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.

 


 

 

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?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

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.

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

Two major tax increases are about to crush middle class Americans. The first tax increase has already been passed into law and will soon go into effect. The second massive tax increase is more sinister. The amount of the increase has yet to be determined, but we can get a good idea how much will be pried from your wallet if you don’t take steps to defend your wealth.

The Tax Cuts and Jobs Act of 2017 (TCJA) lowered taxes for the vast majority of individuals and regular corporations. There were a few losers. Taxpayers with high state and local taxes (SALT) found their deductions declining faster than rates fell causing a sharp pain behind their left eye on April 15th.

Other taxpayers feeling the pain of a tax increase include truckers, sales people, artists and others with work related expenses. Unreimbursed employee business expenses were eliminated. Truckers (and others) no longer can deduct their work expenses. The TCJA hurt a large number of hard working Americans. Even the mortgage interest deduction was slightly curtailed. Not as many felt that sting, but all the same, the TCJA was uneven in reducing taxpayer liabilities.

Regular corporations saw the biggest benefit. Corporations now have a flat 21% tax rate. Except for corporations with less than $50,000 in profits, this was a tax cut.

Small business owners fared well, too. The qualified business income deduction (QBID) lopped off 20% of profits from the taxman. Income property owners also benefited from QBID, but with a different formula. 

Here is where is turns ugly. Regular corporations saw a permanent cut in rates; individual tax cuts were only temporary. Truckers might find the reversion back to 2017 tax rules in 2025 a reprieve. The bulk of taxpayers, however, will see a serious tax increase. 

 

Planning for the Inevitable

Rumors have surfaced that a Tax Cut 2.0 is in the works where the temporary tax break for individuals would be extended another 10 years to 2035. The treasury will suffer a $1.4 trillion reduction in tax collections over the time period involved if this is the case. Regardless, the proposal will not pass prior to the election and once the election is past, promises are less likely to be kept.

I place the odds of taxes reverting to 2017 laws at 80%. That assumes taxes are not hiked earlier after the election when the new Congress sits with whomever wins the White House. The odds the temporary tax cuts for individuals get extended to 2035 is less likely at 20%. More on this in the second tax increase discussion below.

Several tax planning opportunities exist under the temporary rules. The amount of long-term capital gains taxed at 0% is much higher right now. Those affected by the SALT limitations need to throw out old tax theory until rules revert back to before the TCJA. Tax brackets are lower and extend to higher income levels. These and other changes from the TCJA mean you must be multi-year tax planning or you will seriously overpay your taxes.

Here are some of the things you need to consider when reviewing your long-term financial planning as it involves taxes:

  • Forget old rules of accelerating deductions and delaying income. It doesn’t work for individuals in most cases anymore. Preserve those deductions as long as possible in anticipation of the old rules kicking back in where they have more value.
  • Business owners need to forget the above rule as well. QBID has turned that philosophy on its head! Business owners — and to a lesser extent, income property owners — want to accelerate income and delay deductions, especially when the end of the temporary tax cuts approaches. Business owners get up to a 20% non-cash deduction on profits under current tax law. 
  • Truckers, musicians, sales people and anyone else with large amounts of unreimbursed employee business expenses needs to think of ways to delay some of those expenses. I understand it is hard to delay many of these expenses and here is an alternative. You must always be aware of any costs you can defer. If you can slip it far enough into the future the expense might reduce future taxes, whereas, they have no current tax benefit.
  • Pay property taxes as late as possible without incurring a late fee. Preserve as many SALT deductions as you can. At some point these expenses will potentially regain their larger deductibility. Pay at least $10,000 of SALT since that amount is deductible if you normally itemize. Otherwise you want to push out as many SALT expenses as possible for as long as you can. Once again, the idea is to preserve as many deductions as possible for when they could regain deductibility.
  • The 0% tax bracket for long-term capital gains is very high at this time. Tax loss harvesting might be the worst idea at this time. Tax gain harvesting has some powerful incentives while the TCJA remains in effect for individual taxpayers. Locking in gains at 0% or even 15% could amount to serious tax savings.
  • Be sure to consider the other effects your actions will have on your tax picture. While you might enjoy a 15% long-term capital gains rate with tax gain harvesting, you also need to consider the Net Investment Income Tax issues if you take this to higher income levels.
  • Lower income taxpayers also need to consider Social Security benefits. Accelerating income might increase the amount of Social Security benefits subject to tax.

There are many additional tax planning options under the TCJA. I encourage a serious conversation with a qualified tax professional to maximize your benefits. (Wait until after tax season before jumping every tax professional you know so they can get their tax season work completed in a timely fashion.)

Virtually nobody is thinking long term with these tax issues. Nearly every client in my office is getting advice that will affect them in future years and the dollar amounts are not small. Consulting clients find I am drifting strongly toward multi-year tax issues. Saving money today is not enough! How much you pay in tax for all years is a far better planning strategy!

 

The Second Secret Tax Increase

The first tax increase discussed above is fairly easy to plan since the rules are defined, at least for now. The rules might change, but the concepts will remain static. Under current tax laws businesses want to accelerate income in most instances and defer expenses to maximize QBID or the lower corporate tax rate. Individual taxpayers want to push out certain expenses to the future where they might have some benefit.

The second tax increase is harder to quantify and involves some logic and deduction. We know the tax increase is coming, but the timing and amount is uncertain.

Estimated federal government revenues for the 2019-20 fiscal year are estimated at $3,644.8 billion; outlays are projected at $4,745.6 billion. (See tables.) This leaves us with a projected deficit of $1,100.8 billion. This gets added to the credit card, aka the national debt which is now over $23 trillion. The actual deficit will be different, of course. It could be better or worse. In any case, the amount of debt being added is huge and these are economic good times. What happens when the economy slows?

At some time the party will end. I refuse to call an expiration date because many people much smarter than I am have called it wrong up until now. What we do know is this cannot go on forever. Eventually the price will be paid. Inflation or lack of confidence in the government’s ability to repay the debt will effectively end the party. If the government can’t support the debt the house of cards collapses.

The national debt in and of itself is not bad. If the debt rises at less than the rate of economic growth the debt would actually be getting easier to support. Unfortunately, the debt is rising faster than economic growth currently. Therefore, the national debt, as a factor of GDP, is growing. That is unsustainable. The only question is: When will it end? And will we regain fiscal sanity before the forces of nature enforce it upon us?

A closer look at the federal budget will outline the seriousness of the issue and why it will end sooner rather than later. 

We have an estimated revenue for the federal government of $3,644.8 billion this fiscal year. We will assume this number holds true for our examination and no recession makes an appearance. Most of the revenue comes from personal income and payroll (Social Security and Medicare, aka, FICA) taxes. (Table 5)

We need to make some logical conclusions on where the nation’s finances are headed and the likely consequences. The real question is: How many bills can be paid with $3,644.8 billion of revenue?

Looking at Table 6 we see the biggest expenses for 2020, in order, are: Social Security, national defense, Medicare, health, income security and interest on the debt. If we drop income security to zero and forget every other item on the spending side of the budget we can balance the books! Of course that means TSA is gone. Just think! No more waiting in line to enter a plane. Very convenient. No more Ag Department. Yeah, food will go unregulated. But the corporations will take care of that just fine. Right? No more R&D, no more housing or FHA loans, no student loans, no development, no international or wall on the southern border, no energy, no immigration policy. It would be funny if not such a serious issue.

All that remains are Social Security and Medicare, national defense, health and interest on the debt. Obviously we can’t cut spending close to enough to balance the budget. Well, unless you want to cut Social Security and/or Medicare. But do we still collect the payroll taxes for these expenses if we no longer provide the benefit? So Social Security and Medicare are a nonstarter. 

We could default on the debt and refuse to pay the interest. But, that would destroy American banks and insurance companies. Also, we would never have the ability to borrow again regardless the crisis, so we probably should pay the debt.

Maybe we can cut national defense? Is there anyone in the room who wants to cut the military the amount needed to balance the budget? We could save some by reducing waste. Unfortunately, there isn’t enough waste to cut to solve the budget deficit problem in more than a token amount.

Then we come to health. Well, America has such an enviable health care system it can take come cuts. We are the most expensive in the world and no longer rank in the top 25 in most surveys of health. Besides, a little coronavirus never hurt anyone. Again, this is no joke. We could make meaningful changes to medical care to reduce federal spending and for individuals as well. Still, it will not be enough to stem the red ink.

Obviously this does not work. We can’t cut government spending enough to come close to balancing the books. And all the money printing hasn’t given us economic growth above 3%. The only remaining variable is taxes. Whether we like it or not, they will eventually go up in the near future. (For the record, I like lower taxes. Don’t take my conclusions as wanting higher taxes. My job is always to help clients pay the least tax by law.)

How much will taxes have to rise? We don’t have to cover all spending. If the national debt climbs at a slower rate than economic growth the debt becomes easier to manage in the same way Bill Gates can manage a million dollar mortgage better than someone in the middle class. 

If we assume (I know, I know) inflation hovers around 2% and real economic growth does the same, we get nominal economic growth of around 4%. Yes, that means the national debt can grow around $920 billion per year without the national debt becoming a larger burden compared to the size of the economy. 

There are two issues with my simple analogy. First, it assumes interest rates never climb and forgets about the unfunded liabilities (Social Security and Medicare, most notably) facing the federal government in the near future.

A $300 – $500 billion tax increase could solve the budget problems for the foreseeable future. We would still run large deficits, but if the economy kept growing it would not be a serious issue. The national debt looks big because we are largest economy on the planet. 

There is no doubt sovereign debt is climbing worldwide. U.S. debt is also piling on rapidly. At some point, under the current system, we face a fiscal crisis. A recession throws my modest proposal out the window and balloons the debt fast. Taking steps while the world is wonderful and kind economically makes sense to this weary old accountant.

Taxes will go up. The federal government has shown no desire to stop spending. Individuals received a temporary tax cut only. And still, to fulfill all the promises the government has made will require more money. And you can’t just print it out of thin air unlimited. At some point Uncle Sam will eye your wallet.

There are 6 tables for your review in this post. You can come to your own conclusions with the data. I spent a lot of time playing with the numbers. I will be interested in your prediction for future tax rates and the steps individuals can take to reduce the bite. You can read more about how the federal budget works here.

 

 

 

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?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

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.

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