Many of you have been keeping tabs on the Coronavirus Aid, Relief, and Economic Security (CARES) Act that is expected to be passed into law in the coming days. It is a lot to take in as the bill is nearly 900 pages long. More details and clarification will come, but here is our initial take on the stimulus package.
Make no mistake, this is meant to be a shot of adrenaline to kickstart the entire economy and is considerably larger (3x) and faster (5x) than what was shelled out during the Financial Crisis. For perspective, the stimulus should inject the equivalent of $7,000 for every man, woman and child in the country. So how does this impact you, your ability to pay bills, and ultimately your wealth?
Income – Cash is king, and consumers drive our economy. It is estimated that one in five people are working at a significantly reduced level or not at all. Unemployment benefits typically cover just over half of someone’s former after-tax wages. The bill is now doubling unemployment benefits for the next four months (with an extra $600 per week, which is $10,000 between now and August). It is also expanding the definition of unemployed to include self-employed folks, “gig” workers, and independent contractors. The duration of normal benefits has also been extended to about 9 months (from 6 months). There is even talk that folks will be disincentivized to go back to work as they will actually be making more on unemployment than if they were working full time. Many reading this may not receive unemployment checks directly; however, think about the impact for those that do. This is huge, as it means that people can pay their bills for the next four months, feel the “wealth effect” and spend money once they are able to do so again. Small businesses, landlords, banks, local governments, and utilities are more likely to be paid and thus recover more quickly as we eventually return to a more normal existence.
Another big cash infusion are the direct checks to most Americans (receive full benefit if Adjusted Gross Income on most recently filed tax return is below $75,000 for single filers and $150,000 for married… the benefits are phased out at $99,000 single and $198,000 married). These are big too. For those who qualify, $1,200 per adult and $500 per child. For a family of four, that can be as much as $3,400 (and tax-free… meaning it is really like earning $5,000 for a middle-class family). These checks go out to everyone who qualifies, working or not.
Expenses – We are spending less already as collectively we are not commuting, vacationing, eating out or entertaining ourselves outside of the confines of our homes. Hopefully, we will feel more confident if our checking account balances hold up over the next few months without taking on other measures. However, there are provisions that provide time and breathing room for some of the largest expenses within anyone’s budget. Basically, any government backed loan will now allow for several months of forbearance (mortgages - delay in payments without hurting credit score or initiating foreclosure process) or suspension (student loans - no need to later play catch-up on payments, no interest will accrue). As we all know, taxes are a big budget item and the U.S. Treasury and the IRS have provided flexibility. Regardless of whether we have filed our 2019 tax returns, any 2019 tax payments and 2020 federal quarterly estimates can be deferred until July 15th, penalty free. Another big expense is saving for retirement, we also have until mid-July to make IRA/Roth and H.S.A. contributions. For those who actually don’t need the money, but would like to reduce taxes and allow more time for their investment accounts to recover, they can skip their Required Minimum Distribution from their IRAs for 2020.
Lines of Defense – Through planning, many of you likely have emergency funds, access to a Home Equity Line of Credit (HELOC) and designated bond allocations in your portfolio to fall back on if need be… but a few more lines of defense have been enhanced (although still look at these as being last resorts). First, 401(k)s and other work-based retirement plans that allow loans will double one’s ability to borrow from their own account, up to $100,000 (or the account balance, if less than $100,000). This means that a married couple can act as their own bank and lend $200,000 to themselves. If needed, it is typically better to sell bonds in a 401k and lend money to yourself than use a credit card to bridge a cash flow gap. Also, we can now “borrow” up to $100,000 from our IRAs, penalty free if you qualify (typically there is a 10% penalty if funds are withdrawn prior to age 59 ½). Note, IRA distributions would not be tax free, but the tax cost could be paid over three years. Also, you would have 3 years to redeposit the funds (instead of 60 days).
Businesses – The items above affect us individually, but the lion’s share of the relief bill is meant to keep the lights on for America’s businesses. Most businesses should qualify for low interest loans to help them shore up their balance sheets. Those loans can “transform” into tax credits/grants if the money was used for payroll, rent or utilities (rhymes with the stimulus for individuals with paychecks, mortgages and bills). Another big cost for businesses is their share of payroll taxes (7.65% of Social Security and Medicare taxes on compensation up to $137,700 per employee, 1.45% on compensation thereafter). Those tax payments can now be deferred for the rest of the year (and split repayment over next two years). Many industries that have been hardest hit will receive extra stimulus such as airlines, health care, hotels, restaurants, etc.
We are in this together and have all felt the weight of this experience. Know that we are here for you, there is a light at the end of the tunnel and that you may now have more “arrows in your quiver” to draw from. Please don’t hesitate to contact us with any questions.
Coronavirus Aid, Relief, and Economic Security Act (H.R. 748)
Wall Street Journal (March 26th and March 27th editions)
The New York Times - https://www.nytimes.com/article/coronavirus-stimulus-package-questions-answers.html
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