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MS, MTx, CFA, CFP®, CPA, PFS, CIPM
March 30, 2020
As everyone is aware, the novel Coronavirus (COVID-19) has impacted the global economy and stock markets around the world. In an effort to assist citizens and businesses in this unprecedented time, the Federal Reserve has announced a new round of quantitative easing and dropped interest rates practically to zero. Now our representatives in Congress have negotiated a $2 trillion package, including $4 trillion in loans, to help businesses keep employees, help the unemployed and those laid off, and stimulate the economy with some much-needed liquidity.
The following summarizes most of the important ramifications our clients are likely to witness. I apologize in advance for the length, but there is just a lot of stuff to cover here.
The government is going to send out checks of $1,200 per adult and $500 per eligible dependent. These checks are means tested via your reported adjusted gross income (AGI) according to your most recently filed tax return. In other words, if you haven’t filed your 2019 return yet, they will use your 2018 return, and if you have filed 2019, they will use 2019. The flowchart below should clarify how this will all work.
The last point here is that you will be trued up when filing your 2020 tax return if you received less than you should have. In other words, if your last filing year was 2018 and you were above the threshold, your check will be $0. However, when filing your 2020 return, if your income dropped below the threshold (for example you have been laid off), then you will get the benefit via a refundable tax credit.
Interestingly enough, the opposite is not true! If you qualify for a check now but when you file your 2020 tax return you shouldn’t have, there is no claw back. You get to keep the check.
Planning Opportunity: If your 2018 income put you above the threshold but 2019 will put you under, go ahead and get your return filed as soon as possible! Conversely, if you haven’t filed and 2018 income was lower, wait on filing 2019. And lastly, if you had a dependent come on or drop off your tax return, take that into consideration in whether to file 2019 or to wait.
Example: Our investment manager had one child in 2018 but had another child in 2019. Assuming the income thresholds aren’t reached in either year, it would be better for them to file their 2019 ASAP so they get $2400 (MFJ) + $500 (1 child) + $500 (new child) = $3,400 in checks.
Retirement Plan Distributions
Required Minimum Distributions (RMDs)
Retirement plan account owners are not forced to take distributions for 2020. It is important to note, if you turned 70 ½ last year and delayed your first RMD to April 1, 2020, you MUST take that distribution still. The only distributions that are being waived are FOR 2020. If you have an inherited retirement plan, these RMDs are also waived for 2020.
Planning Opportunity: For those who have already taken their RMDs this year, there are two possible fixes (provided you want to put the money back): I
This planning opportunity does NOT apply to inherited plans. Unfortunately, if you have taken the distribution already, you are out of luck.
You can take penalty-free (not tax-free) distributions from IRAs, 401ks, and other retirement plans of up to $100,000 in AGGREGATE in 2020. The distributions can be repaid over 3 years and the income can be spread over 3 years (if not repaying). However, to qualify, you:
Example: John has $30,000 in an IRA and $150,000 in his 401k. If he is eligible, he could take a distribution of $30,000 from his IRA and $70,000 from his 401k or $100,000 from his 401k, or any other combination not to exceed $100,000. The income would be treated as recognized one-third each year for 2020, 2021, and 2022. He also can pay back the amount over that same time period, allowing him to avoid tax on the distribution.
Retirement plan loans from 401k and 403b plans are increased from $50,000 maximum to $100,000 maximum. However, you cannot take more than 100% of your vested account balance. And lastly, repayment is delayed for 1 year.
Example: Instead of John (previous example) taking $100,000 from his 401k as a distribution, he could take $100,000 as a loan. Repayment would begin 1 year after receiving the proceeds and usually lasts 5 years.
As many of our clients have experienced, with the new standard deduction being twice the old limits, most people don’t get a tax benefit from their charitable giving. We have discussed ways to still get benefits via Donor Advised Funds (DAF) and Qualified Charitable Distributions (QCDs). If you want more information on these, please reach out to your advisor.
Planning Opportunity: Sticking with the older advice of using QCDs, it now makes sense to also give up to $300 in cash to a charity. Alternatively, if using DAFs, in the “off years” you can still do $300 to take advantage of this new allowance.
Example: Andrew utilize a donor advised fund to lump his charitable giving for the next 5 years into the current year (2020). For 2020 it doesn’t make sense for Andrew to do the extra $300 because he is itemizing his deductions. However, for 2021 through 2025, he can give $300 of cash to charity since he will be using the standard deduction for those years.
The next change on charitable giving is for cash donations to charity. Provided the donation is not a DAF or “supporting organization,” taxpayers are limited to 100% of the their AGI (rather than 60% as was the case before).
Student loan payments are deferred (interest free) until September 30, 2020. In addition, employers can pay up to $5,250 toward employee’s student loans (deductible by the employer and tax free for the employee).
Eligible Medical Expenses
HSAs, MSAs, FSAs are all expanded to include over-the-counter medications including “menstrual care products.”
There is also a tremendous amount of unemployment benefits, employee retention benefits, and paycheck protection benefits that are too voluminous to discuss here. As of this writing, 5:45pm on 3/27/2020, President Trump has just signed the legislation into law. It will take some time to work out all the procedures to get checks delivered and more planning opportunities will come to light as we begin dealing with the new rules. As always, if you have any questions or concerns, please reach out to your advisor and we will be happy to help. We pray for your safety and health through these trying times.
Bryan Strike, MS, MTx, CFP®, CFA, CPA, PFS, CIPM is a Senior Financial Advisor at Kays Financial Advisory Corporation. He can be reached at (770) 951-9001 or at firstname.lastname@example.org.
This report and Mr. Strikes’ comments are provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance.
Any security mentioned in this report may not be suitable for all investors. No investment mentioned in this newsletter constitutes a recommendation to buy, sell or hold a particular investment. Such recommendations can only be made on an individual basis after an assessment of an individual investor’s risk tolerance and personal circumstances. Past performance of any investment mentioned is not a guarantee of future performance. Statements regarding the investment concerns and merits of any investment and fair market value computations are strictly the opinion of Kays Financial Advisory Corporation. Employees of KFAC and KFAC clients may have positions and effect transactions in the securities of the issuers mentioned here in.