In April of 2011 a young Canadian man decided to share his philosophy on work, living life well and early retirement by publishing his first blog post. His message of fiscal responsibility and frugality landed with a thud at first. 

Prior to starting his blog and before claiming the early retirement mantel, our young hero moved to the United States. The first year of blogging was brutal. He published a massive load of very useful information without the traffic or revenue matching his efforts. 

And then it hit. The right message at the right place at the right time struck a chord and the Mr. Money Mustache blog was no longer an internet backwater blog, but on a destiny to change the world.

It is only proper at this point I provide full disclosure. I served as the tax preparer/consultant for the Mr. Money Mustache (MMM) blog and its owner, Pete Adeney, for a few years. It was in a conversation with Pete and his wife at the time that I learned the first year of blogging was not all roses for Pete.* The first post didn’t automatically attract traffic. That came later.

If you produce good material they will come, and so it was for our hero. Pete kept telling his story. It was real so it resonated. He retired at 30 by design. Of course, if you retire at 30 you do not necessarily spend the remainder of your life planted in a chair. And that caused the largest complaint Pete faced in his blogging career: that he really didn’t retire.

Once you reach a level of success there will always be a few who want to tinkle on your shoes. Pete was not exempt. Once retired, Pete entered into a partnership, starting a construction company with a friend. As so often happens with partnerships (ask any seasoned accountant), it went south. You can hear the story straight from the source. It wasn’t pretty. It also placed a real risk in Pete’s retirement plans.

Pete also bought a property to fix and rent. That went much better. Pete loves working with his hands and building stuff. Working on a property at a casual pace (to assure quality and avoid burnout), Pete manged to hone his carpentry skills. From a failed construction company, to a rental property to the MMM headquarters in Longmont, Colorado, Pete found the prefect path to engage his passion.

Then we come to the MMM blog. Pete once again filled his time with something constructive (pun intended). Retirement is not short-hand for death! Pete decided to share his accumulated wisdom. But some were not having it.

 

That is NOT Retirement!

It didn’t take long before it was pointed out Pete didn’t actually retire since he was running a business for a while, remodeling/renting out a property and kicking out a massive quantity of material on his blog. Some of his readers were calling BS. 

A certain wayward accountant from the Northwoods of Wisconsin noticed our hero about this time. When the two met Pete instantly took to this wayward accountant for about 15 minutes. As good fortune would have it, the sickness passed.

I love Pete’s work and philosophy of living the good life, financial independence and frugality. But when it comes to retirement we are about as far apart as any two people can be. The 15 minutes we connected was limited to such a short time due to my attitudes about retirement. 

Climbing to the top is worth the effort.

The good news is that neither of us are right for the entire crowd. Some want a Pete style retirement and some, like me, start a business doing what they like and refuse to stop. (What am I supposed to do? Something I like less just so I can brag I retired?) I sometimes wonder how things would have turned out differently if the partnership Pete had with his friend had actually worked out.

My argument with Pete’s philosophy was not about living a productive, meaningful life. Rather, I always felt Pete’s encouraging others to retire just like him had a timing issue. 

April 2011 was a really good time to retire. Pete actually retired a bit prior to that which made it an even better time to retire early.

You see, we had a financial crisis that smacked the economy and stock market around pretty bad in 2008-9. If you had enough money to retire at the market low I would be far more comfortable with you taking said retirement than with all the fine folks who followed in Pete’s footsteps who wanted to push the retirement envelope to the limit when the market and economy were on a sugar high. Retiring on the edge financially when the market is pulling 10 years of near straight-up gains is not the best idea.

 

The Best Time to Retire is Now

Right now, this very day, is the best time to retire since Pete took those same steps! If you have the resources to retire when things are down you have an excellent chance of staying retired. 

True, the economy is still declining from the pandemic while the market has regained much of its losses. And the market is likely to get cranky when the reality of the economic damage done sets in. Still, it is during these trying financial times when you learn if you really are ready for retirement, early or otherwise.

Pete found the sweet spot in picking his early retirement date; he just happened to be 30 at the time. Many considered it a challenge to retire younger than Pete without remembering Pete still maintained financially gainful activities. 

Retiring younger than 30 will take some luck. Skill is unlikely to get you there much faster. 

Many claim they have retired in their 20s, hoping to strip Pete of his early retirement mantel. Deep down I think they hope they will be bailed out by publishing a profitable blog before anyone notices the emperor is not wearing his skivvies. 

How would I know all this? Because people pay me a lot of money to talk to them about their personal situation. And the theme is recurring. I don’t think Pete has a full grasp of the effect he has on some people. They are not really listening to what he said. They pick what they want and forget the rest. It turns out as expected. 

If you have thought of retirement, now is the time you can practice the process. The pandemic has left many forced to deal with a retirement lifestyle whether they like it or not. It takes talent to have a meaningful day when there are no pressing demands.

Pete retired after the bottom of the economic collapse of 2008-9. It was the perfect time to make the transition. If you can do it when all your assets are at or near lows, the chances of retirement going as planned increases dramatically.

Maybe today isn’t the ideal time to take the early retirement you planned. But the day is fast approaching. The pandemic will pass, economic activity will increase and the market will travel to new highs. Beginning retirement when the economy is at the beginning stages of a bull market allows for the longest period of growth before your budget is seriously challenged with declining asset prices.

Disaster Planning

Many clients have bent my ear the last few months as the financial pressures have increased. Discussions of taking early Social Security, and the consequences thereof, are common. 

Another frequent discussion involves people who took retirement too early. Instead of following the Pete plan and building multiple sources of income, they retired as soon as they thought they could get away with it and took up traveling. That fantasy came to a screeching halt.

Retiring at 28 just to say you beat Pete to the finish line is insane! Some of these early retirees are now looking to reenter traditional employment and it isn’t by choice. 

When planning early retirement with clients I use a formula for determining if you are ready to retire, assuming you are mentally prepared. In my formula I ask clients to consider a really bad economic decline where the stock market declines by 50% and real estate is hard to sell at any price. I also assume a decline in rent, interest and dividend income. If we can map out a serious economic disruption and it is nothing more than background noise in your financial plans you are probably ready financially for retirement.

This should not be confused with what I do, which is never retire. My plan is to work at my preferred tasks (taxes, accounting, business planning and consulting) until my body can no longer cash the check. Not everyone has that luxury. I’m lucky I found what I love doing at a young age and feel compelled to keep doing it. 

Most people want a designated time in life where they don’t have the stress of a job or of running a business. Many want to travel or explore other avenues of living. Those goals are no less valid than mine.

What I am saying is that the two ends of the spectrum have Pete on one side and me on the other. There is a large amount of middle ground for you to consider. 

There is no competition! There is no prize for retiring younger than Pete! And for crying out loud, don’t try to be like me. God knows the world has a hard time dealing with one of me. 

Find your path. Pete and I have provided excellent templates for the extremes. Finding what fulfills your life is what is important. You only live once; don’t waste it.

If you have been planning, saving and investing for retirement — and getting close — now is the time for a serious look at taking that step. Today (the day I’m publishing this) might not be the exact perfect day to pull the trigger. But the sweet spot is coming soon; probably within a year to year and a half at most.

There will be no bragging rights if you planned wisely and are now ready to make the transition. If the numbers still work when the markets finally move on from the current economic issues, you should be ready for a smooth entry into retirement.

There will be no excitement, but that is what you are trying to get away from in the first place with traditional work.

 

* As an insider I cannot share everything I know as it is confidential. Friends of Pete will know I have left out parts, as I should. The important parts for this story are all publicly available so I mention them. The links to the MMM blog provide greater details if you want to know more. In some cases there are multiple blog posts, but I don’t link to all of them. I leave it to you, kind reader, to take a deep casual dive into the MMM blog if you already haven’t.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Restarting the economy is going to be more difficult than it was stopping it. A vigorous discussion on the topic is desperately needed as many feel talking about opening the economy is akin to reigniting the infection rate when in reality the discussion is needed to formulate an appropriate and workable plan.

Talking about restarting the economy is good policy. Shutting down large swaths of economic activity was necessary for public health. And for the most part it was a fairly easy process: governors gave the order and their state ground to a halt as people sheltered in place, giving COVID-19 no viable path to propagate. The same happened around the world. It is The Day the World Stopped.

The spread of COVID-19 had slowed and in many countries has all but stopped. Concerns the virus is picking up steam where social distancing is relaxed is still a real risk. However, policies designed to slow the spread of the virus appear to be working. Multiple medical therapies hold promise and a massive effort to develop a vaccine are in progress. A vaccine would be a game changer, but realistically that is still as much as 1 ½ years away before it becomes available. The economic price would be too high, and the resulting harm to human health from lack of services, too damaging to wait over a year before reopening the closed parts of the economy.

Reopening the economy can begin in as little as a few weeks to a month if handled properly. Germany has made signs they are ready to slowly restart economic activity. China, the first to suffer the scourge, has already reopened much of its shuttered economy. The real question now is: How well will it work? If the virus takes off again it will set us back. However, if enough people have built an immunity while social distancing is still practiced, many parts of the economy can reopen.

Turning economic activity back on will not be like flicking a light switch. There are several issues when restarting an economy after such a brutal and abrupt stoppage. We will now turn our discussion to an appropriate and safe way to reopen a shuttered economy. Even more important than opening closed businesses is how to get money flowing again. If nobody shows up for the party we are no better off.

 

A Plan for Reopening Shuttered Industries

While it is true the current economic downturn may be the most abrupt (fastest) and deepest decline in modern history, it isn’t the first time an economy had to plan on restarting after such a shock to the system. The situation (and rules) are different from rebuilding after the destruction from war; the rules, however, have many similarities, albeit on a much smaller scale. 

After World War II, Germany and Britain were in ruins, along with much of the rest of Europe and Japan and other areas of the Far East. While a contagious virus wasn’t running wild, a plan was developed for rebuilding the destroyed areas. Without the Marshall Plan, Europe would have suffered much longer as they worked to rebuild. A similar reconstruction plan was instituted in Japan. 

We don’t need anything as drastic as a Marshall Plan today. But the lessons can still be learned.  For example, you didn’t start rebuilding a war torn Britain by investing in industries that heavily rely on infrastructure before the infrastructure was funded and well on its way to becoming operational. In other words, there has to be an order to the reopening of an economy. 

It can happen fast. The Marshal Plan was a 4-year plan to fund investment in rebuilding cities and industries, and remove trade barriers between European nations and those nations and the United States. 

We do not need 4 years to reignite our economy! Still, it will take time and it will not always be a smooth process. Prior to a vaccine for COVID-19 there stands a strong chance there will be pockets of infection flareups. Fear will be the common enemy.

It would be unwise to open everything at once. A step-by-step process will allow for the fastest opening of the economy without undue risk to public health. The real question is: What gets opened first, second and so forth and to what degree?

Step 1 

Before any plan can work social distancing must be practiced by the public until an effective vaccine is found, effective and fast testing is available or most people are inoculated. If enough people develop a natural immunity (prior infection) the same result can be achieved, if only over a much longer time frame and higher number of dead.

A requirement everyone wear a mask in public would also go a long way, if not very fashionable. Social distancing and a mask would reduce the spread of COVID-19 to such an extent it might not remain viable for long as it can’t keep finding new hosts.

A cheap, fast and easy way to test for those currently contagious would also allow for a faster opening of economic activity.

Step 2

The first businesses to reopen should be retail establishments. It is easy to practice social distancing at a furniture mart and therefore, these businesses should be allowed to open soon.

Certain service businesses can be opened at this time as well. The law office, bank and public buildings and parks all allow for social distancing without much inconvenience to people.

Factories and other manufacturing facilities can reopen along with service businesses and retail outlets. Safety policies might mean some factories run at less than full capacity, but they would be open and should be able to find ways to slowly increase business activity until fully operational, or nearly so.

Churches and other places of worship would also be some of the first places to reopen. 

Step 3

After an adequate waiting period (say two or three weeks) to determine the virus is not spreading faster again, it will be time to open even larger swaths of economic activity. 

This is where it gets difficult. Bars and restaurants really could use a return to normalcy. Unfortunately, large groups of people gather at these establishments and social distancing is extremely difficult. Unless a natural immunity or vaccine reduces risk, large gatherings are a serious threat to reigniting the infection rate. 

Instead, it might be proper to open salons. Social distancing is impossible in these situations; by design the hair stylist has to be close to you to cut your hair. However, a mask might be enough to solve the problem. Yes, the hair stylist is close to the customer when cutting her hair, but the room isn’t crowded tight with people. A mask and hand washing between clients could do the trick. (This is more important than you think! Do you want to now what our world would look like after people go a year without any hair care? Yikes!)

An accurate and fast way to test for those currently contagious would also facilitate a quicker opening of these businesses.

Step 4

As serious as the matter is, certain businesses need to reopen as some point. Gyms are a high risk place, but social distancing, frequent hand washing and sanitizing equipment between use should make it a viable solution to reopening our exercise centers. A fast, accurate and low cost testing method to reveal who is contagious would certainly allow for these establishments to open sooner.

Restaurants are next. We might limit the number of people in the room and require masks for all employees. (Kind of hard for patrons to eat while wearing a mask.) The same for bars. A reasonable plan would be to allow a certain number of people per area and slowly raise the density of people allowed per gathering as long as infection rates remain low.

Step 5

The hardest hit is the last to reopen. Concerts and sporting events pack people in too tight for proper safety with a highly contagious virus on the loose. Yelling and cheering at a packed sporting event all but assures you will face a high risk of infection if an infected individual is present. Sporting events with empty stands is an option, but there is something about a full stadium that makes the event serious, real.

Travel will also be among the last to fully reopen. Packing a plane is not the best idea when a highly contagious virus is on the loose. Proper precautions could be taken to reduce risk. Disinfecting after each use and masks on public transportation would make sense. Testing, when available, would allow for a full opening of economic activity even if a vaccine is not yet ready.

 

These steps do not have to take place in a vacuum. Fully reopening the economy could happen in a few months with most business activity functioning at a high level within 30 days. Accurate, fast and low cost testing would also speed the reopening of the economy. A vaccine would be the best option, but the economy will still need time to reset as it opens after such a shock. Things will not pick up where they left off.

We have learned a lot about COVID-19 so far. Treatments are getting better and more equipment is available. That reduces the seriousness of the infection. Even without a vaccine there will be a growing number of people with a natural immunity. As we discover how effective an immunity infection provides, we can also focus on how many have been infected without serious symptoms. At some point we need to know how many people already are not at risk due to immunity. Reinfection issues will need to be addressed.

It is growing clearer each day we can reopen economic activity without undue risk to human health. There are measurable risks to locking people down to prevent the spread of disease. At some point it is a better choice to take precautions while letting the herd out in the pasture.

 

Velocity of Money

The velocity of money is the gorilla in the room nobody is talking about. Opening businesses is only the first step. My guess is there will be a surge in business activity as the wildlife gets a whiff of fresh air. Then the economic reality of the family budget will bear down. 

The stimulus money will certainly help, but that money helped people muddle through the abyss. Some jobs are not coming back. Some businesses will not survive the assault inflicted upon them. There is no amount of money that will put things back exactly as they were.

Will back rent need to be paid or will landlords suffer the loss? Will all employees be called back to work? What about businesses that close? If tenants are forced to pay a backlog of rent it will retard tenants’ spending on other goods and services. If the landlord swallows the loss the landlord will be forced to reduce spending. Either way money will not move as fast in the economy. The same applies to employees not called back to work as their employer closed permanently. 

The same applies to mortgage payments and other loans. Will payments be pushed to the back of the loan? Regardless, the family budget is worse off. Many questions still need answering for a smooth re-opening of economic activity.

And will jobs still pay the same with higher unemployment? 

 

 

Bars and restaurants might get an initial surge of business, but not all industries will enjoy such a bump. Travel and entertainment take time to set up. Planning a concert takes time. The day the switch is flipped is not the day people have airline tickets to get away. People will start closer to home before venturing further. Planning a vacation will not happen instantly.

And some industries are of the trickle-down type. For Boeing to sell more airplanes, airlines need to book more passengers. The money flows downhill and Boeing is not first in line for a check.

The above chart shows a damning detail about the American economy. From 1960 to 1990 the speed at which money exchanged hands in the economy was static. The accelerating economic growth of the 1990s bumped the velocity of money a bit higher before coming back down in the early 2000s.

But ever since the Great Recession the speed that money changes hands has been slowing. Part of the issue is the level of the money supply. The Federal Reserve has not been bashful about increasing the money supply over the last decade. If people don’t increase spending at the same pace the Fed increases the money supply we see the velocity of money come down. Each new dollar the Fed dumps into the economy has less effect than the one prior. This is a form of spin-down and it always comes to an end at some point.

That has been a problem for the last decade. More and more money gets pumped into the economy, but it has had a smaller and smaller effect. Money just does not move the way it used to, even when more is pumped into the system. 

The third major bear market in 20 years might drop the velocity of money even lower. A vibrant, healthy economy has a strong velocity of money as money is earned, spent, saved and invested. For a decade we have seen money pumped into the economy and mostly it arrived with a loud thump. Most of the past decade of economic gains is attributable to public spending on the national credit card. Without this so-called stimulus, we had no discernible economic gains. I will leave it to you, kind readers, to determine if this is a viable long-term solution.

The real challenge is not the reopening of businesses; it is the reinvigorating of the movement of money. If everyone has a million dollars, but they all sit on it — none of it moving — there is still no economic activity, at least as measured by Gross Domestic Product which tracks how much money has been put to work buying goods and services. If the velocity of money slows even more it could be a very anemic recovery, indeed! Or worse.

The economic expansion after the Great Recession was slow by historical standards. It is also a likely reason it lasted so long since the excesses of too rapid of growth were avoided.

But slow growth is like watching paint dry or suffering water torture if you need a job or are working to build a business. If money isn’t moving it means it isn’t going to wages or small businesses either. 

The challenge is starting a national dialog on reopening the economy as soon as safely possible and developing plans to avoid an incredibly slow recovery, even slower than the 2009-2019 expansion.

It seems during my entire adult life (from the early 1980s) each economic expansion has started slower and was harder to accelerate. Interest rates have dropped for 30 years until we are now at 0% yet again. If the Fed creates more money, only to see the velocity of money slow more, there will be little value gained by future Fed actions. 

Maybe a Keynesian style government infrastructure spending program might do the trick. However, China has tried to do this every time they want to spike growth and the benefits are not all they desired.

I guess the Fed could print money forever without consequences and give it away as a basic income. I also have a bridge I’d like to sell you if you believe there is such a free lunch without consequences. 

I certainly do not have all the answers. I think my plan for opening the economy is sound with some modest tweaks by the powers that be. The real problems start when the economy is back open and it isn’t what we remember when we last saw it.

And we better start tossing ideas around because I think time is running shorter than anyone wants to admit.

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the attempt by Congress to reduce the economic dislocation caused by the current pandemic. Taxes play a key role in the Act, along with several economic stimulus policies. 

Normally a new tax law requires time to figure out all the details. The Tax Cuts and Jobs Act (TCJA) of 2017 is still looking for clarifications on several issues, some of which are addressed in the CARES Act. COVID-19 had pushed economic decline into overdrive. The American economy has never declined at such a pace. Businesses and individuals went from good economic conditions to millions unemployed and many businesses forced to close. A draconian stimulus package was required.

The CARES Act is $2.2 trillion of federal stimulus. With no time to iron out the details, rumors are flying. Normally reputable sources of information are struggling to get facts out. Misinformation is rampant. This post, along with the accompanying Facebook Live event, will outline the facts as they currently stand. The facts might change is some situations. I will correct those errors in this post periodically so you have a reliable resource.  There are many instances where the only answer is: I don’t know. Because nobody does, even the people in charge of the programs. 

I broke this post into sections covering several of the most important points of the CARES Act. While I might touch on issues in the Family and Medical Leave Act (FMLA), it is not the focus of this post. This post has many links to reputable sources. Use them, as they will contain additional updated information.

 

Stimulus Checks for Individuals

A refundable tax credit is provided by the Act of $1,200 for individuals ($2,400 for joint returns). There is an additional $500 rebate for each child under age 17. 

There is a lot of confusion around who gets the recovery rebate and how much. 

  • First, Social Security recipients also get the rebate. The Treasury Department and the IRS got this wrong when they stated these people must file a tax return to get the rebate. The Act made it clear this was not required and after much drama the Treasury Department changed its positions; a tax return is not required.
  • Second, the rebate is not taxable income.
  • Third, the IRS will direct deposit the rebate into your bank account if you used direct deposit on your last tax return or Social Security check. Everyone else will get a check in the mail.
  • Fourth, direct deposit payments will begin the week of April 13th and continue until all who qualify get their payment. Checks will be mailed starting in mid-May and continue until all are issued. The IRS will use information from your 2019 tax return to determine if you qualify for a rebate (see details below). If you did not file your 2019 tax return, the IRS will use your 2018 return. If you file neither year, the IRS will issue the rebate once you file your 2019 return anytime during 2020. If you do not need to file a 2018 or 2019 return you can file a 2020 tax return where the rebate will be issued then if you qualify.
  • Fifth, the rebate is on the 2020 tax return to be filed in the Spring of 2021. The rebate is a refundable credit (you get the rebate even if you have no tax liability). If the IRS screws up and overpays you, you don’t have to pay back the over-payment. If the IRS underpays you, you get the remaining amount with your 2020 tax return.
  • Sixth, there is an issue involving children that might be rectified in a future bill from Congress. Children 17 and older and in college or school are still usually claimed on the parent’s return. The parent gets nothing (children under 17 are an additional $500 to the parent, $0 for those 17 and older) even if the child is in school or college, but if the child files their own return — and not claimed on the parent’s return — the child would get $1,200. There are several problems here. Technically, there are no dependents on a tax return since the TCJA. However, similar rules are still followed for education credits and the Child Tax Credit (CTC). It isn’t as simple as removing a child from the parent’s return. The child has to disclose on their return they are a Dependent of Another when they file. If the parent is providing more than 50% of their support the child cannot claim themselves. It is vital to review all the support rules. If your child provides more than half of her support they can claim themselves and probably qualify for a rebate. 
  • Seventh, if you owe back taxes you will still receive the rebate. The only exception to receiving the rebate is if you owe back child support. Back child support is first paid before any rebate is sent to you.

The rebate is based upon your adjusted gross income (AGI). Single taxpayers get the full $1,200 rebate up to an AGI of $75,000 ($112,500 for head of household; $150,000 AGI for joint filers) The rebate is reduced by $50 for every $1,000 of AGI above the threshold (the CARES Act actually says a 5% reduction for AGI above the threshold) until it is reduced to zero at $99,000 for single taxpayers without children ($198,000 for joint returns without children). The complete phaseout of the rebate is higher if you have a qualified child as the rebate is reduced $50 per $1,000 over the threshold, meaning you can have a higher AGI with children and still get a small rebate

Planning tip! While caution must be advised when it comes to not claiming a child in college when the child does not provide more than half of their own support, there is an opportunity for high incomers to plan their rebate.

If your income is over the phaseout level for 2019 — but not 2018 — it might be advantageous to wait until you get your rebate before filing your 2019 tax return. if the opposite is true (2019 income is under the threshold and 2018 is above) you want to file your 2019 tax return as soon as possible. The IRS will issue your rebate anytime during 2020 once a tax return is filed if one (2018 or 2019) was not previously filed or additional rebate is allowed. If both 2018 and 2019 are over the threshold you have one more chance to get the rebate. If your 2020 income is below the limit the unpaid rebate you qualify for will be added to the 2020 return.

Remember, if the IRS sends too much you do not have to repay it. 

Here is a calculator to estimate how much you can expect in your rebate check.

 

Tax Return and Estimated Payment Due Dates

This section is not in the CARES Act.

The Treasury Department extended tax season for 2019 tax returns until July 15, 2020. That means 2019 tax returns are now due July 15, 2020. Any balance due is due at that time without additional penalty or interest. Estimated tax payments are also due July 15th. That means the April 15th and June 15th estimated payments can be made as one lump-sum by July 15th without interest or penalty. 

 

Charitable Contributions

Prior to the TCJA the maximum deduction allowed for cash charitable contributions for individuals was limited to 50% of AGI. The TCJA increased this to 60%. The CARES Act increases this limit again to 100% for tax years beginning after December 31, 2019. In all cases, the excess charitable contribution is carried forward up to 5 years.

Corporations (regular corporations, not S corporations) move from 10% to 25% of taxable income as the deductible limit for charitable contributions, with the remainder carried forward up to 5 years.

The CARES Act also allows up to a $300 cash charitable contribution deduction above-the-line (if you do not itemize) for individuals. The $300 above-the-line deduction excludes donor advised funds.

 

Student Loans

Federal student loan interest and principle are suspended for 6 months, from March 16 through September 30, 2020. Private loans no not count! There are several exceptions. All Stafford loans, PLUS loans for educational costs (instead of for tuition), consolidation loans under FFEL and Perkins loans.

Suspended payments will not hurt your credit. Interest will not accrue during this time either. Automatic payments are cancelled. To make a payment anyway, it will need to be done manually. Payments during the suspended period are applied to already accrued interest first and then principle. If financially able, making student loan payments on federal loans will pay down the loan faster as interest is not accruing for 6 months.

There is also a provision for employers to pay up to $5,250 annually of an employee’s student loans tax-free. This provision applies to payments made from March 28, 2020 to December 31, 2021. This cap includes other employer provided educational assistance. This might be a powerful tool to reward employees for 2020 and 2021.

Note: Some of the student loan material came from sources I trusted mostly. However, I was unable to verify all the material. I will update soon when I can verify this information with certainty..

 

Unemployment Benefits

For those impacted by COVID-19, funding has been provided for unemployment benefits, even if you exhausted state unemployment benefits or normally do not qualify for state benefits (self-employed, excluded members of a small business, etc.) These benefits run from January 27, 2020 to December 31, 2020.

There is also an additional $600 per week for up to 4 months, along with state benefits. Once state benefits expire, an additional 13 weeks of unemployment benefits are funded by the federal government.

All unemployment benefits are managed through your state’s unemployment office. My office has heard from clients some states are not up to speed on this yet. It may take persistence to get all the benefits you qualify for.

 

Required Minimum Distribution

The required minimum distribution (RMD) are waived for 2020.

 

Retirement Plan Distributions

Retirement plan distributions prior to age 59 1/2 face a 10% penalty in addition to the income taxes on the income. The CARES Act allows individuals to take a distribution of up to $100,000 from a qualified plan without the 10% penalty. The income tax on the distribution is still subject to income tax, but can be paid 1/3 each year starting in 2020. If the distribution is coronavirus related the distribution can be repaid to an eligible retirement plan within three years to avoid the income tax on the distribution as well.

Some states also have an early retirement plan distribution penalty (i.e. Wisconsin). The state penalty usually reflects the federal penalty. However, each state may treat this differently. Many problems can exists if the state of your residence does not follow federal law. For example: Your state may subject distributions to income tax in the current year. Later repayments to a qualified plan might be treated as an excess contribution on the state level. It is vital you discuss these issues with a competent tax professional before using this provision of the CARES Act. There are many considerations from a state tax standpoint beyond the federal CARES Act.

 

SBA Economic Injury Disaster Loan Grants

Small businesses have many tools from the CARES Act to deal with financial problems stemming from the coronavirus. My office was inundated with calls about the $10,000 grant provided to all businesses. Actually, this is technically a loan grant that is forgiven and is not added to income when it is forgiven.

Clients calling about this are right. Most small businesses will qualify (I think). The question is: How long will it take for money to arrive? Your guess is as good as mine. I think it is a good idea for all businesses to file an online application found here

Will everyone who applies get $10,000? Probably not. But many, even most, probably will.

The $10,000 is really “up to” $10,000 and treated as an advance. So don’t start spending before the check arrives. It could be weeks or months before funds arrive.

 

Delayed Payment of Employment Taxes

Employers can delay payment of the employer’s portion of the Social Security payroll tax. This does not apply to the Medicare portion of the payroll tax. 

As a recap: Employees have 6.2% withheld from their wages up to the cap for that particular year. The employer forwards this to the government, along with another 6.2% as the employer’s share of the payroll tax. It is the employer’s portion only that can enjoy a delayed payment. All of the employer’s Social Security portion of the payroll tax from March 12, 2020 to January 1, 2021 can be delayed. Half (50%) is due December 31, 2021 and the remainder by December 31, 2022. 

Self-employed individuals can take advantage of the same delay of payment for 6.2% of their self-employment tax. 

Note: If you receive any loan forgiveness under the CARES Act, including the Payroll Protection Loan Program, you are not allowed to delay tax payments under this provision.

 

Forgivable SBA Loans

Now we come to the elephant in the room. These so-called forgivable loans are shrouded in concerns. Just as the Treasury Department changed the rules on if Social Security recipients must file a tax return, the department changed the rules at least once on the terms of these loans to small businesses

These SBA loans are handled through your financial institution. As of Friday (April 3, 2020) some banks opened for applications. Here is a sample application. Many smaller banks are not ready to accept application. Bank of America in an email to my office outlined their procedures: notably, you must have a lending and deposit history with the bank. I have heard other large banks are easier to work with. 

Applications will start being accepted April 10th for independent contractors and the self-employed.

Payroll Protection Program Loans (PPP) have many details. Rather than make this post any longer, I will refer you to an excellent article in the National Law Review. We will use the National Law Review article in the Facebook Live. The video will be inserted into this post at the conclusion of the event. (See the video above.)

You should also review the SBA page on the topic. 

Here a few highlights to consider. These loan are not guaranteed forgiven! Too many people calling my office think this is guaranteed free money. It isn’t There are many rules to follow before they will forgive the loan.

  • First, employers can receive up to $10 million for 2.5 months of average payroll expense, including health benefits.
  • Second, this is in addition to the $10,000 advance Economic Disaster Injury Loan. 
  • Third, it only applies to businesses with 500 or fewer employees.
  • Fourth, the portion of the loan not forgiven must be repaid over a term no longer than 10 years at an interest rate of 4% or less.
  • Fifth, the amount forgiven is limited to payroll, mortgage interest, rent, and utilities paid or incurred over the 8 week period beginning with the loan origination date.
  • Sixth, if you lay off employees or reduce wages between February 15, 2020 and June 30, 2020, the amount of the loan forgiven is reduced proportionally. 

You are strongly urged to speak with your lending institution you intend to secure funding through for this program. You will need to provide additional information when you apply for the loan. This program is not as easy as the Economic Injury Disaster Loan Grants application. 

 

Additional Resources

In addition to the National Law Review article linked above, I strongly recommend the following resources:

CARES Act Summary by Foley (Pay special attention to the Employee Retention Credit not covered in this post.)

SBA Bridge Loans

SBA Paycheck Protection Program

SBA Disaster Loan Applications

Ward and Smith Review

Text of H.R. 748 known as the CARES Act (Caution: As a bill works through Congress many ideas are floated. Only the bill that became law counts. News reports frequently discuss items that “might” be in the final law. Again, read the final bill that became law for an understanding of the provisions.)

 

Stay safe, kind readers.

 


 

 

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