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Time To Regroup

Many of us may have avoided looking at our investment portfolios after the major economic disruption brought on by the closure of non-essential businesses. However, as you recover from shell shock, its important to review your financial situation.

INVESTMENTS

Financial market volatility can throw off asset allocation, so your portfolio likely needs some finetuning. Make sure you’ve allocated the right type of investments with the timing of each goal including short-term, mid-term and long-term. Also consider your tolerance for risk and diversify among asset classes.

TAXES

As Tax Day for 2019 comes and goes, talk to your tax advisor about any potential changes you should consider for the coming year. It’s not too late to alter your strategy in order to lower your 2020 tax obligation.

INSURANCE AND ESTATE PLANNING

The COVID-19 crisis has made us all highly aware that our lives can change in an instant. Maybe it has motivated you to finally draft a will (see Must-Have Documents article) and address any other estate planning needs you may have. It is a very loving thing to do for your family. Now is also a good time to review all of your insurance coverage, which may need adjustments if you’ve experienced major life changes.

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Client Profile

Nicole has been furloughed from her job at a major hotel chain. Her temporary suspension is scheduled to last through August at least. How does this affect her income and benefits?

Nicole can apply for unemployment benefits. Thanks to the CARES Act, she will receive a $600 weekly benefit for all weeks of unemployment between April 5, 2020 and July 31, 2020, in addition to the amount she is entitled to receive under state law.

As a furloughed employee, Nicole may or may not still be eligible for her employer-sponsored benefits, including health insurance. No general rules apply to every situation, as all circumstances are somewhat unique. She should reach out to her human resources department to determine if any changes have been made to her employee benefits.

To help manage her money until then, if Nicole has debt, such as student loans or a mortgage, she should consider the debt forbearance programs made possible by the CARES Act, which suspends payments between March 13, 2020, through Sept. 30, 2020.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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Emergency Funds

The COVID-19 pandemic provided a heightened awareness for the need to have an emergency fund. Because cash flow is key to survival, the government rushed to boost unemployment benefits and provide loans for businesses. Now, as we recover from the COVID-19 crisis and rebuild financially, one of your top priorities should be to build or replenish your emergency fund.

FAMILY BUDGETS

The rule of thumb is to accumulate three-to-six-months’ worth of living expenses over time. To do this, work to find an effective balance between lowering your spending and increasing your earning power in order to boost your ability to save money.

Perhaps one positive aspect of social distancing might be the money you saved with dine-in restaurants and other retailers closed. As businesses reopen, you could continue to save money if you are careful about discretionary spending.

Side hustles are one way to help you earn additional income. Online gigs like tutoring, transcribing and proofreading are options for those with the right skillset. Delivery drivers are also in high demand.

BUSINESS RETAINED EARNINGS

If you are a small business owner, you need to concern yourself with managing cash for your business, too. Simply put, this cash account consists of net profits and is referred to as retained earnings.

In normal times, retained earnings can help tide a company over during inevitable cash flow issues and provide the flexibility to take advantage of potential opportunities, such as inexpensive inventory or an acquisition. But retained earnings can also be used as an emergency fund. And as we all witnessed, having access to cash can help increase the odds that your company will survive a crisis.

As your business begins to adapt to the new normal, it’s important that you monitor expenses aggressively and work closely with your financial professional to choose the savings vehicle that is right for your retained earnings fund.

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2019 Tax Filing Deadline Extended

In order to help businesses and individuals cope with the fallout of the COVID-19 crisis, the IRS extended the 2019 federal tax filing deadline from April 15 to July 15, 2020. The extension also applies to 2019 traditional IRA and ROTH IRA contributions. Payment of 2020 first and second quarters’ estimated taxes is also postponed to July 15, 2020.

It’s important to note that some states—but not all—have extended filing deadlines. Check with your state to avoid late penalties.

Need More Time?

Don’t miss the July 15 deadline because any taxes filed on July 16, 2020 or later will be subject to penalties and interest accrual— unless you have filed for an extension to October 15, 2020. To apply for the extension to October 15th, individuals must file IRS Form 4868 while businesses need to file Form 7004 by July 15th.

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Getting Back To Business

On average, only 40 to 60 percent of businesses recover after a disaster, according to FEMA. That is why having a disaster recovery and business continuity plan at the ready is so important. If you don’t have written plans to help you get back to business after the recent shutdown, take notes so you can draft them later.

THE NEW NORMAL

The COVID-19 pandemic is very different from a flood or fire, triggering creative adjustments to a typical recovery plan. For example, the need for safe distancing and a sanitized environment for those who must be at the workplace is completely new. Employees continuing to work from home longer may add a new twist, too.

FINANCIAL ASSISTANCE

Financial aid is common during disaster recovery, but this time it’s different. If you received a federal loan, make sure you follow the rules to the letter. Stay apprised of any new assistance packages and be prepared to apply quickly.

CRITICAL SUPPLIERS

Identify which of your vendors could jeopardize your business and develop a contingency plan in case they are unable to deliver needed goods or services.

REDEFINE SERVICES

Chances are that some businesses may not look the same as they emerge from the COVID-19 lockdown. If your business model doesn’t seem sustainable, get creative and act quickly.

CHECK INSURANCE COVERAGE

Business interruption insurance is generally very important after a disaster. However, this time insurers have been reluctant to pay claims because company operations were interrupted due to a government-mandated shutdown of non-essential businesses, not a natural disaster. If you have insurance, stay updated on the status of your claim. If you do not have business interruption insurance, apply for coverage as soon as you are back up and running. Also, take time to refine your business recovery plan because you never know if a natural disaster could strike.

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July 2020 ClientLine Newsletter

Getting Back To Business – having a disaster recovery and business continuity plan at the ready is important.

2019 Tax Filing Deadline Extended – several deadlines were extended from April 15 to July 15.

Emergency Funds – the COVID-19 pandemic provided a heightened awareness for the need to have an emergency fund.

Client Profile – how does a temporary suspension affect income and benefits?

Time To Regroup – as you recover from shell shock, its important to review your financial situation.

Must-Have Documents – a will, powers of attorney and an advance directive are essential elements in an overall strategy to protect the ones you love, providing a measure of certainty when you can’t.

Question and Answer

Short Bits

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Short Bits

FEDERAL STUDENT LOAN RELIEF

Individuals with federal student loans can defer their payments for up to six months under the CARES Act. If you’re facing hardship, you can suspend your payments until September 30, 2020 without accruing additional interest. This will happen automatically, meaning you don’t need to contact your loan services to take advantage of federal student loan forbearance.

CHARITABLE GIVING FOR COVID-19

The CARES Act includes a provision to increase deductions for charitable giving during the crisis. If you don’t itemize your taxes, you can take an above-the-line deduction of up to $300. In other words, you don’t have to pay taxes on that amount. If you do itemize your taxes, you can deduct gifts up to 100% of your adjusted gross income, rather than the usual 60%.

PUBLIC TRUST

Trust is high in public health officials like the Centers for Disease Control (CDC), according to a recent Gallup poll. Government health agencies earned an 80% approval rate, while hospitals topped the list with 88% approval. The bottom of the list was the news media, which only had a 44% approval on its response to the coronavirus.

MORTGAGE REFINANCES SPIKE

With the Fed lowering the federal funds rate to near-zero in March, mortgage rates have also dropped significantly. As a result, homeowners have been scurrying to refinance their mortgages to take advantage of this savings opportunity. In the last week of March, refinance applications jumped 168% from the previous year. They also increased 26% compared to the week before. Mortgage applications for new homebuyers dropped 24% year over year, as measured by the MBA Purchase Index. This is largely due to the economic uncertainty surrounding COVID-19.

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Question and Answer

Question:

I am filing taxes on July 15. Can I still contribute to my IRA?

Answer:

Yes, but your income and tax filing status will determine if your traditional IRA contributions are tax-deductible. For example, if you are covered by a retirement plan at work and your tax filing status is single or head of household, you can make a tax-deductible contribution of up to the limit of $6,000 if your modified adjusted gross income (MAGI) is $64,000 or less. Take a partial deduction if your MAGI is between $64,000 and $74,000.

If you file jointly or are a qualified widower, the income limit for a full deduction is $103,000. Married taxpayers filing jointly have no income limits to qualify for tax-deductible contributions when neither has a workplace retirement plan. If your spouse has a workplace plan and you don’t, take a full deduction if your MAGI is $193,000.

Question:

I was laid off because of COVID-19. Will I have to pay taxes on my unemployment benefits?

Answer:

Yes, unemployment benefits are generally taxed at federal ordinary income rates. Some states also count unemployment benefits as taxable income while others exempt it. You can opt to have 10% withheld from each payment. No other percentage or amount is allowed.

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Payroll Tax Credit Eligibility

The CARES Act’s new Employee Retention Credit is an alternative to receiving a loan through the Paycheck Protection Program (PPP). Businesses may choose the credit or PPP loan, if available. Unlike the PPP, the tax credit does not have a limit on the size of your business, making it an option for larger companies that don’t qualify for the PPP.

The Employee Retention Credit helps businesses to retain employees during the current economic crisis. The credit equals 50% of qualified wages and qualified allocable health care expenses paid to staff members between March 12, 2020 and December 31, 2020. The maximum credit per employee is $5,000 per quarter during that period.

In order to be eligible for this credit, however, the IRS states you must meet one of two qualifying factors. The first is if your operations have been suspended in any way because of the government’s restrictions on commerce, travel, or group meetings due to COVID-19. The other eligibility factor is if you experience a “significant decline” in gross receipts for the quarter. The IRS defines a significant decline as gross receipts totaling less than 50% than what they were in the same quarter for 2019. Once gross receipts reach 80% of the previous year’s quarterly numbers eligibility for any credit ends.

The employer is not required to pay qualified wages if they qualify for the program, and can choose to opt out of claiming the Employee Retention Credit.

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Client Profile

At the beginning of the year, Phil, age 40, took out a 401(k) loan to use as a down payment on his new home. When the coronavirus hit, Phil was laid off from his job at a travel tech firm as flights all but came to a standstill.

Along with the bad news of losing his job, Phil also found out that his outstanding 401(k) loan balance of $20,000 will be due in full by April 15, 2021. What options are available to Phil?

Phil must either repay the full loan balance by the deadline or treat the amount as a distribution. In the first scenario, he must save over $2,000 each month in order to pay back the loan by April 2021.

In the second scenario, Phil will have to pay state and federal income tax on the money withdrawn. However, thanks to the Cares Act, the 10% penalty for the withdrawing the funds before age 55 will be waived. Depending on how quickly he returns to work, the distribution may even bump him up into a higher tax bracket.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.