Recovery Rebates
In the next few weeks, approximately 94% of US taxpayers will receive a $1200 check per adult, and an additional $500 per dependent child 16 years old and under. This payment is issued as an advance refundable income tax credit based off of your most recently filed income tax return (2018 unless you file your 2019 return soon) and will be reconciled against your 2020 income.

Income phase outs:

• “Head of Household” $112,500
• Married filing joint: $150k
• All other filers: $75k

For those earning in excess of the income limits, the benefit is reduced “$5 per every $100 above the income limit” or 5%.  As an example, if a married couple earns $175k and have two children under 17, the benefit starts out as $2400 + $500 + $500 = $3400, but is then reduced by $5 per 100 over $150k, or 5% of $25k. The benefit would be $3400 – $1250 = $2150. If the taxpayer earns substantially less in 2020 than she did in 2018 or 2019, a subsequent payment will be made when she files her 2020 return next year. That said, if a taxpayer’s 2020 earnings are in excess of the phase out thresholds, there is no claw back; she gets to keep the tax credit that was distributed.

For my attorney friends who practice family law and probate, there may be issues to navigate. Feel free to contact me directly if you would like to discuss further.

As to how the money is received, for those who are receiving social security, the money will be directly deposited to the account on file with the social security administration. And for taxpayers who receive tax refunds by direct deposit, the tax credit money will be directly deposited to the account the IRS has on file. Otherwise, a physical check will be mailed to the last known address the IRS has on file. If a taxpayer has moved since the last filing, she should complete and promptly file a Change of Address Form 8822.

CARES Act Unemployment Insurance Program and Benefits
The Act creates a new type of federal unemployment insurance, the Federal Pandemic Unemployment Compensation program. The FPUC provides a $600 weekly unemployment benefit for the period of April 5, 2020  to July 31, 2020, with a 13-week extension available if needed. The FPUC benefit is in addition to any state benefit available. The FPUC benefit will be administered and distributed through your state’s unemployment insurance program. In Texas, the Texas Workforce Commission is administering the program. If you file for unemployment with TWC, you will also be automatically considered for the additional federal benefits. However, if you are already receiving a state benefit or you’ve applied, you do not need to contact TWC to apply for the FPUC benefit. TWC will automatically apply for those currently in the system. The benefit is expected to roll out in early April and retroactive payments will be made.  In addition to the weekly benefit, states are incentivized to create a “short-time compensation program.” These are programs designed to assist workers who haven’t been laid off altogether but have had their hours reduced. As I’m sure many have figured out, many states have a waiting period before a person becomes eligible for a state unemployment benefit. The CARES benefit is available immediately and there is no waiting period. This program provides an unemployment benefit to those who are self-employed.

CARES Act: Relief for Student Loans
Federal student loan payments are deferred until September 30, 2020. Interest will not accrue during the deferment period. At this time it is not clear whether the Department of Education will automatically stop payments or if the borrower is required to contact the lender and stop payments; therefore, it’s best to contact your lender and verify. Importantly, the deferral period will count towards those who are on a loan forgiveness program. Loan forgiveness candidates should call their lenders and confirm. In addition, at any time in 2020, employers can exclude up to $5250 paid to employees for education expenses or paid toward student loans for education already obtained. These payments are also excluded from employee income.

CARES Act Related Distributions from Retirement Accounts
During 2020, up to $100k may be withdrawn from tax advantaged retirement accounts without being subject to the 10% penalty applied to distributions if under 59 ½. Further, the distribution will not be subject to a 20% withholding for income tax purposes. The distribution must be made because of a COVID-19 related issue. The distribution will be taxable income but that may be applied all in one year or over the next three years. The account owner also has the option to replace the money taken out over the next three years and amend previous returns.

CARES Act Retirement Account Loans
401k participants may take out a loan of up to $100k or 100% of the vested balance. Payments do not have to begin for a year. But most plans require the loan to be paid within five years once payments begin. If you choose a 401k loan, know the rules regarding repayment upon termination/resignation. Many plans will accelerate the and demand payment in full or consider it a distribution if not paid, which may subject you to taxation and a 10% withdrawal penalty. It’s important to also understand that you are not borrowing from yourself. The plan administrator holds your account as collateral and lends money against the collateral. The amount of the loan is not earning a market return, so the interest paid is the actual loan interest plus the lost return on the borrowed amount. Finally, when payments are made, they are made with after tax money to pay back pre-tax contributions.

CARES Act and Required Minimum Distributions (RMDs)
RMDs for 2020, and 2019 initial distributions scheduled for first quarter 2020 are waived; they don’t have to be distributed. If an RMD has already been made and it was made within the 60-day period preceding March 27, 2020, that RMD may be rolled back into the retirement account. Be mindful of the once per year rollover rule. If a rollover had happened within the previous year, a distribution made will likely not be allowed. And if an RMD has already been made to any non-spouse beneficiary, it can not be rolled back in. Finally, non-designated beneficiaries (estates and charities), which typically must dully distribute the account within 5 years from date of death of the original account holder, these beneficiaries get an extra year to fully distribute the account.

For questions or comments reach out to me by email.

Keith A. Pillers, JD, CFP^®, CIMA^®, CPWA^®
Director of Wealth Management
keith@ackermancapital.com

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