On today’s show we are going to dissect the recently passed CARES Act Stimulus package. The bill was 800+ pages long and there is definitely a lot of confusion out there on what relief is available and how to get it. I am going to break the podcast up into two parts. On this one we are going to cover the Act specifically as it applies to individuals. On the next podcast we are going to cover the provisions for small businesses.

In this episode you will learn

• The Recovery Rebate Check and who is eligible and how much will you receive.
• Additional provisions to Unemployment compensation.
• Additional access to your retirement accounts through loans and distributions.
• Relief to student loan borrowers who have federal loans.

This is the first part of a two-part series on The CARES Act. Listen to the second part, which covers how The CARES Act applies to small businesses.

Resources:

Bautis Financial: (862) 205-5000 | What Things Should I Consider Checklist | CARES Act – Small Businesses | IRS Coronavirus Website

Welcome back to the Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show we are going to dissect the recently passed CARES Act Stimulus package.  The bill was 800+ pages long and there is definitely a lot of confusion out there on what relief is available and how to get it.  I am going to break the podcast up into two parts. On this one we are going to cover the Act specifically as it applies to individuals.  On the next podcast we are going to cover the provisions for small businesses. You can listen to that episode at agentofwealth.com/43 or on the same app that you found this one.

It’s a mammoth $2 Trillion dollar package. The largest stimulus package passed ever. 

On the individual side we are going to cover 

• The Rebate Checks
• Unemployment Insurance
• Changes to how you can access the funds in your retirement account
• And relief for student borrowers

Recovery Rebate Checks

These are the checks that everyone has been hearing about.

• Estimated to reach over 90% of taxpayers 
• Provided as a refundable advanced tax credit against 2020 taxes
• $1,200 for individuals, $2,400 for married couples
  • Additional $500 per child under age 17

Now the question is, who’s eligible? A single taxpayer with one child would be eligible for up to a $1,200 + $500 = $1,700 refundable credit. 

A single taxpayer with two young children would be eligible for up to a $1,200 + $500 + $500 = $2,200 credit. 

A married couple, on the other hand, with one child and who file a joint return, would be eligible for up to a $2,400 + $500 = $2,900 credit, while the same couple with four children would be eligible for up to a $2,400 + $500 + $500 + $500 + $500 = $4,400 credit.

Notice I said that it is for dependents under the age of 17.  If you are a dependent older than that you will not be eligible for a check.  

The recovery rebates check phases out based on AGI and Filing Status:

• $150,000 for Married Filing Jointly
• $112,000 for Head of Household
• $75,000 for other filers
• Phases out at $5 per $100 of additional income

Recovery Rebate Check Calculator

If you don’t know your AGI offhand you can look at your tax return (Form 1040) and it is listed on line 7.

What tax return year is your AGI based on?

• Based on 2019 tax return if filed
• Otherwise based on 2018 tax return
• Accelerate tax filing in 2019 if income was lower than 2018

One of the more confusing aspects of the Recovery Rebate is that the initial amount paid will be based on either a taxpayer’s 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), while it will ultimately be ‘trued up’ if a taxpayer is owed money based on their actual 2020 income.

In other words, Congress is going to ‘front’ taxpayers an estimated amount based on their 2018/2019 incomes, but if the 2020 return shows they really ‘deserved’ it, they’ll get it after all, albeit much later. 

Perhaps the individuals most negatively impacted by Congress’s choice to process the Recovery Rebates this way are those taxpayers who had high income in 2018/2019, but who have since been laid off, furloughed, or had their incomes substantially decrease for other reasons. In such situations, individuals may have a genuine need for income at this very moment. And while they won’t ultimately benefit from the Recovery Rebate until April of 2021 (or whenever they file their 2020 return), that is of absolutely no use to them today!

Of course, while many taxpayers are likely to see income decreases in 2020 as compared to previous years, some will surely see their incomes rise. And for some, that might mean that they get a check for a Recovery Rebate now that they don’t really ‘deserve’ based on their ultimate 2020 income. There will be no clawback on the ‘excess payment’ when they file their 2020 return. Such “lucky” individuals get to keep their recovery rebate!

• This tax credit is to be paid “as soon as possible” (but potentially not until May)
  • Social Security recipients to receive when they get their SS checks
  • Others will receive a direct deposit to the account they received their 2018/2019 refund
  • Otherwise a check will be sent to the last known address on file

Unemployment Compensation

It’s no surprise that when you enforce social distancing and quarantining there are going to be a lot of people who lose their jobs.  

In the most recent jobs report there were 3.3 million job claims.  There are reports that it could get as high as 40 million unemployed.  The CARES Act has put in place unemployment insurance on steroids. In addition to the normal unemployment compensation which differs state to state, there has been an expansion on who is eligible for benefits, the amount of compensation someone will receive, and how long those benefits will last.  So let’s break those down.  

Where to Apply for Unemployment

• File a NJ unemployment claim
• File a NY unemployment claim

Pandemic Unemployment Assistance – Self-employed individuals (who are generally ineligible for unemployment compensation benefits), and other individuals who are ineligible for ‘regular’ unemployment, extended unemployment or pandemic unemployment insurance, or run out of such insurance, will be eligible for up to 39 weeks of benefits via this provision.

How to file for the Pandemic Unemployment Insurance in NJ

Uncle Sam Will Cover Unemployment for the First Week of Unemployment – In general, individuals are ineligible to receive unemployment benefits the first week that they are unemployed. It essentially amounts to an elimination period that’s meant to encourage people to try and get another job quickly so as to avoid the week without income. Of course, at the present time, finding work quickly will be difficult, if not impossible. And in recognition of this fact, the CARES Act offers to pay states to provide unemployment compensation benefits immediately, without the ‘normal’ one-week waiting period.

‘Regular’ Unemployment Compensation is ‘Bumped’ by $600 per Week – Section 2104 of the CARES Act provides states with the ability to increase their unemployment benefits by up to $600 per week with Federally-funded dollars, for up to four months. This has the ability to dramatically increase the amount of money an individual is entitled to temporarily receive via unemployment compensation benefits, as the average weekly unemployment benefit nationwide is under $400! Thus, many individuals will see their unemployment checks increase by 150% or more, thanks to this part of the CARES Act. This is the part of the bill that briefly stalled legislation in the Senate.  Some individuals will receive more money by collecting unemployment insurance than they would by returning to work

 Unemployment Compensation is Extended by 13 Weeks– In the event that people are nearing – and ultimately reach – the maximum amount of weeks of unemployment compensation provided under state law, Section 2107 of the CARES Act will allow them to receive such benefits for an additional quarter.

Incentives to Create Short-Time Compensation Programs – Section 2108 of the CARES Act provides an incentive for states who do not currently have “short-time compensation” programs to establish such programs by covering 50% of the establishment costs incurred through the end of the year. Short-time programs are meant to help those employees who have seen hours cut (or similar cuts) and have had income drop, but who are still employed, and therefore, ineligible for unemployment compensation benefits.

Unemployment Info for Self Employed / Independent Contractors
FAQ for Self Employed / Independent Contractors

Coronavirus – Related Distributions from Retirement Account

How much can be distributed from a retirement account and who qualifies?

• Distribution of up to $100,000 from a combination of IRAs and/or employer plans
• Distribution must be made in 2020 (Anytime from 1/1/2020)
• To qualify for this distribution you must meet one of these requirements: 
  • You have been diagnosed with Covid-19
  • You have a spouse diagnosed with Covid-19
  • You experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
  • You are unable to work because they lack childcare as a result of the disease
  • You own a business that closed or operated under reduced hours because of the disease
  • You meet some other reason that the IRS decides to say is OK
  • As you can see the IRS is trying to make this broadly available 

Benefits of Coronavirus related distributions:

• Exempt from 10% early withdrawal penalty.  If you are under 59 ½ you normally have to pay a 10% penalty on any distributions.  That 10% penalty is being waived. You still will owe tax on the distribution. So if you take a distribution of $100,000 and are in a 20% tax bracket, you will only walk away with $80,000.  
• Eligible to be repaid over 3 years – beginning on the date the payment is received.  
  • Can be paid back in one or more checks – whatever you prefer
  • Effectively a “roll back” into the account
• As I mentioned, the distribution is still taxable but you may spread paying the tax over 3 years.
  • Generally deferring paying tax on something is a good thing, unless 2020 is a low income year and you are going to be in a lower tax bracket.  You just want to make sure that the distribution doesn’t bump you up into a higher tax bracket.

Enhancements to loans from employer plans:

• Maximum loan amount increased from $50k to $100k
• 100% of vested balance may be used.  Usually you can only take a loan out for a max of 50% of your vested balance.  Now if you have $100k in your 401k you can take a loan out for $100k.
• Payments on a plan loan otherwise owed may be delayed 1 year

Be careful about taking money out of your retirement account: 

• It will impact your retirement
• You may be selling at lows right now

RMDs Waived in 2020

• RMDS suspended for 2020
  • Includes IRAs and employer retirement plans
  • First timers get to suspend delayed 2019 RMD as well as 2020!
• Also suspends RMDs that may have otherwise needed to be taken
  • Beneficiary IRAs and Stretch IRA RMDs suspended as well
  • 2020 ignored as a year for the 5 year rule
• If you do not need the money keep it in the retirement plan.  There is a benefit for letting it sit there an extra year and being able to defer the tax on it. 

Rollback of RMDs waived in 2020:

• What if RMDs were already taken in 2020?
  • Already taken RMDs may be rolled over (back into the account)
  • 60 day rollover if applicable
  • Rollover as a Coronavirus related distribution
  • No option to roll back for beneficiary RMDs from inherited accounts

Relief for student borrowers

• Federal student loan payments deferred
  • No payments required until September 30, 2020
  • No interest will accrue during the interim
  • Will still count towards loan forgiveness programs (PSLF)
  • Required payments are suspended, but voluntary payments are not prohibited
    • Must be proactive to stop payments if desired
  • Involuntary debt collections on Federal student loans are also suspended
  • If you’re going to have all of your student debt waived, why pay more of it now?

How Does Student Loan Postponement Impact Credit Score

It is impossible to make everyone happy with a bill like this. There are people still unhappy with the bailout in 2009.  

The other thing to note is that now this bill passed, the execution of it is going to be challenging. 

I am keeping a page at bautisfinancial.com/coronavirus that I will update as things get flushed out of the stimulus package. There’s links there on how to apply for these benefits.  I have a calculator there to help determine how much of a check you will receive, or how to calculate how much of a paycheck protection loan you can receive.

I am a financial advisor, but may not be your financial advisor.  I recommend talking to your tax or financial advisor about how the bill impacts you.  

If anyone has any questions on the stimulus package or what they should be doing financially right now I would be happy to talk.  Schedule a Free Consultation

The two most important questions that people should try to answer are:

• Am I going to have any problems paying my expenses in the short term?  
  • You want to project out conservative scenarios in terms of how long the virus lasts and the impact to your income.
• Are my long term goals still on track?

There are already talks that Congress is working on another stimulus package as the thought is that this one may not be enough.