COVID-19 Stimulus Checks: Who Qualifies and What to Expect

The U.S. Government has already started sending stimulus payments to Americans from the $2 trillion coronavirus stimulus bill known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020. But there is still some confusion surrounding the details. Here are some things to know about the stimulus payments.

Income Requirements

The stimulus plan outlines that individuals will receive the following: $1,200 for individual tax payers with an adjusted gross income of up to $75,000; $2,400 for married couples filing jointly with an adjusted gross income of up to $150,000, and $112,500 for heads of household. Additionally, families will receive $500 per qualifying child under the age of 17. Dependents over the age of 17 who are claimed under someone else’s tax return will not receive their own payment, which means that most college students won’t qualify to receive a check. If your adjusted gross income (AGI) is more than what’s outlined above, you’ll fall into the “phase out” category—the more your AGI increases, the more the stimulus amount granted decreases, specifically by $5 less for every $100 over the limits noted above. The total phase out amounts based on AGI are: $99,000 for single filers, $198,000 for married couples filing jointly, and $136,500 for heads of household. The AGI will be based on your 2019 tax return, or your 2018 tax return if you haven’t filed 2019 yet.

Disbursing Payments

Stimulus checks will be direct deposited into the bank account listed on your 2019 tax return (or 2018, if you have yet to file for 2019) beginning mid-April. The IRS will send a physical check to your most recent address on file if a bank account is not listed on either tax return. For those whose banking information has changed since then, the IRS is developing a web-based portal where individuals can provide their banking information to the IRS online to ensure that as many people as possible can take advantage of receiving a direct deposit rather than waiting for a check in the mail. This tool is expected to be available around April 17.

You will receive a notice of payment from the Treasury approximately two to three weeks after your payment has been disbursed, which will be sent to your last known address. The notice will include the method by which payment was delivered (direct deposit or check), the address where payment was sent, and a phone number to contact the IRS if, say, your banking information has changed but hasn’t been updated and therefore you did not receive the payment.

Back Taxes

As long as you meet the income guidelines, you should still receive a stimulus payment if you owe back taxes, even federal, state, and student loans. The one exception is for those who owe child support payments.

Who doesn’t Qualify?

In addition to high wage earners and college students, other individuals may be left out of receiving a stimulus check: senior citizens and disabled people who are claimed as dependents by someone else; non-resident immigrants, temporary workers, and immigrants who are in the country illegally (immigrants with green cards, H-1B, and H-2A work visas qualify to receive payment); unemployed high wage earners: those who earned more than $99,000 last year but are now unemployed will be eligible for a rebate on their 2020 tax returns if they earn below the phase-out limits this year; Too, parents of babies born in 2020 won’t receive their $500 payment for that child until next year.

Low Income Earners

Individuals who make less than $12,000 a year are not required to file taxes. If you fall into this category and haven’t filed taxes in the last two years, you are still eligible to receive a check, but there’s an extra step involved. First, if you receive social security benefits, you will automatically receive a stimulus check. But for the estimated 10 million Americans who fall into the “low income” wage earning bracket, don’t receive social security benefits, and haven’t filed taxes for the last two years, the IRS has set up a web portal that will allow you to register for a stimulus check. Visit IRS.gov and look for “Non-Filers: Enter Payment Info Here”. The IRS has also partnered with TurboTax to set up a web page where individuals can answer a few questions and then choose to receive their payment via paper check or direct deposit.

The CARES Act and Small Business Loan Assistance

On March 27 the CARES Act was signed into law in response to the COVID-19 pandemic. Below is an overview of the types of assistance available to small businesses in an effort to lessen some of the economic impact.

Paycheck Protection Program (PPP) Loan

This is a $350 billion loan program that will provide loans to small businesses for 2.5 times the average monthly payroll based on payroll reports from the previous year, with a cap of $10 million.

The interest rate for the Payment Protection Plan is 1%, and loan payments for any non-forgivable parts will be deferred for six months. The loan can become forgivable if funds are used for approved expenses: payroll costs, including continuation of health care benefits during periods of paid sick, medical, or family leave; insurance premiums; employee salaries and commissions; payments of interest on any mortgage obligation, rent, and utilities; and interest on any other debt obligation incurred before February 15, 2020. No more than 25% of the loan forgiveness can be related to non-payroll costs, and the amount of the loan available for forgiveness will be reduced if full-time employee count, salaries, or wages decrease.

Businesses and charitable nonprofits with fewer than 500 employees, self-employed individuals, sole proprietors, and independent contractors are eligible. There may be some exception to larger restaurant and hospitality businesses who have less than 500 employees per location.

Emergency Economic Injury Grants

Small businesses, private nonprofits, sole proprietors, and independent contractors who were in operation as of January 31, 2020 are also eligible for $10,000 of SBA economic injury disaster loans (EIDLs) without a repayment requirement. These loans can be used to pay for expenses such as payroll, paid sick leave to employees, production costs, as well as business debts, rent, and mortgage payments. However, using these funds to refinance pre-existing debt or to pay dividends in not permitted. The deadline to apply for an EIDL is December 16, 2020 for most states.

Debt Relief for SBA Borrowers

Included in the stimulus package is $17 billion for immediate relief to small businesses through standard SBA 7(a), 504, or microloans, which covers loan payments for existing SBA borrowers for six months. This includes principal, interest, and fees. This relief is also offered to new borrowers who take out an SBA loan within six months after March 27, 2020.

Employee Retention Credit

For employers whose businesses were fully or partially suspended as a result of COVID-19, the CARES Act specifies a refundable payroll tax credit for 50% of wages paid by employers during the pandemic. This also applies to business owners whose gross receipts declined by more than 50% when measured against the same quarter in 2019.  Qualified employers with 100 employees or less are entitled to the credit, whether business is open or subject to a shut-down order. However, employers with greater than 100 employees qualify for the credit based on wages paid to employees while business is halted due to COVID 19-related circumstances.

Smart Moves to Make with Your Tax Refund

Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.

Evaluate Your Debt

There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.

Consider Your Emergency Fund

Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.

Fund Your 401(k)

This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.

Open a Roth IRA

If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.

Invest in Stocks

Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.

Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.

Taxes You Could Face in Retirement

As an American worker, relinquishing part of your income to taxes is standard practice, but once you move out of the workforce, much of your retirement income is subject to taxes as well. Below are some possible taxes you could face in retirement.

Social Security Taxes

If you have income in addition to Social Security, you will likely lose a portion of your benefits to federal taxes. To determine if your Social Security benefit will be taxable, you need to determine your provisional income. This is your income outside of Social Security—including pension payments, traditional 401(k) and IRA withdrawals, and income from a part-time job—plus half of your yearly benefits. If your provisional income totals more than $25,000 for individuals and $32,000 for couples, 50% of your Social Security benefit will be taxable. If your provisional income exceeds $34,000 for individuals and $44,000 for couples, up to 85% of your Social Security benefit will be subject to tax.

Retirement Plan Penalties

A common tax deduction tactic among workers is to deposit money in an IRA shortly before filing taxes in order to defer paying income tax on the new contributions, but this is not an option after age 70 ½. Additionally, if you miss a required distribution from your retirement accounts after age 70 ½, you will incur a 50% penalty, which is added to the income tax due on retirement account distributions. However, Roth IRAs don’t have distribution requirements in retirement, and workers older than 70 ½ might be able to delay 401(k) distributions.

Taxes on Pension Income

With the possible exception of military or disability pension, you should expect to pay taxes on pension income. However, if you contributed after-tax dollars to your pension, you won’t be required to pay tax on that part of the contribution.

Taxes on Investment Sales

If you intend to sell some investments in retirement, expect to report that sale on your tax return as a short-term or long-term capital gain or loss. Long-term gains are generally taxed at a lower rate than other types of income, but you must hold the investment for at least a year and a day in order to qualify for long-term gains. Interest income and dividends will also continue to be taxed as they were before retirement.

How to Prevent Tax Identity Theft

The start of a new year is a time for fresh starts and new goals, but it’s also the beginning of the oft-dreaded tax season, which means Tax identity thieves are on the lookout for information they can use in order to create fraudulent tax returns. Here are some tips to help protect yourself from tax identity theft during tax season.

File Early to Prevent Tax Identity Theft

Tax-related identity theft most commonly occurs from February to early March because thieves want to beat real taxpayers to the punch by filing fraudulent returns before legitimate ones. Because the IRS allows only one tax return per Social Security number per year, your best defense against identity theft is to file your taxes as early as possible.

Use E-File Instead of Postal Mail

An e-filed tax return arrives instantly at the IRS, which then sends back an acknowledgement receipt. At this point you’ll be notified if there’s any suspicious activity, such as possible identity theft. The quicker you know, the quicker you can deal with it. Before you e-file, however, be sure that your firewall, antivirus, and anti-spyware software are all up to date. If you do send your tax return in by post, think about taking it directly to the post office rather than letting it sit in your mailbox.

Don’t Fall for Scams

The IRS will not contact you by phone, email, or text to ask for personal or financial information. Never give out your Social Security number, passwords, PINs, and credit card or bank information to someone who reaches out via these channels. Official correspondence from the IRS is issued in the form of a letter and sent through the mail. However, scammers are getting increasingly clever, and sometimes phony links can look just like the real IRS website. If you ever have questions about the legitimacy of an IRS related query, your best bet is to call the IRS at 800-829-1040.

Protect Your Financial Accounts

Start by using a different password for each of your financial accounts, preferably one that combines letters, numbers, and special characters. It’s also wise to use a two-factor authentication when available, which requires you to verify your login—typically a code sent via call or text.

How to Report Tax Identity Theft

If you’re a victim of tax-related identity theft, you’ll find out when you try to file your return and learn that a return has already been filed with your Social Security number, or you’ll receive a letter from the IRS stating that a suspicious return using your Social Security number has been identified. If either of these happen, you should do the following:

  • Complete a paper return. As shocking as it is to learn that you’ve been the target of identity theft, you still need to file your tax return. In order to avoid tax penalties or late fees, submit a paper return by the filing deadline.
  • Go to IdentityTheft.gov to file a report with the FTC and IRS.
  • File an Identity Theft Affidavit (Form 14039). Fill out and attach this form to your paper return. It will make its way to the Identity Theft Victim Assistance Organization, which will work on your case. Be prepared to submit various forms of documentation proving your identity.
  • Contact the three major credit bureaus—Equifax, Experian, and TransUnion—and ask them to place a fraud alert on your credit records. You should also consider asking them to freeze your credit in case the thief should try to open new credit accounts in your name.
  • Request a copy of the fraudulent return via Form 4506-F. Seeing the fraudulent return will help you determine the specifics of the theft, such as what family information has been compromised.
  • As a precaution, delete any stored credit card numbers from shopping sites and change saved passwords to online accounts.

 

If you have questions on tax identity theft or would like to discuss your 2019 tax return, please feel free to email me at dkittell@mkrcpas.com or call 317.549.3091.

How the Tax Cuts and Jobs Act Affects Year-End Business Tax Planning

With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.

Depreciation-related Deductions

If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.

Travel Expenses

The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.

QBI Deductions

One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.

Business Repairs

It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.

Estimated Tax Payments

If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.



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