Individual Stimulus Impact – Part I (Individual)

Over the past several weeks we have seen many unprecedented occurrences. More than anything in my lifetime, the coronavirus (COVID-19) has touched every facet of life: our work, our schools, our health, and our relationships with others.

As this crisis progresses, more and more people will experience an even greater impact as we witness the economic ramifications of this virus. As such, many people are curious about how the CARES Act will affect them. Part II of this guide will outline resources for businesses.

Recovery Rebates

Who will receive a rebate?

An estimated 90% of taxpayers will receive some level of rebate. However, the math behind the rebate is a little more complex. At its most basic level, the rebate will be calculated against Adjusted Gross Income (AGI) from taxpayers’ most recent tax return. That’s 2019, unless you didn’t file for 2019, in which case the government will use your 2018 return. For people filing as Head of Household, payments begin to reduce at $112,000, Married Filing Joint reduce at $150,000 and all other filing statuses reduce at $75,000. Remember, this is not based on wages, but on AGI, so retirees will receive a check as well.

As a starting point, every eligible tax filer will receive $1,200. So, that’s $2,400 as a married couple with an additional $500 for every qualifying child (a qualifying child is under 17).

After the AGI limit is hit, the check is reduced by $5 for every $100 of income over the limit. Additionally, if you have had a child since your last tax filing, that child will not be included in your stimulus.

Example 1

A married couple with two children that have income less than $150,000 in 2019 will receive a rebate of $3,400. $2,400 for themselves and $500 for each child.

Example 2

A single person with 1 child and an income of $80,000 would receive $0.

Example 3

A married couple with income of $175,000 and 2 children would receive $2,150 ($3,400 as a starting point with a $5 reduction for every $100 of income above $150,000).

Where will it be paid?

The IRS has stated that it will deposit the check to an account or address on record. For social security recipients, that means you will receive the check in the account in which your social security is deposited into. For other tax filers, the check will be direct deposited to the account in which you received your most recent tax refund; likewise, if you owed tax and paid it electronically. For persons that aren’t collecting social security or have not used a bank account when they file, the check will be sent to the address on record with the IRS.

This will present some problems for persons that have either closed a bank account previously given to the IRS, or have moved since their last tax filing. The IRS has stated that it will provide a hotline to call to alert it to changes in your address or bank accounts, but at the time of this writing that number has not been published. If you are in this category, expect delays in receiving your payment. ***For persons not filing a 2019 tax return, enter paymen information here. 

When will checks be paid?

This week, some officials have stated to expect payments THIS MONTH…however, this is the Federal Government we’re talking about so I expect mid to late May is a reasonable expectation. **Note, as of April 15th, checks have started to arrive, score one for the Government.

Final thoughts and Considerations

It’s important to remember that these checks will be paid based on 2018 or 2019 tax filings but are for 2020. That means if you had higher income in a prior year but have been laid off or furloughed and would qualify based on your income in 2020, you may not receive your rebate until you file in 2021! Essentially, for persons that may need the rebate the most, it will be unavailable.

Unemployment

Unemployment insurance has been widely expanded through this bill. That being said, before we talk specifics it should be noted that unemployment is run by states. In Michigan, the governor has stated that we will adopt all of the Federal provisions outlined by the CARES Act. For other states, its best to review a local resource before making financial decisions.

Normally, filing for unemployment comes with a 1-week waiting period. That period has been waived and filers should expect to receive their unemployment benefits immediately upon filing. Additionally, for the first four months of benefits, checks will be increased by $600 per week! As a final addition, benefits have been extended an additional 13 weeks beyond normal payment times.

Most notably, unemployment benefits are typically not available to 1099 workers like contractors or gig workers (think: Uber drivers). Under the CARES Act, these workers will be able to file for Pandemic Unemployment Assistance and receive the same benefits as traditional, W-2 workers.

Finally, states have been encouraged to adopt “short-time” benefits for workers that are employed but in a diminished capacity (less hours, less pay). I have not seen anything definitive for Michigan, but if you are in this position, I encourage you to contact your state’s unemployment department.

Retirement Plan Distributions and Loans

There have been several more changes for families that need additional cash this year. Namely, expanded provisions to access cash from retirement accounts like IRAs and 401(k)s.

First, these distributions are limited to persons impacted by the coronavirus. Fortunately, the definition is fairly liberal:

· Persons diagnosed with COVID-19

· A spouse or dependent who has been diagnosed with COVID-19

· Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease

· Unable to work because they lack childcare as a result of the disease

· Business owners that have had to close or reduce operations because of the disease (including reduced operations because of a government-mandated closing)

Retirement Plan Distributions

For people meeting the preceding criteria, distributions from retirement plans are allowed up to $100,000 total, without early withdrawal penalties. Additionally, income taxes on these distributions can be spread out over a 3-year window. For people experiencing job loss or lower incomes in 2020, it likely makes sense to pay all the taxes now. However, because of the 3-year window, this also means that the distribution can be rolled back into the account and no taxes would be owed. These distributions are also not subject to the normal mandatory withholding requirements (employer-sponsored plans only).

Retirement Plan Loans

Likewise, 401(k) and 403(b) loan provisions have been expanded. Normally, retirement plan limits are 50% of the account balance up to $50,000. Now, balances can be tapped to the tune of $100,000 – up to 100% of the account value! Payments can also be delayed for up to one year. Given the current rate environment, which is very low, this is an attractive option for families needing an additional cash infusion in 2020.

Mortgage Relief

While relief from mortgage payments is not included in the CARES Act, Fannie Mae and Freddie Mac have stated they will allow for some reprieve from payments for those persons impacted in 2020. Specifically, borrowers can request a forbearance from their current loan provider (assuming their loan is backed by Fannie or Freddie). Other agencies may allow similar provisions but ultimately, success here depends largely on the company servicing the loan. The bottom line: contact your loan provider to see what options are available to you.

Student Loan Relief

Student loans are more clear: Federal student loan payments are suspended until September 30, 2020 and no interest will accrue on this debt. While required payments are suspended, voluntary payments are not. This means that if you have an automatic payment set up – it will continue unless you stop it!

For anyone that is currently working under a debt forgiveness program, even though payments are suspended, these months will continue to count toward your forgiveness program. Choosing to cancel payments to student loans will depend largely on financial stability, cash flows, and goals. However, if you are part of a debt forgiveness program, the choice is clear: stop your payments! Your goal is to ultimately have the balance of your loan forgiven, so paying it down during an interest free period is pointless. Remember though, you will need to turn your payments back on at the end of the period.

RMDs (Required Minimum Distributions) waived

For retirees, the Government has wisely allowed for the suspension of RMDs in 2020. Maybe more than any other question I have been asked is “Why did the government suspend RMDs?” The answer is fairly

simple. RMDs are calculated off the prior year’s December 31st account balance. For most people that number is substantially higher than their account value today. Essentially, in 2020, an RMD would be a larger (than normal) percentage of an account’s value, forcing seniors to liquidate investments at the bottom of the market! Interestingly, the rule also allows for the suspension of an RMD already taken in 2020!

The exception here is inherited IRA accounts. If you are an owner of an inherited IRA and have not taken an RMD this year, you are in luck. Unfortunately, if you have already taken your RMD, there is not provision to put it back.

Traditional IRA RMDs can be returned to the account via the 60-day rollover provision (unless, of course, you’ve taken a 60-day rollover in the last 12 months).

Minor Additions:

· A new $300 above-the-line deduction for charitable contributions (for people that don’t itemize)

· Medicare beneficiaries will be eligible to receive the COVID-19 vaccine (when available) at no cost

· Medicare Part D recipients can request a 90-day supply of medication

· Medicare will cover Telehealth services

· HSA accounts can be used for menstrual care products, as well as over-the-counter medication

· The AGI limit for charitable contributions has been temporarily increased to 100% (if charitable contributions exceed 2020 income, the excess can be carried forward for 5 years)

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