Coronavirus Stimulus Package F.A.Q.
No matter where you stand on government spending and the growing federal deficit, one thing is certain…the government is trying. At least Congress and the Federal Reserve are trying. The unprecedented $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act provides fast and direct economic assistance to American workers, families, and small businesses to counter the economic impact of the coronavirus. So how will it affect you? Below are frequently asked questions and answers about the stimulus package.
Let’s talk money. How much will my direct payment be?
The bill provides a direct payment of $1,200 to individuals ($2,400 for joint taxpayers) in the form of a tax credit. On top of that, you can expect to receive a flat $500 for each child. Keep in mind, in order to receive the payments, you need to fall under a certain income threshold. Your income is based on your 2019 tax return unless you have not filed yet, then you can use your 2018 tax return.
The direct payments phase out at $75,000 in income for singles and $150,000 in income for joint taxpayers. If you earn over this amount, you’ll receive 5% per dollar of qualified income (or $50 per $1,000 earned) up to the phase out limit.
The payments phase out completely at $99,000 in income for single taxpayers with no children and $198,000 in income for joint taxpayers with no children. So, if you’re single and you earn over $99,000, or married and earn over $198,000, congratulations, the government thinks you make too much money to benefit from these payments. The chart below illustrates how much money you can expect to receive based on your filing status and income:
It’s important to remember that these payments are not taxable! Because they are considered tax credits, they are not taxed as ordinary income. That means you get to keep every dollar of the stimulus payments that you receive.
When will I get my money?
Most payments should have already been received by mid-May. If you are receiving a check in the mail as opposed to direct deposit, you may have to wait another several weeks to receive your payment.
How do I determine if I’ve received my payment?
The IRS released an online tool to check payment eligibility and status.
Has the government done this before?
Yes, recently, but not to the same degree. You may remember getting a direct payment from the government during the 2008-2009 global financial crisis. In 2008, President George W. Bush signed the Economic Stimulus Act of 2008, a $152 billion stimulus package designed to counter the upcoming recession. The bill included direct stimulus payments of $600 to Americans in the form of tax rebates.
Just a year later, the US rolled out a $787 billion stimulus package known as the American Recovery and Reinvestment Act (ARRA) of 2009. This bill included tax breaks and spending projects aimed at job creation to revive the US economy after the housing crash.
These two bills came in at just under $1 trillion in government spending, while the CARES Act is twice as expensive at $2 trillion.
How does the unemployment insurance work?
The CARES Act provides unemployment relief to a greater number of people who would not otherwise be eligible for these benefits including self-employed, part-time, and gig workers. On top of state-provided benefits, the federal government will provide $600 per week in benefits for up to four months.
The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed workers from getting benefits as soon as they are laid off by fully funding the first week of unemployment income for states that suspend such waiting periods. Additionally, the federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits.
Unlike the direct income payments, unemployment benefits are taxable - likely at both the federal and state level.
What about student loans?
The CARES Act automatically suspends principal and interest repayment on federally-held student loans through September 30. In order to determine if your student loans are eligible, ask your loan servicer if you have a federally-held loan or you can log on to studentaid.gov and look at the loan detail to see if it lists the Department of Education as the lender. If your loan is eligible, there is no action needed to suspend payments, as this has been done automatically.
If I need money, where should I take it from?
If you are affected by the coronavirus, the CARES Act allows you to access money that you wouldn’t normally have access to. While, it’s best to use savings in a cash reserve for unexpected expenses, you can consider pulling from retirement accounts if you don’t have an emergency fund.
You are able to withdraw up to $100,000 from retirement plans including IRAs, 401(k)s, 403(b)s, 457 plans, etc. without paying the mandatory 10% “early withdrawal” penalty. This penalty typically applies to withdrawals taken from retirement plans prior to the age of 50 ½. These withdrawals are still taxable as ordinary income, and you need to pay the taxes over the next three years.
You can also take a loan from workplace retirement accounts such as 401(k)s, 403(b)s, and 457 plans. Under normal circumstances, you are usually able to take a loan of $50,000 or 50% of your vested balance, whichever is less. The CARES Act increased this to the lesser of $100,000 or 100% of your vested balance if you have been adversely affected by the virus. You are required to repay the loan within five years.
What about RMDs?
Investors over the age of 72 usually need to take Required Minimum Distributions (RMDs) from retirement plans. Because these withdrawals are taxable, the IRS wants their tax income each year after you reach retirement age. The CARES Act, however, eliminates the need to take RMDs for 2020. This also applies to RMDs that would otherwise be required from inherited IRAs. This benefit may allow retirement portfolios to recover more quickly after the coronavirus-induced market downturn and help investors maintain and grow their tax-deferred savings as things improve.
Can I expect a second round of stimulus payments?
A second relief bill called the Heroes Act was recently passed by the House of Representatives, and it proposes another round of stimulus payments for $1,200 later in the year. Even though the Act was approved by the House, it still needs majority approval by the Senate, and finally, a sign-off by President Trump. Negotiations are expected to take place over the coming weeks within the Senate.
Though the markets have begun to recover since their initial downturn in March, a lot of unknowns remain. Check out Financial Planning Actions Amidst Coronavirus Uncertainty to learn how to make smart money decisions during the pandemic.
Do you want to talk about how the CARES Act impacts you directly? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.