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CARES Act & What It Means To You!

As most everyone is aware, on March 27th the largest economic stimulus plan in history was signed in an effort to fortify our economy as we navigate the Coronavirus.

This stimulus will inject $2.2 trillion into our economy, leaving almost no one out. From increases in unemployment benefits to 100% forgivable loans made to small businesses, the stimulus package likely offers something that will benefit you.

Below is an overview of some the key components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Please note, that this is what we know so far, details are still subject to change.

The Payment Protection Program (PPP):

If you are a small business owner, sole proprietor, self-employed, or an independent contractor, (among others), you should consider taking advantage of the Payment Protection Program (PPP). The PPP is a new SBA loan that allows the above entities who have fewer than 500 employees, to borrow up to 2 months’ worth of the prior year’s average payroll expense, plus an additional 25%.

Amounts used from this loan over the first eight weeks for “qualified” expenses, will be 100% forgiven! Meaning, you won’t have to pay those amounts back. “Qualified” business expenses include: payroll costs, most mortgage interest, rent, and utility costs.

Please note, that the loan will only be forgiven if you maintain the same employee and compensation levels and 75% of the forgivable costs are used for payroll.

The amounts you don’t use for “qualified” expenses can be paid at 1% over 2 years. Additionally, although interest will accrue, the first payments will be deferred for six months.

The PPP has authorized $349 billion in forgivable loans, but it is on a first-come-first-serve basis, so don’t delay getting your applications in. April 3rd was the first day for businesses and sole proprietorships to apply. Independent contractors must wait until April 10th.

For more information, including limitations and where to apply, see the following link to the US Treasury. https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf

Retirement Account Distributions:

The CARES Act has made some additional options available for taking distributions from your retirement accounts, assuming that the distribution is necessary due to the impact of the coronavirus. They are as follows:

1. You may take a distribution from your retirement accounts of up to $100,000. Even if you are under 59.5, the distribution will not be subject to the 10% penalty, nor will it be subject to the mandatory tax withholding. This does not mean however, that you don’t have to pay tax on this withdrawal. Rather, you will have two options related to the taxation of a distribution of this kind:

Option 1: You may pay the amount back to yourself over a three-year period. In this case, it will be considered a rollover and will not be subject to tax.

Option 2: You can take the penalty-free distribution, but pay your taxes over a three-year period.

2. For those with 401(k)’s, you may now borrow up to $100,000, up from $50,000. Although the interest will accrue, the loan doesn’t have to be paid for five years. Don’t forget that in this case, the interest accrued is payable to yourself. Note, however, if there is a separation of service or plan closure before the five years, it will result in a taxable distribution.

Waiving of the Required Minimum Distribution:

For the year 2020, you are not required to take the Required Minimum Distribution (RMD) from your qualified retirement accounts! This may be a substantial reduction in taxable income for some and most certainly worth considering.

If you have already taken your RMD for this year, you have a couple of options.  You can utilize the 60-day rollover provision, which allows you to replace one distribution within sixty days every 12 month period.  In the event you took a lump sum distribution within the past 60 days, you can replace the entire amount.

If you took it early, however, say in January, and the sixty days has past, you may be able to apply the new retirement account distribution rules up to the $100,000. In order to do this, you have to be able to assert that the distribution was due to the coronavirus.  In this case, the distribution can be paid back within 3 years.

Please note, that the waiving of the RMD also applies to inherited IRA accounts. However, if you have already taken it in 2020, you cannot put it back.

Recovery Rebates For Individual Taxpayers:

The CARES Act includes refundable tax credits for individual taxpayers. The bill provides a $1,200 credit per individual and $2,400 per married couple filing a jointly. Taxpayers with children will also receive a $500 credit per child. For taxpayers behind on their tax payments, this credit will be offset against current tax liabilities. For taxpayers who are caught up on their taxes, this credit will be received as a refund. Refunds will not be counted as taxable income as money received is a rebate from prior taxes paid.

There is an income limit for individuals and families to qualify for recovery rebates. Taxpayers will be entitled to the total amounts listed above, if their Adjusted Gross Income (AGI) falls at or below the following amounts: $75,000 for single, $112,500 for head of household and $150,000 for married filing jointly. If, however, the taxpayer received income above those amounts on their 2018 or 2019 tax return (whichever was most recently filed), then their credit is reduced $50 for every $1,000 in excess income.

Phew! That last paragraph was a lot to take in, here’s an example to make it a little more concrete: Pete and Mary’s most recently filed tax return was for the 2018 tax year. That year their AGI was $156k. They also claimed 2 kids as dependents in 2018. Their total possible recovery rebate credit is $2,400 (married filing jointly credit) +500 (dependent 1 credit) +500 (dependent 2 credit) = $3,400. Now, because their AGI is above the income threshold for the recovery rebate, they will have a reduction in their credit. The couple’s AGI is $6,000 more than the married filing jointly threshold ($150,000), so their credit will be reduced by $300 ($50 reduction for every $1,000 over threshold = $300). The total amount of Pete and Mary’s expected credit is $3,100, which they will receive since they do not owe any back taxes.

While not everyone will qualify for the recovery rebate, the Tax Foundation estimates that up to 90% of taxpayers will qualify for some portion of their rebate (https://taxfoundation.org/cares-act-senate-coronavirus-bill-economic-relief-plan/). Payments for those who qualify are to begin by the end of April and will be directed to the same bank account listed on the most recent tax return, according to the IRS. Updates and guidance regarding recovery rebates will be posted by the IRS at https://www.irs.gov/coronavirus.

Expansion of Unemployment Benefits

With an unprecedented global pandemic comes unprecedented expansions to unemployment benefits.

Pandemic Unemployment Assistance (PUA)

The CARES Act expands benefits to include self-employed individuals (sole proprietors, independent contractors, freelancers, etc.) as well as, people who were forced to quit their jobs due to COVID-19 (quarantined, need to stay home to take care of child, etc.).

States are working fast to integrate their existing online applications with the new legislation. If your claim is initially denied, revisit the site to see if a newly formatted application for the self-employed is available.

Californians can apply here: https://www.edd.ca.gov/unemployment/UI_Online_File_a_Claim.htm

Elimination of One Week Waiting Period

Ordinarily, states don’t pay the first week of unemployment. The federal government will be covering that first week for you.

Increased Weekly Benefit Amount

Anyone who qualifies for unemployment benefits will receive an additional $600 per week for each week they are unemployed through July 31st, 2020. To illustrate the significance of this amount, California’s weekly benefit typically maxes out at $450 per week.

Extension of Benefits

Unemployment benefits will be extended by 13 weeks. To use California as an example, unemployment benefits will be able to be received for 39 weeks as opposed to the standard 26 weeks.

Please note that the extra $600 per week will only last for unemployment benefits through July 31st, 2020.

Incentives to Expand Unemployment Benefits to Include Underemployed

Not all states aid individuals who have had their hours cut or income drop but are still employed. For those states that don’t currently offer benefits to these individuals, the federal government is willing to cover 50% of the costs related to establishing these programs through the end of 2020.

While there are other provisions in the CARES Act that may benefit you, the above summarizes some of the most impactful. Be sure to speak with your CERTIFIED FINANCIAL PLANNER™ practitioner and CPA to determine what is best for you.

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