CARES Act Brings “Pennies From Heaven”

We hope each and every one of you and your families are safe and healthy. In response to the unfolding COVID-19 global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act last Friday. This $2 trillion emergency fiscal stimulus package (“Pennies from Heaven”) was designed to help ease the economic damage caused by the virus. Below are some of the key provisions that can offer relief to individuals, families and businesses. In a number of situations, it’s important for you to act quickly. Items with time urgency are underlined. The objective is to provide short overviews of the provisions. If there are any questions, we at DWM will try to help.

Recovery Rebates. Perhaps 90% of Americans should receive some amount of Recovery Rebate. The rebate can be as much as $1,200 for a single, $2,400 for a married couple plus $500 for each child under age 17. The only limitation is your Adjusted Gross Income (“AGI”). Singles with AGI of $75,000 or less will receive $1,200 plus extra for eligible children. Married couples with AGI of $150,000 or less will receive $2,400 plus extra for eligible children. Incomes above that will get a lesser amount until completely phased out. The IRS will use the latest tax return filed to make their calculation. If your 2018 tax return has a lower AGI, wait to file your 2019 tax return until the rebates are made. If 2019 is a lesser year than 2018, get 2019 filed immediately. Please understand that the rebate will be “trued up” based on your 2020 return. So, if your income in 2018 and/or 2019 disqualified you from the rebate, you can still get the rebate in 2021 if your 2020 tax return shows you are below the $75,000 or $150,000 threshold. And, for those who received a rebate but ultimately had a larger income in 2020 that would have disqualified them-no worries. The IRS will not “clawback” any rebates. Checks and direct deposits are promised “as soon as possible” which hopefully will be in April.

Covid-19 Distributions from IRAs and Loans from 401ks. Distributions up to $100,000 from IRAs and $100,000 loans from 401ks can be made without tax penalty for those impacted by the virus. The income tax of the distribution can be split evenly over 2020-2022. Distributions are not subject to withholding and can be repaid (rolled back in) in 3 years, in a lump sum or installments which will produce a refund of the tax paid.   Loans from Company Retirement Plans can be made up to 100% of the vested balance up to $100,000. Repayments on the loan may be delayed for up to one year.

Required Minimum Distributions (“RMDs”) are waived and can be returned. RMDs for 2020 are specifically eliminated for owners and beneficiaries. Owners, not beneficiaries, that have already taken a 2020 RMD and would like to return it, need to act quickly. If the distribution took place in the last 60 days, you can roll the money back in (note, if withholdings were made, you’ll need to “gross up” the net distribution) and save paying the tax. If the 60 day window has passed, you can still complete a valid rollover for up to 3 years if you can show you were impacted by the coronavirus crisis.

Charitable Contributions. To encourage contributions to charity, Congress has provided that individuals can make and deduct contributions up to and in excess of 100% of their AGI. Hence, they could wipe out their taxes and even get a carryforward for 5 years. In addition, individuals who use the standard deduction (90% of taxpayers) can get up to a $300 charitable contribution deduction “above the line” in the addition to their standard deduction.

Relief for Student Loan Borrowers. Required payments on Federal student loans are deferred until September 30, 2020, during which time no interest will accrue. Furthermore, this period of time will continue to count towards any loan forgiveness. Hence, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt should immediately pause payments. Any payments made in this period will simply reduce principal and therefore are reducing a debt that will be forgiven. In addition, through the end of the year, employers who provide employees with up to $5,250 of student debt payments may exclude those payments from the employee’s W-2.

Additional Unemployment Compensation Benefits. Unemployment benefits have been increased from 26 to 39 weeks. Futher, Self-employed individuals will now be eligible. Plus there will not be the typical one week of “waiting time” for unemployed employees of self-employed individuals without work. Additionally, the weekly benefit is increased by $600 per recipient for up to 4 months. Since the average weekly unemployment benefit is about $400, this will increase the average benefit to $1,000 for those 4 months. Therefore, employees and self-employed individuals who have lost their job or don’t have work, could qualify for up to 9 months of unemployment benefits, with an extra 17 weeks of $600 payments – meaning, an average worker could get as much as $26,000 in the first 9 months.

Paycheck Protection and Forgivable Loans.  Businesses, including sole proprietorships, with less than 500 employees can apply for an SBA loan to help with economic suffering on their business caused by coronavirus. The loan is the lesser of $10 million or 2.5 times the monthly payroll costs over the past year and must be applied for by June 30, 2020. Loans will be made on a first come-first serve basis until the total maximum of $10 Billion has been loaned. So, a company with a 2019 monthly qualified payroll of $40,000 could borrow $100,000. And, as long as the business maintains the same number of employees, the loan will be forgiven for all payroll, rent, utilities and healthcare costs incurred in the first 8 weeks after receiving the loan. For example, if payroll remained $40,000 per month, rent was $6,000 per month, utilities $2,000 per month and health care costs $2,000 per month, virtually the entire loan would be forgiven. And, any debt forgiven is not included in taxable income for the year. For the portion of the loan that is not forgiven, interest on the loan will be at 4% or less over a term of 10 years and payments will be deferred for at least 6 months and no longer than one year.

Employee Retention Credit. Businesses who doesn’t qualify for the SBA loan above but suffered a reduction in quarterly revenues in 2020 to 50% or more for the same quarter in 2019, may qualify for a $5000 employee retention credit.

Deferral of payroll taxes. Most employers, other than those who receive the special SBA loans above, qualify to defer the employer portion of payroll taxes for over one year. Their 2020 employer payroll taxes can be paid half by December 31, 2021 and half by December 31, 2022.

Net operating loss rules are loosened. The CARES act allows losses in 2018, 2019 or 2020 to be carried back five years producing tax refunds that can be used now.

Conclusion. The CARES act provides significant funds, programs and tax benefits for individuals, families and businesses. Some of the provisions have time limits as outlined above. DWM will be individually contacting our clients who we think might be able to take advantage of these programs and get their rightful share of the “Pennies from Heaven.” We will also alert them to other financial and/or tax strategies, including Roth conversions and tax loss harvesting, given the CARES provisions and the state of the current markets. If you have any questions, please contact us.

We hope that you, your family and your community stay healthy and we all can get back to normal as soon as possible.

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Tick, Tock… Is it Time for your Required Minimum Distribution (RMD)?

“Time flies” was a recent quote that I heard from a client.  Remember a long time ago…putting money aside in your retirement accounts, perhaps at work in a qualified traditional 401(k) or to an individual retirement account (IRA)?  It’s easy to ‘forget’ about it because, it was after all, meant to be used many years down the road.  It would be nice to keep your retirement funds indefinitely; unfortunately, that can’t happen, as the government wants to eventually collect the tax revenue from years of tax deferred contributions and growth.

In general, once you reach the age of 70 ½, per the IRS, many of those qualified accounts are subject to a minimum required distribution (RMD) and you must begin withdrawing that minimum amount of money by April 1 of the year following the year that you turn 70 1/2.  Of course, there are a few exceptions with regards to qualified accounts, but as a rule, when you reach 70 ½, you must begin taking money from those accounts per IRS guidelines if you own a traditional 401(k), profit sharing, 403(b) or other defined contribution plan, traditional IRA, Simple IRA, SEP IRA or Inherited IRA.  (Roth IRAs are not required to take withdrawals until the death of the owner and his or her wife.)  Inherited IRAs are more complicated and handled with a few options available to the beneficiary, either by taking lifetime distributions or over a 5 year period.  The importance here, is to be aware that a distribution is needed.  Another word of caution…In some cases, your defined contribution plan may or may not allow you to wait until the year you retire before taking the first distribution, so review of the terms of the plan is necessary.  In contrary, if you are more than a 5% owner of the business sponsoring the plan, you are not exempt from delaying the first distribution; you must take the withdrawal beginning at age 70 1/2, regardless if you are still working.

The formula for determining the amount that must be taken is calculated using several factors.  Basically, your age and account value determine the amount you must withdraw.  As such, the December 31 prior year value of the account must be known and, second, the IRS Tables in Publication 590-B, which provides a life expectancy factor for either single life expectancy or joint life and last survivor expectancy, needs to be referenced.  The Uniform Lifetime expectancy table would be referenced for unmarried owners and the Joint Life and Last Survivor expectancy table would be used for owners who have spouses that are more than 10 years younger and are sole beneficiaries.  It comes down to a simple equation: The account value as of December 31 of the prior year is divided by your life expectancy.  For most of us, your first RMD amount will be roughly 4% of the account value and will increase in % terms as you get older.

It all begins with the first distribution, which will be triggered in the year in which an individual owning a qualified account turns 70 ½.  For example, John Doe, who has an IRA, and has a birthdate of May 1, 1947, will turn 70 ½ this year in 2017 on November 1.  A distribution will need to be made then after November 1, because he will have needed to attain the age of 70 ½ first.  Therefore, the distribution can be taken after November 1 (for 2017), and up until April 1 of the following year in 2018.

Once the first distribution is withdrawn, subsequent annual RMDs need to be taken for life, and are due by December 31.  In this case, John Doe will need to next take his 2018 distribution, using the same formula that determined his first distribution.  This will become a regular obligation of John’s each year.

So, we’ve talked about who, what, why and when, now let’s talk about the where.  Once the distribution amount is calculated, an individual can then choose where he or she would like that money to go.  Depending on circumstances, if the money is not needed for living expenses, it is advised to keep the money invested within one of your other non-qualified accounts such as a Trust or Individual account, i.e. you can elect to make an internal journal to one of your other brokerage accounts.  Alternatively, if you have another thought for the money, you can have it moved to a personal bank account or mailed to your home.  Keep in mind that these distributions, like any distribution from a traditional IRA, are taxed as ordinary income, thus, depending on your income situation, you may wish to have federal or state taxes withheld from the distribution.  At DWM, we can help our clients determine if, and what amount, to be withheld.

Another idea for the money could be a qualified charitable distribution (QCD).  Instead of the money going into one of your accounts, a direct transfer of funds would be payable to a qualified charity.  There are certain requirements to determine whether you can make a QCD.  For starters, the charity must be a 501 (c)(3) and eligible to receive tax-deductible contributions, and, in order for a QCD to count towards your current year’s RMD, the funds must come out of your IRA by the December 31 deadline.  The real beauty about this strategy is that the QCD amount is not taxed as ordinary income.

It may be pretty scary to know how quickly time flies, but with DWM by your side, we can take the scare out of the situation!