some of the steps they can make to take full advantage of it.

First, there are the obvious benefits. “The filing [extension], and more importantly, the payment extension, is an opportunity to keep more cash on hand during these difficult times,” says FPA member Marianela Collado, a CERTIFIED FINANCIAL PLANNER™ professional with Tobias Financial Advisors in Plantation, Fla. Instead of paying whatever additional income tax they owe by April 15, people can hang onto that cash until July 15, the federal tax filing and payment deadline.

As she notes, people can still file their federal tax returns electronically and in doing so, specify that any amount they owe be withdrawn on July 15 (or whatever date they prefer before then). “Just be sure you have enough money earmarked to cover that tax payment when it’s due,” advises Collado.

For people who pay federal taxes on a quarterly basis, the July 15 extension applies to first quarter 2020 estimated taxes. However, second quarter 2020 estimated taxes still are due June 15, 2020.

On the state tax policy front, all states with an income tax also have extended their filing and payment deadlines, in most cases to align with the federal extension, with a handful of exceptions. To access a comprehensive listing of state extension dates, visit the American Institute of Certified Public Accountants COVID-19 resource page.

Another potential benefit of the filing extension comes in the context of the Economic Impact Payments included in the CARES Act. These so-called stimulus payments are based on an individual’s or a couple’s adjusted gross income (AGI) for the most recent tax year in which they filed tax returns — either 2019 or 2018. If the AGI was lower for an individual or couple in 2018 than in 2019, it could behoove them to wait to file their 2019 returns, so the Treasury Dept. uses their 2018 AGI figure to determine the amount of their Economic Income Payment. The lower AGI figure could in turn make them eligible for a higher stimulus payment. Before deciding on a course of action, it’s a good idea to consult a tax and/or financial professional for guidance. Most financial and tax professionals are working through the COVID-19 crisis and are available by phone, email, video conference, etc. To find a CERTIFIED FINANCIAL PLANNER™ professional in your area, check out FPA’s searchable national database at www.PlannerSearch.org. 

 

People who expect to receive a tax refund for the 2019 tax year should file their 2019 returns “sooner rather than later” so they can get their refund quicker, says FPA member Sean M. Pearson, CFP® based in Conshohocken, Pa.

The only instance in which “the sooner, the better” rule of thumb for people expecting a tax refund may not apply has to do with Economic Income Payment eligibility. If, by delaying filing their 2019 tax returns, a taxpayer stands to reap a higher Economic Income Payment (because that payment would then be based on their 2018 AGI), and the difference in the amount of their potential Economic Income Payment is more than the refund they would get via their 2019 returns, Collado explains, then it would make sense to wait until the Economic Income Payment arrives before filing 2019 returns. That way, they could potentially get a higher Economic Income Payment based on their lower 2018 AGI, and are still in line for a refund from their 2019 returns, once those are filed. Here’s another instance where it’s wise to consult a tax professional for guidance.

In extending the federal tax filing and payment deadline for the 2019 tax year from April 15 to July 15, Uncle Sam likewise extended the window during which people can make 2019 contributions to IRAs, Roth IRAs, health savings accounts, Solo 401(k)s, SEP IRAs and the like. “This is a great thing,” says Collado, “because it gives people more time to assess their cash situation and figure out whether they can in fact make that extra HSA contribution or IRA contribution. It gives people a chance to get a clearer picture of where they stand, and an opportunity to still move the needle on their 2019 tax returns.”

For example, if, come June or early July, a person or a couple takes stock of their cash situation and (preferably with guidance from a financial professional) determines they have the financial wherewithal to increase their contribution to an HSA, IRA, 401(k) or some other tax-favored vehicle, the extension provides them the extra time to make that determination and execute that maneuver, says Collado. “Some of these contributions affect the prior-year tax bills, so having more time for hindsight is an incredible opportunity.”

 

May 2020 — This column is provided by the Financial Planning Association® (FPA®) and FPA of Nebraska,  the principal membership organization for Certified Financial PlannerTM professionals.

FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide members with tools and resources for professional education, business support, advocacy and community, FPA advances financial planning practitioners through every phase of their careers, from novice to master to leader of the profession. Please credit FPA of Nebraska if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.