The new relief package has been signed into law, which means financial advisors will soon face questions from clients. Take advantage of this opportunity to proactively help them understand what this new legislation might mean for their family or business.
Much of the focus has been on the $600 payments to individual Americans, but there is plenty more in the 5,000-plus pages of the stimulus package, covering everything from unemployment to small business loans, funding for the COVID-19 vaccine and more.
However, for the sake of brevity, let’s cover just a few of the main financial planning points that you’ll want to make sure your clients are aware of. If you want to go beyond the planning side, especially for small business owners, you can learn more about the bill’s provisions here.
Refundable Tax Credit
The $600 individual payments – and the $1,200 payments under the CARES Act in March, for that matter – are based on 2019 tax filing information (or 2018 if no 2019 record exists). Which leads to the question: If you were over the income threshold in 2019, but you weren’t over the threshold in 2020, do you still receive the payment?
The answer is yes you will receive the payments, but it will be as a refundable tax credit when you file your 2020 taxes.
Individuals are eligible for the $600 if they make less than $75,000 as a single tax filer or less than $150,000 as a married couple filing jointly. If they earned more than the threshold, then they can receive a smaller payment, however the phaseout thresholds are capped at $87,000 and $174,000, respectively. In addition, payments of $600 for each dependent child under age 17 are also included in the new legislation. There is no cap on the number of children that qualify.
It is important to note that Congress and the president are still negotiating a potentially higher amount, up to $2,000 per person, that would replace the $600 payment. It is possible that this relief payment will change even after the bill has been signed into law.
If a client did not receive a payment under the CARES Act, they likely will not receive a payment this time around, either. However, be sure to let them know the income thresholds in case they lost a job, had to take a lower salary, had less of a bonus or commission, or took a pay cut this year and now come in under the threshold so they can file for the tax credit.
One last note: If someone received a payment in 2020, but ends up making too much money in 2020, they do not need to return the check.
Retirement Planning Changes Coming Soon?
Interestingly, the new legislation does not include many retirement planning provisions.
Its predecessor, the CARES Act, presented some creative retirement planning provisions that were designed to help individuals use retirement funds without penalty when needed, or avoid withdrawing funds in a down market.
The legislation suspended required minimum distributions (RMDs) and allowed penalty-free distributions from retirement accounts (coronavirus-related distribution), meaning advisors had to help clients determine how these new rules fit into their overall financial and retirement planning.
(As an aside, RMDs are set to resume in 2021, which is something you’ll want to make your clients aware of.)
With the limited retirement planning support in this bill, it’s possible we will see another round of legislation in early 2021 under the Biden Administration.
Biden’s plan was to adjust 401(k) deferrals to become a tax credit instead of a deduction, which would give lower earners more incentive to contribute. Whether that happens in early 2021 – or in the next year at all – is yet to be seen. But it is noteworthy that very little retirement planning provisions appear in this new bill, perhaps setting up further movement on the bipartisan bill that was introduced just a few months ago. The bill, Securing a Strong Retirement Act of 2020, has a number of common-sense retirement provisions and some bipartisan support. In fact, it has already been referred to as the SECURE Act 2.0.
Simplified PPP Loan Forgiveness
For your clients who are business owners, the process just got a lot easier to apply for the Paycheck Protection Program’s forgivable loans.
For loan applications under $150,000, a business will now need to submit a certification to the lender with just three things: the number of employees you are able to keep due to the loan, how much of the loan will be used to cover payroll costs, and an attestation that you’re going to do what you say you will with the money (and that you’ll keep records to prove it).
However, you may want to advise the business wait to file for the loan until after the SBA creates its one-page forgiveness document – a requirement of this new legislation. The new document requires lenders only ask for necessary information for loans under $150,000.
This simplification is designed specifically to help small businesses with the hope that they continue to retain employees despite pandemic-related struggles. Full information on loan forgiveness eligibility and required costs allocated to employee payroll is available on the U.S. Small Business Administration website.
Flex Spending Rollover
Another interesting provision is the ability to roll over flexible spending account (FSA) funds from 2020 to 2021 and from 2021 to 2022. Generally these accounts have a “use it or lose it” stipulation that requires account holders to use the funds by the end of the year. However, some FSAs allow a grace period, up to March 31 of the following year, to get expenses in and the FSA money out of the account. But at some point, money left in an FSA too long can be forfeited.
Be sure to let your clients know they have all of 2021 to use any remaining funds in their account, and be sure they account for the fact they can use 2021 funds in 2022, as well. These rules apply to both health- and dependent-care FSAs. The age threshold for dependent-care FSAs was temporarily extended under the new relief bill to cover expenses for children under 14, up from 13.
Lastly, the new bill allows for FSA plans to permit a prospective change in election amounts for both health- and dependent-care FSAs mid-year in 2021. This means some companies will have to decide if they will hold a mini open-enrollment period in 2021 to allow a mid-year change by the participants.
Charitable Planning Opportunities
The charitable planning provisions from the CARES Act have been extended to 2021, so prepare your clients to think about their charitable giving strategy for next year sooner rather than later.
First, the above-the-line deduction of $300 for individuals and $600 for those married filing jointly that give cash gifts to charities remains in place. This is for non-itemized filers only, but it provides extra incentive to support charitable organizations in a tough economy.
Next, the CARES Act allowed for cash gifts to most public charities of up to 100% of adjusted gross income in 2020. This is normally limited to 60% of AGI. So, if you had a client who plans on selling a business or having an otherwise large tax bill in 2021, they could look to take advantage of this larger than normal charitable deduction opportunity. It is typically not the best planning strategy to have a 100% of AGI charitable deduction, but in some large taxable income situations, an 80% to 90% deduction could make a lot of sense.
In addition, many retirees chose to forgo giving via a qualified charitable distribution (QCD) in 2020 because there were no RMDs. If they waited until 2021 to do a QCD, now is the time to reach out and start the process. For some people who did not make the QCD or an RMD in 2020 (because it was no longer mandatory), they might want to double up their charitable giving in 2021.
It could also make sense for RMDs and QCDs to wait a bit in 2021 to see if any new legislation gains momentum that would change planning. There are a few proposals out there that would have a significant impact, like the SECURE Act 2.0 referenced earlier, that would move the RMD beginning age for some to age 75.
As the Biden Administration sets its sights on the first 100 days, advisors will be keeping an eye on retirement planning provisions and additional COVID-19 relief packages. As most Democrats in Congress – and President Trump – pushed for additional funding to individual Americans, it wouldn’t be a surprise if we see a smaller aid package hit the floor in the early days of the new administration.
In the meantime, focus on helping your clients with their 2021 planning, whether it be receiving their tax credits, applying for a PPP loan (or having one forgiven), adjusting their FSA strategy, rethinking charitable giving strategies for 2021 and more.