Coronavirus Relief Programs

We must remain in constant study to ensure we are taking advantage of all opportunities available in client's plans. That's one of the things I like most about the job. There is always something new to learn. The Coronavirus has been particularly prodigious in providing changes in the financial planning landscape as there have been three pieces of legislation passed in the four weeks we have been dealing with the outbreak in the US.

They are as follows:

1.Coronavirus Preparedness and Response Supplemental Appropriations Actwas signed into law on March 6thand provides an estimated $8.3 billion in emergency funding for research and development of vaccines, therapeutics and diagnostics, public health funding, and medical supplies, health-care preparedness, etc.

2.Families First Coronavirus Response Actwas signed into law on March 18thand, quoting from the White House statement, "provides paid leave, establishes free coronavirus testing, supports strong unemployment benefits, expands food assistance for vulnerable children and families, protects front-line health workers, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions." (Estimated to cost in the vicinity of $104 billion, but the CBO has not provided a firm number yet.)

3.Coronavirus Aid, Relief, and Economic Security Act(CARES Act) was signed into law on March 27thand has a number of provisions that will be covered below. (Estimated to cost in the vicinity of $2 trillion, but again legislation is passing so quickly that there is no official estimate from the CBO yet.)

In addition to the change in 2019 tax deadlines and small business loans that become grants if employees are retained as mentioned in my last note, the five aspects of the bills generating the most questions and those most likely to be applicable to client plans are summarized below:

I. One-Time Relief Payment

Probably the one making the biggest headlines is the one-time relief payment.

How Much:Recovery checks of up to $1,200 will be put into the hands of most taxpayers, providing cash immediately to individuals and families. Married couples who file a joint return are eligible for up to $2,400. Those amounts increase by $500 for every child.

Who Gets Them:These checks are reduced for higher income taxpayers and begin phasing out after a single taxpayer has $75,000 in adjusted gross income and $150,000 for joint filers. The amount is completely phased-out for single taxpayers with incomes exceeding $99,000 and $198,000 for joint filers.

What About Retirees:Those collecting Social Security are eligible for the payment. Like other Americans, the size of the checks for those on Social Security will be based on their adjusted gross income.

Taxability:The relief payments willnotbe taxable. For a tax geek it is interesting the way they’ve chosen to distribute the funds. The payment will be made in the form of an advanced tax credit. Clients will know from tax meetings that tax credits are subtracted dollar for dollar on the bottom of the tax return after the tax liability has been calculated, so this is not “income.”

While the credit is being given now (in tax year 2020) with the goal of getting cash in the hands of the taxpayers as quickly as possible, the Government has no idea what your income will look like this year. The payment will be given based on 2019 adjusted gross income—or 2018 income if the 2019 return has not yet been filed. However, the final amount of the benefit will be determined based on 2020 income and settled on the 2020 tax return.

So what happens if your income was high in 2018 and 2019 but drops below the threshold in 2020 due to the economic impacts? People who ultimately qualify for more money than they receive this month —a person whose income drops from $100,000 to $70,000, for example—would get the rest through a larger tax refund or smaller tax payment in early 2021 (when the 2020 tax return is filed).

What if your income was low in 2018 and 2019 and you receive a check, but your income rises above the threshold in 2020? Basically, good for you. You don’t have to pay it back.

When and How:These payments should start being sent in the third week of April. Payments will go out automatically to those who authorized a direct deposit for their refunds on either their 2019 or 2018 tax return. The money will be deposited directly into the same bank account and the taxpayer doesn't have to take any action to receive it (important – see scam warning below).

For social security recipients, those who normally receive their Social Security benefits directly in their bank accounts will receive the stimulus money in the same way.

For those without a bank account connected via the previously mentioned means, the IRS expects to start issuing paper checks to the latest address of record the week of May 4.

Stimulus Scam Warnings

As with any crisis comes dishonest people looking to take advantage of it. There are already fraudsters working to use this as an avenue to steal money from people. Here’s the warning provided by my tax software provider.

Be alert for phone scams. The Internal Revenue Service (IRS), Treasury Department, or any other government agency will not contact you by phone to collect information for stimulus payment processing. Period.
Be alert for phishing scams. Government agencies will not email or text you to collect information for stimulus payment processing. Watch for suspicious emails or texts with links or attachments requesting information for processing stimulus deposits or checks. If you receive one, do not click the link or open the attachment. It’s a scam. Delete it.
Be alert for state-related scams. State agencies will also not call, email or text you to collect information or a fee to process a stimulus payment. To date, no state has introduced their own version of a stimulus payment.

As of now, we are only aware of one communication a taxpayer will receive from the IRS. No later than 15 daysafterdistributing a stimulus payment, the IRS is required to mail a notice to the taxpayer indicating the payment amount, whether the payment was mailed or deposited, and a phone number to call if the taxpayer did not receive the payment.

Victims or targets of stimulus payment scams should report it immediately to the Federal Trade Commission,www.ftc.gov/complaint.

II. Supplemental Unemployment

The historic CARES Act dramatically expands the amount of unemployment insurance provided to workers who’ve lost their jobs due to the pandemic as well as the eligible population.

Who:The CARES Act includes a new program called Pandemic Unemployment Assistance (PUA), which expands benefits to workers who were previously ineligible. Unemployment assistance will now extend to self-employed workers, including independent contractors, freelancers, farmers and gig workers. Self-employed workers with a limited liability company (LLC) or S corporation qualify.

Unemployment will also be extended to individuals seeking part-time work and those who don’t have the sufficient work history (generally one year) previously required to file a claim.

How Much:The bill provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.

When:The Federal Government is also providing funding to states for the first week of unemployment so those laid off don’t have to wait the typical week to begin receiving benefits.

If you want to know more, here is a great article that provides answers to the questions regarding the CARES Act unemployment benefits.https://www.cnbc.com/2020/04/01/are-you-newly-eligible-for-unemployment-insurance-heres-what-to-know.html

III. Waiver of Penalty on Early Retirement Withdrawals

Consistent with previous disaster-related relief, this provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes*.

Tax Relief:In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

Retirement Plan Loans: Further, the provision provides flexibility for loans from certain retirement plans (not IRAs). For coronavirus-related relief plan loan, limits are increased from $50,000 to $100,000. Also, 100% rather than the typical 50% of vested balance may be borrowed. Loan repayment may be delayed up to one year.

*"A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary."

IV. Temporary Waiver of RMDs

Given the market’s dive, the Government doesn’t want to force retirees to sell investments at an inopportune time, so RMDs have been waived for 2020. This apparently includes anyone who deferred their first RMD from 2019 (the April 1 deadline). It also includes inherited IRA RMDs.

V. Student Loan Payment Suspension

Relief has been provided to federal student loan borrowers.

Which Loans:Most provisions apply only to Direct Loans and Federal Family Education Loans (FFEL) not in default that are currently owned by the U.S. Department of Education.

Payment Suspension:All payments due for eligible federal student loans are suspended until September 30, 2020.

The cool part of this is each month of suspension will count toward a loan payment for the purpose of any loan forgiveness program or loan rehabilitation program. This means suspended payments are considered qualifying payments for income-based repayment, Public Service Loan Forgiveness, or defaulted loans enrolled in a rehabilitation program. That’s six months of credit toward one of these programs without a cash outlay.

Unfortunately, though, whilerequiredpayments are suspended, voluntary payments are not prohibited. And by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.

Interest Waiver.During the period of payment suspension, no interest will accrue. For eligible federal student loans, the interest rate is 0% until September 30, 2020.

Collections: During the period of payment suspension, wage garnishments, refund offsets, federal benefit reductions, or any other involuntary collection activity are also suspended.