Written by Kyle Thompson, MBA
There has been so much confusion and misinformation behind the coronavirus stimulus package (CARES Act) that I wanted to clear things up. What follows is the result of two weeks of research and is as accurate as I could possibly hope it to be. If you have any questions, please feel free to contact me and we will figure your situation out!
Summary-
- The stimulus check might be more complicated than you think; it is a cash advance on next year’s refund. If your income is too high, you will not receive anything this year… but you may qualify in 2021 anyway.
- Student loan interest is waived and required payments are suspended until September 30th, 2020.
- Some mortgage lenders are offering 90-180 day forbearance.
- Rules for distributions from pretax accounts (including 401ks) have changed to be more favorable.
- Required minimum distributions (RMDs) are waived for 2020.
- Unemployment benefits are being supplemented by the federal government for up to $600/week.
- Self-employed/contractors and certain business owners are eligible for unemployment benefits for the first time.
- Certain business owners are eligible for up to a $10,000 grant.
- Many businesses are eligible for a forgivable loan up to $10,000,000 for certain expenses.
- New charitable contribution rules.
Stimulus checks– Each individual will receive $1200 and $500 per child, up to $3000 per family so long as income is below $75,000 (single) or $150,000 (married). This is based on your 2019 tax returns, or 2018 if you haven’t filed yet. If you make more than that, you will receive a reduced amount, or none. This is technically a tax credit for 2021, which you are receiving in advance. If you are over the threshold for your last tax year, you can still receive the credit NEXT year, so long as your 2020 income is below the threshold. This creates some interesting planning opportunities for tax loss harvesting within taxable accounts.
Student Loans– All required payments and interest are suspending for Federal student loans (including Parent Plus loans) until September 30th. You may have to call or log into your loan servicer, to suspend payments; it may not be done automatically. The silver lining of this is that any payments made during this time go directly to principal. However, for anyone on an Income Driven Repayment plan and expecting loan forgiveness in the future, this is a problem. Any payments (including NON-payments) count toward loan forgiveness, so you ideally would want to pay as little as possible.
Mortgage Forbearance– Many lenders are offering forbearance, but with wildly differing terms. If you are considering this, make sure you get full terms! Ask whether it affects your credit score, late fees, and how that forbearance will be re-amortized into the loan. Personally, this is the provision I am most skeptical of, as it carries the most risk. I would consider this as a last resort.
Pretax Account Distributions– All RMDs have been waived for 2020, regardless of age or account type. This includes Inherited IRAs. You may also take a distribution of up to $100,000 without the typical 10% penalty, and the income may be spread over 3 years rather than being fully recognized in 2020. Additionally, you can choose to pay these distributions back within 3 years, then go back and amend your 2020 returns as if you never took the distribution. This is huge for tax planning!
Unemployment– Under normal circumstances, you are only eligible for unemployment benefits if you are a W2 employee for which your employer paid into your state’s unemployment pool. Additionally, you are subject to a wide variety of state limitations. Under the CARES Act, traditional unemployed workers are supplemented by an additional $600 per week, for up to an additional 13 weeks. Also (and here is the big deal), self employed individuals and independent contractors are eligible for the first time! There still isn’t any good guidance here, but anyone that is self employed should apply! You must apply at your own state’s website, but Iowa’s site is located here.
Small Business Grants– There is a program through the Small Business Administration to provide grants of up to $10,000 to eligible small businesses as a forgivable Economic Injury Disaster Loan (EIDL). “Eligible” seems to be a flexible word right now, but since this is first come first serve, you might as well apply ASAP. You can do so directly through the SBA website here.
Payroll Protection Loans– Small businesses with less than 500 employees (including sole proprietors!) are eligible for the lesser of 2.5x the average monthly payroll costs for 2019, or $10 million. These loans are forgivable to the extent that they go to pay employees (including yourself) as well as rent, mortgage, or utilities. This will be available through your bank.
Charitable Contributions– Normally, deductions for charitable contributions are limited to 60% of gross income, but for 2020 that is raised to 100%. Any excess is carried over to future years. Additionally, up to $300 is deductible above-the-line for taxpayers that do not itemize deductions. The latter is a tiny drop in the bucket, but I have been pushing for such a deduction for a long time. I hope this is something that is retained and expanded in future years.
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This article is for information and entertainment purposes only, and does not constitute investment advice. Kyle Thompson, MBA is the founder of Leetown Advisors, a fee-only wealth management and business advisory firm. For further inquiries or suggestions, please email Kyle at kylet@leetownadvisors.com.
