As the world continues to respond to the ongoing pandemic, many governments have committed substantial resources to slowing its spread while protecting their people's access to necessities. In the United States, the federal government passed the "Coronavirus Aid, Relief, and Economic Security Act" (CARES Act) into law on Friday, March 27, 2020.
This comprehensive recovery bill is a collection of direct payouts to citizens, a boost in unemployment benefits for those who no longer have a regular paycheck, and a number of temporary tax benefits. I would like to review key provisions of this new legislation as well as guidance on how to take advantage of these incentives.
Perhaps the most popular provision of the CARES Act are the direct-to-taxpayer stimulus payments of up to $1,200 per individual. This amount is intended to provide cash to people who need it in order to take care of regular needs and to help keep money flowing in local economies that may be under duress while shelter-in-place orders remain in effect. There are caveats involved with the amount received per individual and per family, namely:
- In your most recent tax filing, you may qualify for the full $1,200 if your adjusted gross income (AGI) is $75,000 or less as a single filer; $150,000 or less as a joint filer.
- A lesser amount will be given for an AGI higher than those amounts.
- No amount will be given if AGI is over $99,000 for single filers or $198,000 for joint filers.
If your AGI was higher in 2019 than in 2018, you may benefit by waiting to file your 2019 taxes. Conversely, if your AGI was lower in 2019, then filing your taxes sooner may work to your advantage. However, it is important to remember that the stimulus payments are intended for 2020 based on 2020 AGI. A taxpayer with a sudden loss (or drop) in income should ultimately be eligible for the payment, but if your most recent tax return AGI was above the thresholds, you will have to wait until tax time next year (2021) to claim it. Like most financial planning matters, details make all the difference, so please call us to discuss your individual situation for the best strategy.
No Required Minimum Distributions (RMDs) in 2020
All RMDs have been suspended for 2020. With high market volatility, invested retirement accounts have sustained substantial losses already, and a required minimum distribution would effectively be forcing individuals to withdraw a larger portion of their account than intended by regulation. This rule also applies to Beneficiary IRAs. There is currently no plan to double next year's RMD, and you can still take withdrawals if you need to, but 2020 will simply be skipped for RMD purposes.
Waiving the 10% Penalty for Early Withdrawals for Affected Individuals
Under normal circumstances, withdrawing funds from a qualified retirement savings account (IRA, 401(k), 403(b), etc.) would incur a 10% penalty with the IRS in addition to the ordinary income taxes on the amount withdrawn. However, for people who are directly or indirectly affected by the coronavirus and need to make early withdrawals from their qualified retirement savings, the penalty will be waived in 2020. Furthermore, any income taxes due on the withdrawal can be paid over three years but can be avoided if the amount withdrawn is returned into the account within three years. There are specific guidelines to determine if one meets the definition of “affected by the coronavirus”:
- Individual, spouse or dependent child either tested positive or was diagnosed with the virus.
- Individual “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease”.
If this applies to you, let us help you navigate your options.
Small Business Assistance – Paycheck Protection Program
The CARES act establishes a program to support small businesses affected by the coronavirus and related shelter-in-place orders. Banks and credit unions will be administering federally backed loans, and employers who maintain similar payrolls may be eligible for forgiveness of these loans. This program will be available within the coming weeks. To apply for benefits, gather payroll records since the start of 2019. For more information on the program, the Tax Foundation has created a useful summary at: https://taxfoundation.org/sba-paycheck-protection-program-cares-act/
In These Markets
It has been a difficult month for investors. Since the February 19th peak, the S&P 500 Index shed 34%, in just over one month, to its most recent low (St. Louis Federal Reserve). While it is not nearly the largest sell-off, its rate of decline is unprecedented.
Given the enormous amount of uncertainty, there is no modern precedent on which to model economic forecasts, which has led to the wide range of second-quarter projections for GDP growth. This economic uncertainty has translated into earnings uncertainty, which has resulted in incredibly volatile markets.
In order to slow the spread of the pandemic, the federal government has encouraged social distancing while several states have ordered lockdowns or strict shelter-in-place mandates. You may go outside to exercise or head to the grocery store, but there is a ban on social gatherings and only businesses deemed “essential” may keep their buildings open. This has resulted in a predictable slowdown in local and global economies.
Policymakers are not expecting the economy to bounce back shortly after restrictions are lifted. Where shutdowns are encouraged or enforced, the government is trying to soften the expected economic blow by taking measures that go well beyond the recovery plan for the 2008 financial crisis.
The Federal Reserve has dropped the fed funds rate to zero and has implemented several programs designed to use quantitative easing to support fixed income markets. Further, a new program designed to support small- and medium-sized businesses will be forthcoming. During the financial crisis, the Fed’s focus was on Wall Street and critical credit markets. Today, they are extending support to Main Street as well.
Meanwhile, the federal government has implemented a $2 Trillion stimulus package. In addition to mitigating some of the damage from surging layoffs, the Federal Reserve and the Federal government are trying to put a foundation in place that will support a robust economic recovery.
Unfortunately, it is difficult to analyze the effectiveness of these plans in conjunction and if more stimulus will be required. Until we are past the peak – the point at which the number of new cases begins to decline – and until we have an effective treatment and/or vaccine, it will be hard to find clarity on current economic data that will give us a clear illustration of the steepness and duration of the economic impact.
Social Distance Yourself From COVID-19 Scams
Whenever there is a natural disaster, there are always people who prey on those who want to help. Today, the disaster is a pandemic. Many are fearful, many are scared. It makes us especially vulnerable.
The FTC has warned Americans to beware of the potential scams that are proliferating. Here are some precautions to take that will keep you safer:
- Hang up on robocalls, and don’t press any numbers. Scammers are using illegal robocalls to pitch fraudulent COVID-19 treatments and work-at-home schemes. Press a number to be removed from a list and you’ll likely get more calls.
- Ignore online offers for vaccinations and unproven home test kits.
- Ignore texts and emails about cash from the government. Stimulus checks will be forthcoming, but, per the FTC, anyone who tells you they can get you the money now is a scammer.
- Please be leery of emails that claim to be from Centers for Disease Control and Prevention (CDC) or experts that claim they have information about the virus. For the most up-to-date information about coronavirus, visit the websites of the CDC or the World Health Organization (WHO).
- On the same note, malware and phishing scams are on the uptick. Legitimate companies will never ask you to verify passwords or usernames via an email. Fraudsters will.
- Do you see misspelled words or grammatical mistakes? That’s a sure sign that the official-looking email originated from a suspicious source.
Here’s a warning from the Securities and Exchange Commission (SEC) that was updated on March 30:
Fraudsters often use the latest news developments to lure investors into scams. We have become aware of a number of Internet promotions claiming that the products or services of publicly traded companies can prevent, detect, or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result.
Please be aware of the substantial potential for fraud at this time.
A good financial plan is our roadmap through good times and bad. Our investment strategy assumes that, over time, stocks rise more than they fall, and stocks rise more than they fall because the U.S. economy has expanded over time in a cyclical fashion. Currently, we are seeing an overall rise in fear and uncertainty as we undergo an economic and healthcare crisis.
I am confident this pandemic eventually will pass, and I am confident that the underlying fundamentals of the U.S. economy will help us regain our footing. Resilience and ingenuity are part of the DNA that make up America. We will persevere and we will recover.
If you have questions, concerns, fears, and doubt--well, I get that. I really do. And please remember, we are only an email or a phone call away.