The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020. The law includes many provisions that impacts both the personal and business finances of Americans as we navigate an unprecedented situation. Since majority of our clients are high-earners in their 30s and 40s, this article has been written to address the components pertaining to that particular group.
Direct Payments
I’ll get straight to the point: you’ve likely made more than the income limit to qualify for the direct payments. The IRS will base this on your 2018 or 2019 tax return — whichever you’ve more recently filed. You can use this stimulus payment calculator to double check or review this handy FAQ directly from the IRS.
Even though you may not qualify, your family members, employees, and friends may be eligible for direct payments. You can educate them on this benefit and encourage them to make sure their information is up-to-date with the IRS. If they’ve been getting refunds or social security payments via direct deposits, they will want to ensure that bank account is active to receive the direct deposits. If they’ve been getting their government payments via mail, then they should ensure their addresses are up to date.
This is also a time to be on alert about related financial scams designed to steal your personal information. Do not follow any prompts via phone calls, texts, or email to enter your banking or personal information. Go directly to the IRS website for any updates or questions you have about direct payments.
Unemployment Benefits
The act boosts unemployment benefits. If you experience an interruption to your income via job loss or furlough, you can file for unemployment and will receive an extra $600 per week for 4 months (through July 31, 2020), in addition to your state’s maximum unemployment benefits. Most states offer benefits for up to 26 weeks of unemployment benefits. The CARES Act now has a provision for states to extend the benefits duration to Dec. 31st, 2020 for eligible workers. The waiting period of one or two weeks, depending on state, has also been waived.
Some examples:
NY Maximum Weekly Benefit:
- $504 + $600 (CARES Act booster) = $1,104 per week for 4 months.
- After 4 months, benefits drop down to $504 per week.
NJ Maximum Weekly Benefit:
- $713 + $600 (CARES Act booster) = $1,313 per week for 4 months.
- After 4 months, benefits drop down to $713 per week.
CT Maximum Weekly Benefit:
- $631 + $15 per dependent (max. 5) + $600 (CARES Act booster) = $1,231 to $1,306 per week for 4 months.
- After 4 months, benefits drop down to $631 to $706 per week.
Self-Employed Workers: Self-employed, freelancers, and contract workers impacted by the pandemic are also now eligible for these unemployment benefits.
Federal Student Loan Interest and Payments
Interest on student loan payments (does not cover loans not owned by the government) will be down to 0 percent through Sept. 30th, 2020. This means that any payments you make between now and that date will apply toward your principal (assuming you don’t have any accrued interest prior to March 13th, 2020 left over) and help you pay off your loan much faster. You do not have to take any action to activate this 0 percent interest period. For borrowers with federal loans, your loan servicer will automatically apply this to your accounts.
For student loan payments, all payments due will be suspended through Sept. 30th, 2020. Your loan servicer should communicate whether automatic debit payments will be stopped as well. If your income hasn’t declined due to COVID-19 and you have an adequate emergency fund, consider continuing your payments during this period, even if you have to do it manually every month. This will help you stay on track to pay off of your student loan debt in a timely manner. If you have other high-interest debt, you could use this student loan “forbearance” period to divert your payments to eliminate higher interest credit card debt or other private loan debt. Again, this is assuming that you have an adequate emergency fund already set aside. If you are short on cash, you may decide to save up these suspended payments to shore up your emergency savings account.
401 (k) Loans & Retirement Account Withdrawals
Loan limits have been increased from the loan maximum of $50,000 (or 50 percent of the vested balance) to a maximum of $100,000 (or 100 percent) of the vested account balance. You must have a COVID-19 related hardship to be eligible for these relaxed rules. The repayment plans on the loans may be delayed up to 1 year. For outright withdrawals from retirement accounts, the 10% penalty for those under age 59.5 has been waived. Withdrawals will still be subject to income taxes, but can now be spread out over a 3 year period.
Raiding your 401(k) for cash is one of the most expensive and least forgiving ways to get money.
Exercise caution before raiding your 401(k) for cash. This is still one of the more expensive and less forgiving ways to get money. Your account has likely taken a hit from recent stock market declines and selling off a portion to get cash means you are converting any paper losses into realized losses. You also miss out on the opportunity to participate in a market rebound since your funds will be out of the stock market. Please be sure to connect with a financial professional if you are contemplating this option for yourself. There might be cheaper ways for you to get access to cash that you should consider first.
Tax Filing and Payment Deadlines
The regular federal tax filing and payment deadlines have been pushed back to July 15th. Most states have also adopted the same extension but be sure to check with your individual state before deciding when to file and when to pay. If you will be owed a refund, you should file early to get access to your cash more quickly. If you owe a payment, then it would be to your advantage if you delayed. Be sure to line up your documents and everything else you might need to file in advance.
Disclaimer: This blog post is not intended to be a substitute for specific financial, tax or legal advice. The article is for educational purposes only. Reproduction of this material is not permitted without written permission.
