One Airport Place,
Today, Richard Oring and Jag break down the CARES Act - the Coronavirus Aid Relief and Economic Security Act - and what it means for you. We cover:
IRS Publication 972
Welcome back to Financial Matters with Richard Oring. I am Johnjay Gay joined by Richard Oring. We are both in our home offices today. Rich, how's it going over there?
It's going great, Jag. I think the last podcast, I said the world's coming to an end, the zombies and all that, when we were talking about the markets. I don't think I was that far off.
Yeah, I feel like I should do a shot every time somebody uses the phrase, new normal, but that's where we're at right now.
I think every morning, I wake up and I'm working out at home, I keep thinking that. By the way, I was a big REM fan in high school, so the song, It's the End of the World As We Know It and I Feel Fine, keeps coming to my head.
The reality is I'm doing okay. My family is doing okay. What saddens us is when we're watching the news and we talk to our neighbors and we hear about what's going on outside our household.
My neighbor across the street, I spoke to him two days ago and his brother is in Brooklyn, a 72 year old male, healthy, is now on a ventilator and dialysis, and it's not going to work out for him. He's unfortunately going to pass soon. It's sad because one day everything is great. Next day you're losing your brother, and you may not even be able to be there for a funeral. It's sad.
To that point, a college buddy of mine from Syracuse, he's a reporter in New York, and his dad is back home in Indiana, and he just passed. The mom has tested positive, so the mom's quarantined at home. The first line of his Facebook post said, "My dad just died with a stranger holding his hand."
They had a conference call and they had to say goodbye over the phone. That might be the cruelest part about this whole thing, is that people are not being able to be with their loved ones in their final moments and it's just heartbreaking.
It's very heartbreaking. Today, Jag, when we arranged this podcast recording, I wanted to really focus on those who are financially burdened right now because of this Coronavirus outbreak. That's what we're going to talk about today. As we know, the President signed the CARES Act.
The CARES Act stands for the Coronavirus Aid Relief and Economic Security Act, because every single government act needs to have a clever acronym, right?
That is correct, but you know what? Let's just call it CARES Act going forward.
Much easier that way. Yes.
That's a mouthful. This was just signed on March 27th by President Trump and we're seeing some of the benefits rolling out. We see the news focusing on different parts of the CARES Act. It's broken down in many different categories, how it's going to help individuals, big businesses, small businesses, education, healthcare. I could keep going on.
They have it down to the $2.2 trillion. As of this morning, we're talking about additional money they're going to raise. Japan is doing a $1 trillion stimulus package. Hopefully, some of this is going to work and help families and businesses and get people back to work.
Yeah, and so I should mention, we are recording this on Tuesday morning, April 7th. Depending on when you listen to this, everything we're talking about is accurate as of April 7th. Rich, I want to start with the one question that everybody's asking and that's these rebates, these checks that are going out to Americans. What can you tell me about that?
Well, first off, the recovery rebates for taxpayers, the checks are going to start off for individuals at $1,200 a check. For married couples, $2,400. For each dependent, an additional $500. Unfortunately there are phase outs. The phase outs start off at $75,000 for a single person, $150,000 for joint, and if you're a head of household, $112,500.
The phase out works real simply. For every thousand dollars over the phase out, it's reduced by $50, but it's not just the $50 off the $1,200 or the $2,400, it's the total. It's the total, including that, plus your dependent credits.
Let me go over some additional information regarding these relief checks. First off, there's no limits on the dependents you can claim, so if you have two kids, one kid, 12 kids, 20 kids.
If you live in a shoe.
You could live in a shoe. You can claim them all, so that's 500 bucks for each child, if they qualify, and we'll go over that in a little bit. The number of dependents will be taken from your 2019 tax return, if you already filed it. If you didn't file it, they're going to base it off the 2018.
That's where I got burned because I did better in 2019 than I did in 2018, and I already filed. Had I known this was coming, I probably would have waited a little bit to file a 2019. I would have had more favorable numbers for 2018.
Probably. Here's the interesting thing, though. What happens if you had a child in 2019 and you haven't filed yet?
You better file.
Well, it's okay. You'll get the credit in 2020 when you file. You're not going to lose it. It's just going to be delayed.
Okay, got it.
For divorced parents, only one can claim the dependent.
Can't double dip. Got it.
If you e-file and the IRS has your banking information, it's going to expedite the processing of getting this check. They're saying they're going to try to get them out as early as possible. Expect three weeks. Otherwise, it can take up to six weeks for the mailing of the check. The IRS wants direct deposit, as you can imagine, so they're working on their website to allow you to update your bank information or put in your bank information for direct deposit.
It makes life a lot easier. Rich, let's talk about the qualifications for who qualifies as a dependent.
Most people think of a dependent as someone they're taking care of, but the IRS has very strict rules on this for the child credits. They're issued in publication IRS 972. These rebate checks are going to be going by those rules.
First off, the kids must be 16 or younger. They have to be, I'm going to just rattle off a whole bunch of different things, son, daughter, stepchild, foster child, brother, sister, step-brother, sister, descent of any other individuals, including your grandchildren, also nieces and nephews. The IRS treats your adopted child as your own biological child. The child must not be supporting over 50% of their own financial support.
If Justin Bieber was your child, when he first came out, you would not be able to claim him as a dependent. You must have also claimed the child as a dependent on your personal tax return. The child must be a U.S. citizen, a U.S. National or a U.S. resident alien. They must have lived with you for more than half the year.
There are some exceptions to this rule, which again, could be found in publication 972 of the IRS. That's if they go to school or unfortunately, if your child's in a juvenile facility. There's many different ones you could look at. Medical purposes, it could be found in 972.
Got it. All right, so that takes care of the dependent issue and those stimulus checks, which is again, the first thing everybody's asking about. I think the second question, I'm going to go out a limb and assume that your clients are asking you, Rich, are about these new rules about retirement plans and withdrawals, right?
Yeah. We could break this down to withdrawals and loans. Let's talk about the withdrawals first, for hardship withdrawals. Usually, these are regarding 401ks, 403(b)s, 457 plans. The new rule is actually opening it up to SEP, IRA, simple IRAs and traditional IRAs, which is pretty big because those types of IRAs had their own special rules.
For the hardship, it's going to be all the 401ks 403(b)s, 457, SEP simples, traditional. I want to point out one thing though, it does not include a defined benefit plan.
What is a defined benefit plan? I'm sure everyone listening, I'm sure they know what it is. We know them as pension plans. The reason why they're excluding those pension plans are an actuary number based upon how many years and wages, and it has to work out to a certain funding amount. The IRS is not allowing hardship distributions from defined benefit plans.
Normally, if you took out a withdrawal, not a loan, a withdrawal, from your 401k plan or retirement plan, it would be used to repair your primary house, purchase a primary house, secondary education, medical expenses, and funeral expenses. Now it's expanded for anyone who's been diagnosed with COVID-19, their spouse or dependent, or has financially had consequences from the result of being quarantined, furloughed or laid off.
The rules have opened up to deal with today's situation with the COVID-19. Normally you were able to take a withdrawal up to 50% of your vested balance at a maximum of $50,000. The new rule has changed it to a $100,000 of your vested balance, dollar for dollar, so there's no ratio. If you have $40,000, you could take the full $40,000. It's not limited to the 50% rule, which would be $20,000. If you have $100,000, you could take $100,000.
I think, really, the important thing to remember here, Rich, is that it's a cashflow issue. Almost all of us have a cashflow issue right now. I don't think I know anybody that hasn't been affected by this in some way.
It's the government saying, "Hey, listen, normally there are a lot of restrictions on pulling stuff out of your retirement accounts early or pulling too much out of them early. We are going to relax these restrictions for now because we know that maybe you're out of work. Maybe you're furloughed, maybe you're laid off. Maybe you're sick. Maybe someone in your family is sick and you need this money now. We're going to relax these restrictions so that you can have access to the money that you have an urgent need for right now, in this moment."
Right. Now saying that, Jag, as a financial advisor, we always disencourage participants from taking out from retirement plans because it affects their overall longterm goals for retirement. Even though there are options to do this, it's always a good idea to explore all your options before making a decision.
The other changes they made for the hardship withdrawals is they're waving the 10% early withdrawal penalty for people who are under 59 and a half. Normally in the past, when you took a withdrawal out from your 401k, there was no way of putting it back in. A withdrawal was a withdrawal. If you'd won the lottery the next day, too bad.
They're going to allow you to start putting back the money in over a three-year period or term, which is really big because instead of taking it out and now creating a tax liability, even though there's no 10% penalty, withdrawals from a retirement plan are considered as taxable income.
At April 15th, next year, if you took out $75,000 and you only had 15% taxes withheld, boom, surprise. I'm going to owe a few more dollars and where am I going to get it from? I depleted my savings. Am I going to have to take more out from an IRA with the 10% penalty? It could be a snowball effect here. You want to make sure that you're doing this wisely.
A three-year payback plan is great. Hopefully, you go back to work in a few months or hopefully, a few weeks. Instead of making contributions, maybe you can make repayments, which can work out, if you have the cashflow to do that. If you have the cashflow to do contributions and repayment, even better.
If you don't plan on paying it back, the IRS is going to allow you to pay the tax liability over three years, also. If you're in a year like this and you're out of work and your tax bracket's low, and maybe you didn't take out $100,000, maybe you took out $20,000, it might be better just to bite the bullet and pay the tax at a lower marginal tax rate than you would be in normal working years.
That makes a lot of sense. Okay. Again, it's a matter of helping you get the money that you need right now. Again, I want to reemphasize what you said a minute ago, Rich, which is that this should not be a free for all where you say, "Sweet, I can take all this money out of my retirement account."
You really want to make sure that, I don't want to say it's a last resort, but don't go down this route unless you really need it. A lot of people do really need it, but if you can avoid going this route and mortgaging your future for the present, obviously you want to avoid it.
I always say make educated decisions. Find out all your options. Every option has a pro and a con. Weigh them out and then make a decision.
Again, you want to talk to somebody like Rich to help figure out the best move for your individual situation. What about retirement plan loans, Rich?
Okay. Regarding the retirement plan loans, first off, for the special new rules, you have to qualify it under the same rules as the withdrawals for the hardships. It has to be affected by the Coronavirus. First off, it's important to understand what the old rules were.
The old rules were that if you took a loan from a 401k, 403(b), 457, they are capped out at 50% of your vested balance up to a maximum of $50,000. If you had a $100,000 in your retirement account, the most you were able to borrow is $50,000. If you had a million dollars in your retirement account, the most you were able to borrow is $50,000.
Jag, if your balance is $25,000, the most you could borrow is $12,500. I think we're getting the rules.
Yes, exactly. Okay.
Also, you had to pay back that loan over five years. Let's talk about the new rules. The new rules changes the $50,000 up to a $100,000. Same rules as the withdrawal, dollar for dollar, up to a $100,000. If you have a $100,000 in your account, vested, you can withdraw $100,000, as a loan.
The payments for the loan are delayed for one year. Here's a big thing, though. Every single 401k plan is set up differently. Some employers set them up with no loan provisions.
Normally, any amendment in the plan would get done at the end of the year and then announced to the employees and then it would be for the following year. These are called plan amendments. The IRS and the Department of Labor is going to allow these 401k retirement plans to amend their documents to allow the loans for this year.
No delay, no waiting for them to do it on their own. The IRS is saying, "Hey, people need the money; just to do it right now."
Yep, so the plan documents do have to be amended to be in compliance, but they're going to be allowed to be amended mid-year. On another issue regarding the loans, there are people who took loans out before all this Coronavirus stuff hit. I encourage them to go to their HR director who handles the retirement plan and talk to them about the special provisions where they're going to be allowed to delay some of their payments this year and then extend their current loan another year.
Rich, this is great for a lot of people who haven't yet taken the money out, but what if you took out a loan prior to the CARES Act going into an effect, how would that play out?
Oh, Jag, that's a great question. They actually did make provisions for them. I encourage anyone who took a loan out before this Coronavirus craziness to go seek out some advice from their HR director. There are provisions where they could delay their payments for this year. Then the extra time on their loan will be extended another year. That might be able to help people who are in a financial crunch right now to free up some cash flow for their household.
Got it. I know a lot of people have questions about unemployment benefits. We're going to get to that in just a minute. Before we do, real quick, Rich, there's changes on those required minimum distributions, the RMDs, also, right?
Yep. They're figuring, with the market being down, and people in retirement, the worst thing they can do is have to sell securities at a discount, so they're allowing people, for 2020, not to have to take out the required minimum distribution. That's big.
Yeah. What happens if you already did? Holy crap. I just took this money out. I have taxes withheld, and now they changed the rules on me. Hmm.
Well, with IRAs, you always have a 60 day rollback where you could pay it back within 60 days from the withdrawal. Unfortunately, you can only do it once every 12 month period. If you did take out a distribution, you can roll back one of those within 60 days. Unfortunately, if you had taxes withheld tell for federal or state, you're not going to get that back until you do your tax return next year, which those taxes withheld will be applied to the credit taxes paid.
Okay. Got it.
If you're fortunate, though, if you turned 72 in 2019 after July 1st, you weren't required to take your RMD out until this year in April. Those people are not required to take out the RMDs for 2019 and 2020.
Oh, you can skip them both. Got it. Okay.
Yep. Beneficiary inherited IRAs don't have to take out the RMDs, but if you did, there's no payback, no rollback, if you're putting it in within the 60 days.
No rollback from those beneficiary IRAs, that's an important difference. Okay. Lastly, again, before we get to the unemployment next year, real quick, there's some changes with charitable donations because a lot of people need a lot of help right now, right?
Yes, a lot of people need help. Unfortunately, donations have to be qualified to a 501c3 to be deductible for the IRS. They did two big things. One of them may not sound like a lot, but it's going to help out the majority. They made a above line tax deduction.
It doesn't fall onto your schedule A. It's above line, which is the maximum of $300, and it has to be a cash donation. It can't be a donation of clothing or household items. It has to be a cash/check donation to a charity, and as I mentioned earlier, it has to be a qualified charity, a 501c3.
This is great because a lot of people don't itemize anymore. When they doubled the standard deduction, people were making charitable donations and getting no tax benefit for it. This is going to help out a lot of people.
The other thing is, which is ironic that I'm going to be talking about this on a podcast for people who are financially hurting right now during this outbreak of the Coronavirus, is for people who want to make large donations. Usually cash donations, which are reported on schedule A are limited to 60% of your adjusted gross income. They're going to raise that to 100% of your adjusted gross income.
That's big. Like you said, a lot of people need help, JAG. This is trying to encourage the bigger donors to donate more this year. If they make donations larger than 100% of their AGI, there's a five-year carry over. They can use those deductions for future years.
We think about people who are financially doing very well, and there are some people that actually are either thriving right now, or not really effected by this pandemic. This is to incentivize them to make a donation to a qualified 501c3, but whether it's a soup kitchen, whether it's one of these organizations that's helping out people that are in need. I love this idea that it's encouraging those who have the means to help those who need the help.
Yeah, for anyone who sits on any charitable boards, the goal is always trying to figure out how to get more donations to come in. When they changed the standard deduction to be double, it got a little bit harder because people who are normally donating XYZ amount of money, who now had no tax benefit, it was harder to get more money from them.
Some people would double up on their donations for a few years and then not make any more donations for the next couple of years. This should help a lot of the nonprofits bring in some extra capital, some donations this year to keep the doors open. Again, anyone who's sitting on the board completely understands, knows the frustration to try to keep the donations constantly coming in, especially with the new rules we saw a couple of years ago.
All right, the last thing we want to cover today, Rich, is unemployment benefits. I actually had a good friend of mine who got laid off from his job last week. He called me all panicked. I said, "Dude, it's unfortunate you lost your job, but if you're going to collect unemployment, this is the time to collect. Right?
I don't think there's any good time to collect, but you're right. I think, besides financially being burned or being unemployed, I think it mentally gets to you.
I can tell you, as somebody who worked in radio, which is a very insecure field, especially in the last several years, in my 15 year radio career, I was laid off for budget cuts three times. It does take a toll on your psyche. That's also why I'm not in radio anymore, but that's for another podcast.
Yes, you're right. It does take, in addition to all the stress that we're all under watching the news and all these things going on, losing your gig is a massive financial hit, but it also does really mess with your head, too.
Yeah. First off, a lot of the states have a one-week elimination period. The federal government is stepping up and saying, "All right, we've got to get rid of this one-week elimination." They're going to cover the one week for the states.
That's that one week waiting period before you can get your benefits?
The problem you have is the states need to waive that elimination period. I'm sure now that the federal government is going to be picking up that one week. I'm sure all the states who have the elimination period for one week, that waiting period, is going to amend their unemployment rules to get rid of it.
All right, so as we've probably seen in the news, there's an additional $600 weekly benefit from the time period of April 5th, 2020, to July 31st, 2020. This definitely should help individuals. One of the things that held up getting this act approved at the last minute was they had to change a provision. They wanted to make sure people weren't receiving more money in unemployment than they did working.
It's going to get capped at your income limit. If the $600 brings you to making more, expect that to be reduced.
Okay, good to know.
They are also expanding it. If you deplete your unemployment, most states is around 26 weeks of unemployment, they're adding another 13 weeks to bring it to a maximum 39 weeks. That should be able to help people. Hopefully, the economy is going to reopen and the companies are going to start rehiring.
There's a lot of incentives in this act for small businesses and large businesses to keep employees and bring people back. Hopefully, as more of this money is dispersed out to the corporations and the small businesses, small businesses were actually able to apply last Friday for the payroll protection loans, which basically the government was giving two and a half months of average payroll as long as you keep your employees employed.
That money could be used for payroll. It could be used for medical, IT, rent, mortgage, things like that. It at least keeps people on the payroll for at least another two months, two and a half months, hopefully. Hopefully, businesses will be reopened. If not, they'll delay the person having to apply for unemployment at least.
Okay, so we're going to keep the unemployment numbers down, and for those workers, hopefully they have a job to come back rather than having to look for a new job once this is all over.
Correct. My company, I never even thought of laying anyone off during this time, nor am I going to. The reason why is that in my industry, it takes over two years to train somebody.
You're talking about a massive investment of both time and money at that point.
I'd rather just suck it up. If I have to put money into my own company to keep my staff employed, I'm going to do that. When they came out with his payroll protection loan program, it was a win-win.
It helps businesses like mine, small restaurants, everyone to keep the people employed to delay unemployment. God forbid if this goes on for a long, long, long time, employers are going to have to eventually let people go. At least, then they can collect their unemployment and hopefully, the extension, the 39 weeks.
Right. If they get that 39 weeks, they're starting the clock later as opposed to earlier, which I like.
Maybe the $600 will be extended. We don't know that right now, but the goal is to keep people employed, I think. At least that's what my goal is.
I also like that this covers gig workers, whether you're an Uber driver or a grocery delivery person. In previous years, before the world changed and we started ended up with this gig economy, there weren't a lot of protections for those folks. I liked that there's protections for them now, too.
You're absolutely correct. Unemployment never included self-employed individuals, independent contractors or people with limited work history. Let's just say you just got out of college and you've only been working for a few months. The new rules are going to include those people, too.
The reason why is if you're self-employed, you can't fire yourself. If you really think about that, you can't fire yourself. You're not paying unemployment insurance for yourself. It's nice that they really did expand that to self-employed individuals, 1099 contractors, kids right out of college who might've lost their jobs. I think that's really big. I think that was nice of our politicians actually to think about that.
Here's another thing where people were included, and this is going to sound horrible. Anyone who's gone through this, my heart goes out for you. It's if you lost your spouse, who happened to be the breadwinner and that now automatically makes you the breadwinner, you now can claim unemployment if you're in that situation.
There's so many items in this new act. I think there's 880 pages to the CARES act.
Of course there is.
It's impossible to know every single thing in that act. The major issues are on the news, on the web. There's probably going to be a lot more things trickling out as people are going through the 880 pages. It's impossible to list every single thing in this one episode, as you can imagine.
Anyone who is seeking some help, I recommend them again to seek a professional, a family member, a neighbor who knows about taxes, investments, budgeting during these difficult times. Anytime you're making a decision regarding your retirement plans, taxes, withdrawals from a retirement account, I always, always recommend seeking professional advice from a CPA, a financial advisor.
There's always multiple decisions you can make. The goal is to find out what all your options are, weighing them out. Like I said before, every option has pros and every option has cons. Going in and making an educated decision is the most important thing.
Jag, I know that you and I've talked about this during the week and last week. Our hearts go out for everyone. We want everybody to stay healthy and strong during these times. I know my prayers are for everyone for a speedy recovery and life to go back to normal.
Yeah, I could not agree with you more on that, Rich. Before we go, if somebody does want to talk to you about their financial situation, are you doing online sessions with clients right now?
I'm doing a lot of Zoom meetings and we do have security protocols set up in our Zoom.
Good to know. Good to know.
The best way to reach out to me is through email, which is email@example.com. You can schedule times directly from my website, which is www.ncfg.com. There's a contact section where you can schedule a Zoom meeting, a telephone meeting, a face-to-face, which I'm not going to be there.
Anyone who needs help and just wants to talk, if you don't have somebody, call me. I'm not going to charge. If I can give you some time over the phone or over the web to help your household, I'll be more than delighted to be able to do that. It'd be my privilege to be able to help you during these times.
I think, in these scary times, sometimes the worst in times brings out the best in people. I'm really glad to hear that you're offering some counsel to folks who might need it in this kind of situation.
Rich, it's always good to speak with you even under these circumstances. Best to you and the family. Of course, the dogs are part of the family, and we'll talk soon. Stay safe and stay healthy.
Thank you, Jag. Thank you.
Richard Oring's branch office is One Airport Place, Princeton, New Jersey, 08540. The branch phone number is (609) 924-2049. Securities offered through Royal Alliance Associates, Inc., Member FINRA SIPC. Advisory services offered through New Century Financial Group, LLC, a registered investment advisor, not affiliated with Royal Alliance Associates, Inc. New Century Financial Group, LLC and Royal Alliance Associates, Inc. does not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.