It’s Here It’s Here It’s Here

It’s finally here.  Six months of partisan bickering back and forth and we finally have a signed stimulus package.  Say what you want about our Congressional representatives, but they finally delivered a package that has a lot to unpack for individuals and businesses.  All 5,593 pages of it.  The purpose of this blog post is to help you navigate the more relevant pieces of the new legislation and the financial planning opportunities I think you should be aware of.  Technically, the stimulus package, as I’ll refer to it, is comprised of a $1.4 trillion dollar appropriations bill and a separate $900 billion dollar COVID-relief stimulus package.  I’m going to start the post with the parts of the stimulus package that have the broadest applications and then work my way through pieces that are still valuable but not quite so ubiquitous.

Do They Know It’s Christmas

Do you ever realize you didn’t know what the words to a song meant?  Maybe after years singing along, but finally a cerebral moment of “aha, that’s what what means!” stops you in your tracks?

Well I celebrate Christmas and this year we started celebrating particularly early.  As in, the tree is up before Thanksgiving.  Don’t judge me.  That meant we also had the Christmas music going plenty early too and after a few weeks, it all kind of runs together.  But the lyrics to “Do They Know It’s Christmas” hit me like a ton of bricks.  I thought it was just poppy British Christmas music.

“It’s Christmas time, there’s no need to be afraid
At Christmas time, we let in light and we banish shade
And in our world of plenty we can spread a smile of joy
Throw your arms around the world at Christmas time
But say a prayer, Pray for the other ones
At Christmas time it’s hard, but when you’re having fun
There’s a world outside your window
And it’s a world of dread and fear”

Hard not to identify with that in 2020.  I think anyway. There’s a lot of people hurting out there right now, and there’s a lot of people not hurting right now.  Take for example, the disparity in unemployment rates between college-educated folks and those with a high school diploma.  According to the BLS, college graduates had a 4.2% unemployment rate in November 2020 compared to a 7.7% unemployment rate for high school graduates (also November).  Just for grins, the TOTAL unemployment in November 2019 was 2.9%.  Those same groups measured 2% and 3.7% unemployment rates (seasonally adjusted) at that time, respectively.

What were the rates for those without a high school diploma, you didn’t ask?  5.3% in November 2019 vs. 9% in November 2020.  This isn’t an advertisement for college, but it does highlight the role education plays in employment prospects.

We can slice and dice the numbers all kinds of ways until we’re both asleep, but I think the big takeaway is that college-educated workers are still more employed today (well a month ago) than high school dropouts were this time last year.  The pandemic is hitting people very differently across a variety of spectrums, but in short, people are out of jobs and perhaps the primary motivation of this stimulus package was how to get money to people or make life a smidge easier, financially.  The easiest way to do that is to send people checks, unemployed or not.

How Much Will You Receive?  That Depends…

I love coffee.  I’m thrilled to be sporting a fancy new coffee maker that grinds the beans immediately before it brews.  As soon as my eyeballs open, I am looking forward to the first cup to put some pep in my step.  That’s not a bad parallel to the stimulus package.  The U.S. economy is primarily driven by consumption.  So giving people money to spend is arguably a pretty good way to keep the economic engine going.  A little bit of caffeine, if you will.  The most recent stimulus package includes $600 payments for qualifying individuals, with some nuance for family dynamics and income phaseouts.  All in all, about 168,000,000 people are estimated to receive some form of a benefit.

The easiest way to think about who gets a stimulus check is to assume everyone gets $600 to start, and then certain people lose it.

Single filers will receive $600.  Married filers will receive $1,200 (combined).  Head of household filers will receive $600.  Then add $600 for each child under 17. 

Single filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $75,000.
Married filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $150,000.
Head of household filers start to lose part of the benefit once their Adjusted Gross Income (AGI) exceeds $112,500.

Now that we have established our starting point ($600 per person), let’s have some fun.  Remember, each child under 17 will qualify individuals for an additional $600.  For example, a married couple with two kids under 17 would qualify for $2,400 to start (4 x $600).

Then we have to look at their income to make sure they can keep all of it.  Filers will lose $5 of benefit for each $100 of income over the AGI threshold per filing status.  Say they had a combined AGI of $120,000.  They get to keep the full $2,400.  But what if they have a combined AGI of $160,000?  They’d be $10,000 over the limit and will lose $500 of their stimulus check due to the phaseout (($10,000 excess income ÷ $100) x $5 = $500).  Their recovery benefit would decline from $2,400 (initial, full amount) to $1,900.

The same couple WITHOUT kids would see their recovery benefit decline from $1,200 to $700.  The children “protect” generate a larger base benefit to start with that effectively shields more of the couple’s income from the income phaseout.

So in a sense, having more children under 17 qualifies you for more recovery benefit to start and protects more of that benefit from the income phaseouts.

If you would like some help figuring out what this will amount to for your family, there’s a pretty good calculator here.  The IRS updated their “Get My Payment” tool you can use to track the status of your stimulus check.

Without children, single filers will phase out of any recovery benefit if they have an AGI over $87,000.  Married couples without children will lose their entire benefit (again, without children) once they cross over $174,000.

These “recovery benefits,” or stimulus checks will be based on 2019 data.  So, if you had lower income in 2019 than 2020 (count your stars), you may see a stimulus check headed your way.  The best news of all?  If your 2019 tax return qualified you for a stimulus check but your 2020 income would make you ineligible, the government gives you a pass.  You get to keep the money.  There won’t be any “clawback” of the funds.  The stimulus check amounts to a 2020 tax credit paid in advance.

If you made too much money in 2019 to initially qualify for the stimulus check but your income has declined to the point in 2020 where you WILL be eligible, you will get the credit when you file your taxes.  The same theory applies to those of you that had a baby in 2020.  You’ll receive the credit for your new little bundle of joy when you file your taxes.  Perhaps a small incentive to file your taxes ASAP this year!

There are a couple other bits of nuance you should know about.  If you’re eligible, you don’t have to do anything to get the money.  Most people will get the money via direct deposit, but the IRS will be mailing checks if they don’t have your bank information on file.  The direct deposits started last night, according to Steve Mnuchin.  Paper checks started going out today.  Mixed-immigration-status families will also be eligible for this payment AND the initial CARES Act payment (potentially $1,800 total).  

Are You Unemployed?

If stimulus checks were the 1, expanded unemployment benefits are the 2 in the “1-2 punch” of governmental support to individuals.  As I mentioned earlier, lots of folks have experienced various stretches of unemployment this year.  The government responded with expanded Unemployment Compensation (UC) benefits via the CARES Act, and has renewed those benefits with a few variations this time around.

As a brief refresher, Pandemic Unemployment Assistance (PUA) originally provided for 39 weeks of benefits for those that would not traditionally qualify for UC (self-employed, independent contractors, etc.).

Pandemic Emergency Unemployment Compensation (PEUC) originally extended regular UC by an additional 13 weeks (also for a total of 39 weeks)

Finally, the Federal Pandemic Unemployment Program (FPUC) provided the additional $600/week of UC on top of the regular UC benefit.

Now, we have a frankenstein version of that.  The government funded eleven more weeks of UC, including an additional $300/week (on top of the regular unemployment benefit) through April 10th, 2021, provided you haven’t claimed 50 weeks of UC yet.  VERY IMPORTANT: APPLICATIONS WILL BE CLOSED ON MARCH 14, 2021. Filers that haven’t exhausted benefits yet will be able to continue logging in to file weekly claims.

This additional $300 is down a bit from the additional $600/week previously established by the CARES Act and only covers 11 weeks.    The government also provided funding for the traditional 1-week waiting period for unemployment benefits so unemployed individuals don’t have to endure a gap in benefits.

Individuals that would normally be excluded from UC (self-employed, independent contractors, etc.) are also eligible for an additional 11-week extension of benefits through April 10th, 2021.  Folks with mixed income, that is a combination of self-employment and W-2 income, may also be eligible for an additional $100/week (on top of the additional $300/week!) benefit, BUT the bill gives states the ability to opt out of the additional $100/week benefit.  So yea…the money is there for the taking from the Federal government, but we’ll see if states actually want to try to get that additional money out.  I’m confident there will be additional guidance given for all of these programs and I’ll do my best to update this blog as I come across pertinent developments.

Change Is The Only Constant

Aside from direct payments and UC, the latest stimulus package yields several notable changes for taxpayers that present planning opportunities.  Again, I will try to organize these benefits in order of their appeal to the masses.

Do You Have Student Loans?  Run, Don’t Walk To Your HR Department

The CARES Act made it possible for employers to amend their tuition reimbursement programs to also give employees money for student loans.  That’s up to $5,250 of tax-free money to pay down student loans!  The stimulus package allows for the continuation of this benefit/amendment through 2025.

I’ll say this again (you’ll have to close your eyes and just imagine the sirens going off): This could be a $5,250 ANNUAL TAX-FREE BONUS.  But, your employer has to play ball.  The payments can be made directly to the lender or to the employee to pay down their debt.

There are caveats to prevent benefits being used to disproportionately benefit highly-compensated employees and/or owners, their spouses, and dependents, so your mileage may vary.  However, this is a tremendous planning opportunity and I don’t want to exaggerate, but you should all do a proverbial Kool-Aid man entrance into your respective HR department when you get back to work.

Do You Have An FSA?

Flexible Spending Accounts (FSA) usually won’t allow for a mid-year change to the contribution amount.  So once you make that election, you’re stuck with it.  Which was particularly problematic for taxpayers with FSA’s, especially dependent care FSA’s.  They were making contributions to an account they couldn’t use, or didn’t need to use as many parents shifted to working from home during 2020.  To make matters worse, FSA’s are very rigid when it comes to using the funds, with limited options to avoid forfeiture if the funds aren’t exhausted.

Some employers will allow employees to roll over up to $550 of their remaining Health FSA balance to the next year, or the employer might grant the employee a grace period of an additional 2.5 months of the following year to use up all the funds.  The general idea with these accounts is “use it or lose it” though.

Congress recognized this and allowed employers to allow employees to roll over unused 2020 FSA balances to 2021, and will also allow rollovers to occur from 2021 to 2022.  It is important to note this is not required, so check with your HR department to see if your plan will adopt such provisions.

Similarly, Congress has allowed employers to extend the grace period for unused FSA balances for 2020 and/or 2021 to 12 months instead of 2.5 months, but this is also up to the employer.

Finally, Congress will allow FSA plans to allow mid-year changes to your FSA contribution amount during 2021.  This is a departure from the aforementioned rigidity that usually governs contributions, locking employees into a contribution amount once they make the election.

Depending on your child care or health care expenses, you may want to entertain some combination of rollovers and modified contributions, if your FSA plan(s) allow it.

Feel Like Giving To Charity?

The CARES Act established a $300 above-the-line deduction for charitable contributions to 501(c)(3) organizations.  Unfortunately, that didn’t matter if you filed single or jointly.  The stimulus package fixed this and doubled the benefit for married filers that do not itemize their deductions through 2021.

Congress also allows you to donate enough cash to completely zero out your tax bill in 2021.  This makes for poor tax planning, but it is an option for those with the funds and the charitable inclination.  If you find yourself in a particularly high tax bracket and very eager to donate money to charities, it would probably be a better idea to spread the donations over the course of several tax years to offset the income at the highest tax bracket and realize the greatest tax benefit.  Consult with your tax professional for additional guidance.

Did You Lose Your Job?

This is a tax credit you need to have…you guessed it…earned income to qualify for.  A lot of people lost their jobs in 2020 and this might jeopardize their ability to claim this valuable credit (over $6,000).  Congress responded by allowing individuals to use their 2019 tax return data to qualify for the 2020 tax credit.

Will You Be Paying For Anyone Else’s Education?

The recent stimulus package brings about some big changes to paying for college and the first is the end of the rarely-used Tuition & Fees deduction.  It will be replaced with a more robust Lifetime Learning Tax Credit (LLC).  What do I mean by that?  The LLC (worth up to $2,000 per return) previously had an income phaseout that started at $59,000 for single filers and rendered them ineligible once they had a MAGI over $69,000.  Married filers started to phaseout once their MAGI exceeded $118,000 and were completely phased out by the time they earned more that $138,000.

Now, the phaseout ranges for the LLC will match the phaseout ranges of $80,000-90,000 and $160,000-180,000 for the American Opportunity Tax Credit (AOTC).  More people should qualify for the tax credit now that the income phaseout ranges have been lifted.  The only reason people would have used the Tuition and Fees deduction in the past would probably have been when they had already exhausted their AOTC AND their income was too high for the LLC.  This is a welcome change in my eyes.

Furthermore, we’re apparently getting a new, simplified application for the Free Application for Federal Student Aid (FAFSA) and the Expected Family Contribution (EFC) will be replaced by a Student Aid Index.  These changes won’t be effective until 7/1/2023, and the concept of the EFC might not change that much, but it sounds better than telling families what’s expected of them?  Low or modest income applicants will automatically be given a Student Aid Index of -$1,500 as a starting point.  This is a step in the right direction, and you can read more on the technical changes here.

Did You Have Big Medical Expenses This Year?

There was an additional month added to the moratorium on evictions (through January 31, 2021).  There were also a few important changes to medical expenses.  More specifically, the floor on deducting itemized medical expenses is now a permanent 7.5% of AGI, down from the previous 10% threshold. Permanent probably should come with an asterisk because this stuff changes over time.  We’re now on our…3rd? 4th? significant set of tax changes in the past 3 years.  So it’s as permanent as tax law gets.  Additionally, Congress banned the out-of-network surprise medical bills (starting in 2022) that happen when you might go to the hospital and knowingly be treated by an out-of-network physician or are transported by air ambulance.  Medical expenses are the number one cause of bankruptcy, so this is probably a good outcome for everybody but out-of-network physicians, labs, and hospitals.

Finally, mortgage insurance premiums are deductible (again) through 2021, subject to phaseouts and limited to those that itemize to begin with anyway.  Insert picture of a gun going off with the “BANG” flag that comes out instead of a bullet.

Fin

It appears the Required Minimum Distribution (RMD) holiday is over, so expect those to resume starting in 2021.  Additionally, there were no specific student loan forgiveness provisions or additional student loan forbearance provisions, so regular payments are scheduled to resume after January 31, 2021.

There’s a lot here and maybe even more that I did not mention (educator’s benefits, PPP, Employee Retention Credit, increased food security, rental assistance, a $2,500 tax credit for electric bikes!).  So if you have questions, please don’t hesitate to reach out. 

I wish you all a happy, healthy, and safe New Year and look forward to brighter days ahead.  

-Brendan