Personal finance updates in response to Covid-19

The Coronoavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27, 2020. This is the third significant piece of Federal legislation dealing with the pandemic, and likely not the last. It joins other efforts by state and local governments, for-profit and non-profit companies, and individuals to address this unprecedented challenge to the world’s healthcare, economic, and social systems.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in late 2019, also made several relevant changes to retirement account rules.

This summary is based on a current understanding of the relevant programs, all of which are subject to revision over time. Before relying on any information provided below, please contact your tax or other financial professional.

Tax-related

Filing deadlines

1. Federal 2019 filing and payment deadline is postponed from April 15, 2020 to July 15, 2020
2. Most states have also postponed their deadlines to July 15^th (check websites for other states to confirm)
3. You should file sooner if you expect a refund
4. Filing extensions until October 15, 2020 are still available, but tax payments need to be made by July 15^th in any case
5. You have to file a return to receive a check from the CARES Act (see below under Direct Payments; currently, social security recipients do not have to file returns to receive direct payments)
6. Q1 2020 estimated taxes are postponed from April 15, 2020 to July 15, 2020
7. For now, Q2 2020 estimated taxes are still due on June 15, 2020

Retirement Accounts

1. CARES allows for penalty-free early withdrawals up to $100,000 from most retirement accounts (401k, Traditional and Rollover IRAs, SEP, SIMPLE)
2. Eligibility requires self-certification that individuals or their dependents have Covid-19 OR suffer from “adverse financial consequences” of the disease
3. Funds need to be withdrawn before the end of 2020
4. Withdrawals can be repaid without tax consequence or penalty (typically, permanent withdrawals before age 59.5 incur taxes and penalties) within 3 years (as opposed to the current 60-day limit for IRA “loans”)
5. If not repaid within 3 years, taxes due on withdrawals can be spread over 3 years
6. SECURE allows for contributions to an IRA or 401K as long as you have earned income (prior rules ended contributions at age 70.5)
7. Raises the starting age for required minimum distributions (RMDs) from 70.5 to 72
8. Requires Inherited IRAs to be withdrawn, and taxes paid for all IRAs except Roths, within 10 years for IRAs inherited after December 31, 2019. (The old “stretch” withdrawal rules still apply for IRAs inherited before January 1, 2020)
9. RMDs are eliminated for Inherited IRAs; withdrawals can be taken, and taxes paid, any time in the 10-year window
10. Exceptions apply for spouses, minor children, and beneficiaries less than 10 years younger than the account owner
11. These rules don’t take effect until 2022 for inheritors of 403Bs (non-profit plans) and 457Bs (government plans)

RMD changes

1. Required Minimum Distributions (RMDs) from IRAs, Inherited IRAs, and workplace retirement plans (401Ks, 403Bs) are waived for 2020
2. RMDs already taken in 2020 can be rolled over if the re-deposit occurs within 60 days of the original distribution date. If the 2020 distribution happened more than 60 days ago, it can be “repaid”, and therefore avoid 2020 taxation, based on the revised IRA distribution rules described above

Roth conversions

1. With the significant stock market declines so far in 2020, conversions of tax-deferred retirement accounts (IRAs, including Rollovers, SEPs, and SIMPLEs) into tax-free Roth IRAs are worth considering.
2. Conversion requires that taxes be paid on every dollar of converted amounts at ordinary income tax rates
3. But with lower asset values, current tax consequences will be reduced
4. Potential for tax advantages in tax-free Roth IRAs assuming long-term recovery of asset values
5. New Inherited IRA rules under SECURE Act (see above) might make Roth conversions more attractive for these accounts

Charitable Contributions

1. Cash contribution limitations are raised to a maximum of 100% of 2020 adjusted gross income (from 50% currently) if you itemize deductions
2. Maximum $300 deduction of contributions are allowed if you don’t itemize

Investing

Re-balancing

1. Consider buying stocks/stock funds if your current allocation to stocks has fallen below targets
2. “Dollar cost average” back into stocks over time to avoid potential large additional declines and benefit from long-term recovery

Tax-loss harvesting

1. Consider sales of investments with recent declines, coupled with immediate re-purchases of comparable investments (i.e., stock funds to replace stock funds) to maintain your overall asset allocation
2. Realized losses can be used to offset gains elsewhere in the portfolio, as well as gains from real estate sales
3. Losses can also be deducted against $3,000 of ordinary income each year, and carried forward indefinitely
4. Make sure to avoid “wash sale rule”, which disallows losses if the same security/fund is purchased 30 days after (or before) the sale

Benefits

Unemployment

1. Unemployment benefits are administered by individual states
2. CARES Act provides for an additional $600 per week in addition to State unemployment benefits
3. Federal coverage extends State coverage by 13 weeks
4. Self-employed and part-time workers are eligible in addition to full-time workers
5. Broad definition of who qualifies for coverage based on quarantines, stay-at-home orders, and required care for sick family members
6. People already on unemployment are also eligible for additional benefits

Direct Payments

1. Direct payments are based on 2019 tax returns, or 2018 returns if you haven’t yet filed for 2019, to determine the amount, if any, you’re eligible to receive
2. Amounts received in 2020 will be checked against 2020 tax returns and potentially increased if 2020 income is lower (but no funds will be re-claimed if 2020 income is higher)
3. $1,200 lump sum for each individual with 2019 adjusted gross income (AGI) less than $75,000
4. $2,400 lump sum for each married couple filing jointly with less than $150,000 of 2019 AGI
5. Amounts phase out for individuals earning up to $99,000 of AGI and couples with up to $198,000 of AGI
6. Additional $500 for each dependent child 16 or younger
7. Social Security recipients are not required to file return if they don’t typically file

Business loans

1. Paycheck Protection Program (PPP): $349B in partially forgivable loans available to small businesses
2. Small businesses defined as 500 or fewer employees, including non-profits
3. Sole proprietors, independent contractors, and self-employed people all qualify
4. Applications available now through lenders for small businesses and sole-proprietors; 4/10/20 application start date for independent contractors and self-employed; application deadline is 6/30/20 or until program funding runs out (although additional funds might be made available in the future)
5. Good faith certification of adverse coronavirus impact is required
6. No personal guarantees or collateral are required; Small Business Administration (SBA) backs lenders; contact your bank or credit union to get started
7. Loan amounts limited to 2.5 times average monthly payroll expenses from previous year; maximum loan of $10M
8. 2-year maturity, 1.0% interest rate, interest payments deferred 6 months
9. Loans forgivable based on eligible spending (payroll and other typical business expenses) during first 8 weeks after loan approval, assuming similar staffing and compensation levels as before CARES Act passed
10. Salaries above $100K are NOT eligible for forgiveness
11. PPP loans could eliminate eligibility for other benefits, including payroll tax deferral, employee retention credits, and Economic Injury Disaster loans

401K Loans

1. Loan maximums are increased to the lesser of $100,000 or 50% of the account balance (up from $50,000) until September 30, 2020

Real Estate/Education

Mortgage and rent relief

1. Varies by lender and State/locality; contact your lender and/or landlord for details

Education loan freeze/suspension

1. Federal student loan payments and interest are automatically suspended until September 30, 2020
2. Private loan changes vary; contact your lender for details

Nick Levinson is a Principal with Park Piedmont Advisors, a Registered Investment Advisor with offices in Piedmont, New York City, and Chicago. He is also the volunteer sports editor for the Exedra.