Numerous new laws provide economic relief to individuals and businesses hardest hit by this year’s pandemic. This much-needed financial assistance, however, comes with a few strings attached.
Here are three potential surprises if you use the available economic relief packages:
Getting a tax bill for unemployment benefits. While the $1,200 economic impact payments most Americans received does not have to be reported as taxable income on your 2020 tax return, there is currently no such luck with unemployment benefits. In addition to paying federal taxes on your unemployment compensation, more than half of states also impose a tax on unemployment benefits.
What you need to do: See if your unemployment compensation check withholds a portion of your pay for taxes. Even if your check does have withholding for income tax purposes, the withholding amount may not be enough. If possible, talk to your state unemployment office and try to get withholding amounts revised.
Paying estimated tax payments. If you normally receive a paycheck from your employer, you may have never needed to write a check to the IRS to pay estimated future taxes. Your employer withholds your taxes from your paychecks and sends it to the IRS for you. If you’re collecting unemployment benefits, however, you may be required to pay tax on the unemployment benefits received during the first six months of 2020 by July 15, 2020.
What you need to do: Estimate the amount of tax you owe for all sources of income, then compare that number with the amount of money withheld from your income to pay these taxes. If necessary, send in quarterly estimated tax payments to the U.S. Treasury and, in some cases, state revenue departments. This must be done each quarter with the next payment due July 15. You may need to send money in on September 15, 2020 and January 15, 2021 as well.
Reporting emergency distributions from retirement accounts: You may withdraw up to $100,000 in 2020 from various retirement accounts to help cover pandemic-related emergency expenses without incurring penalties. While you will not be required to pay an early withdrawal penalty, you will still be subject to income tax when filing your 2020 tax return.
What you need to do: If you plan to withdraw funds from your retirement account, reserve enough of the money to pay the tax! The amount you reserve depends on your potential tax situation so call for a tax review before taking money out of the account.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you may be able to take money out of a qualified plan, like a 401(k), or an IRA, with favorable tax consequences. But should you do it? You might view withdrawing money from a retirement account as a last resort.
Background
Among other changes in the CARES Act relating to qualified plans and IRAs, a participant can withdraw up to $100,000 of funds without paying the usual 10% tax penalty on distributions before age 59½. Plus, you can take as long as three years to pay the resulting tax bill, spread out evenly over the three years. If you repay the full amount within three years, you owe no tax.
To qualify for this program, you or your spouse must be diagnosed with COVID-19 or experience adverse financial consequences due to the virus such as being laid off, having work hours reduced or being quarantined or furloughed.
What are the pitfalls?
There are several reasons why you may want to avoid taking money out of your retirement accounts unless it’s an absolute emergency:
You’re diluting your retirement savings. Although the money comes in handy now, you’re chipping away at your nest egg and forfeiting growth. For example, if you withdraw the maximum amount of $100,000 that would have earned 6% annually tax-deferred for ten years, the value would have been $179,000.
It may be bad timing. Experts say it is difficult to time the markets in the current volatile environment. If you sell some holdings right now, you may be locking in losses that would miss the recovery in the next few months or years.
You still owe income tax. Income tax is due unless you replace the full amount within three years. Also, depending on your situation, you could end up paying tax at higher rates than you would in your retirement years.
Better options might exist. Arranging a hardship loan from your 401(k) might be a better alternative for your situation. You avoid the taxable event of the withdrawal and you pay back yourself with interest. Other options include refinancing a mortgage with lower interest rates, taking advantage of payment relief from mortgage, rent or student loan payments or deferred credit card billing.
While it is an option, retirement plan withdrawals are not always the best choice. Think through all scenarios before withdrawing from retirement funds to cover emergency expenses.
Avalanche of new remote workers creates latest playground for hackers
Hackers have found their new playground amid the increased use of video conferencing during the coronavirus pandemic: Zoombombing!
Zoombombing defined
Named for the company Zoom, the unfortunate first high-profile victim of this phenomena, Zoombombing occurs when internet trolls hack video conference meetings and join as uninvited attendees. After infiltrating a meeting, the hackers then have their fun, doing everything from performing harmless pranks to posting sexually explicit content.
Ideas to keep your meetings private
You can protect yourself, your friends and your company while using popular video conferencing tools with these tips.
Monitor meeting attendance. Designate an employee to monitor the attendees of your video conferencing meetings. By assigning a moderator (host), attendees can be removed or dismissed.
Create a waiting room for new attendees. Most conferencing platforms have a feature called a waiting room. When this feature is enabled, each user who connects to your meeting is put in a queue. The meeting host then approves each person waiting in the queue for admission to the meeting.
Turn off screen sharing for everyone but the meeting host. A favorite Zoombomber prank is to hack into a meeting, share their screen and then draw something really funny or inappropriate. Consider only allowing the meeting host to share a screen and to give permissions to others who subsequently want to share a screen.
Password protect your meetings. As a meeting organizer, you can also choose to password-protect your meetings. Don’t forget to distribute the password to all attendees prior to the meeting.
Carefully choose your video conferencing service. With many different companies offering video conferencing services, it can be difficult to find which company features the best security measures. Take the time to do your homework to find the platform that’s right for your business.
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides individuals and businesses significant financial relief from the financial strain caused by the coronavirus epidemic.
Here is a snapshot of the unemployment benefits section of the bill and how it affects individuals and businesses.
Who qualifies to receive unemployment benefits? In addition to full-time workers who are laid off or furloughed, the Act provides individuals who are not already eligible for state and federal unemployment programs, including self-employed individuals and part-time workers, a set amount of unemployment compensation.
How much will I receive? There are two different components to the new law’s unemployment benefits:
Each worker will receive unemployment benefits based on the state in which they work, and
In addition to their state unemployment benefits, each worker will receive an additional $600 per week from the federal government.
How will benefits for self-employed workers be calculated? Benefits for self-employed workers are calculated based on previous income and are also eligible for up to an additional $600 per week. Part-time workers are also eligible.
How long will the state unemployment payments last? The CARES Act provides eligible workers with an additional 13 weeks of unemployment benefits. Most states already provide 26 weeks of benefits, bringing the total number of weeks that someone is eligible for benefits to 39.
How long will the federal payments of $600 last? The federal payment of $600 per week will continue through July 31, 2020.
How do I apply for unemployment benefits? You must apply for unemployment benefits through your state unemployment office. Most state applications can now be filled out online. Workers who normally don’t qualify for unemployment benefits, such as self-employed individuals, need to monitor their state’s unemployment office website to find out when they can apply, as many states need to update their computer systems to reflect every type of worker who is eligible to collect unemployment benefits under the CARES Act.
What to do now
If you have not already done so, you must file for unemployment with your state as soon as possible. State offices and websites are being slammed, so the sooner you get in the queue the better for you and your loved ones. And remember, these benefits now apply to self-employed and part-time employees.
Coronavirus uncertainty abounds. Thankfully, by monitoring tax changes on your behalf, we can work together to navigate the right path for you and your family. Here is a round-up of tax-related laws and information to help with tax planning for 2020.
Early distribution penalty waived The 10% early distribution penalty on up to $100,000 of retirement withdrawals for coronavirus-related reasons is waived during 2020. New tax rules allow tax liabilities on these distributions to be paid over a three-year period. So if you need the funds, you won’t see your tax bill skyrocket in one year. Even better, you can return these distributions back into your retirement account over a three-year period and not be subject to the annual contribution limits. Action: This could be a great way to handle emergency payments until you receive a stimulus check, unemployment payments, or a pending small business loan.
Required minimum distributions (RMDs) waived for 2020 Required minimum distributions (RMDs) in the year 2020 for various retirement plans is suspended. The corresponding 50% penalty associated with not taking an RMD is also suspended in 2020.Action: Taking out distributions when the market takes a tumble can hurt retirement income for many years. This change allows you to wait to let the value in your retirement account rebound before you withdraw funds.
IRS installment agreement suspension The IRS is suspending payments of all amounts due from April 1 through July 15, 2020. If you do not pay your IRS installment payment during this time your installment agreement will not be in default. Interest will continue to accrue on these installment agreements. Action: Being on the bad side of the IRS is never fun. If you currently have an IRS installment agreement, look to take advantage of this delay.
Offers-in-compromise The IRS will allow you until July 15, 2020 to provide additional requested information for any pending offers-in-compromise (OIC) and will not close out the OIC during this time without your consent. The IRS is also suspending any payments due under an OIC until July 15, 2020.
Enforcement activities suspended? Not so fast…The filing and enforcement of liens and levies will generally be suspended. However, IRS Revenue Officers will continue to pursue high income non-filers and initiate other actions when warranted.
No new audits The IRS will not initiate new audits during this time, but will act to protect the statute of limitations.
Student loan debt is a hot topic and for good reason. Managing the burden that comes during repayment is very difficult. Fortunately, there are ways to get some relief while taking advantage of timely tax breaks at the same time. Here are four ways to help lessen the strain of repaying your student loans.
Deduct your student loan interest. The IRS allows you to deduct up to $2,500 in student loan interest payments on your tax return each year. The great thing about this deduction is you can take it even if you don’t itemize! Each loan provider should issue you a Form 1098-E if you pay over $600 in interest for the year. If you pay less than that, and you don’t receive a Form 1098-E, save your monthly statements as back up for the interest you pay. Even if you are still in school, and you are making interest payments, you are eligible for the deduction.
Exclude cancelled debt as income. In most cases the IRS considers cancelled debt as income. However, the IRS recently announced that students would not have to report cancelled student loans as income in the following situations:
The school closed when you were attending, or shortly after you attended.
The school actions are contradictory to applicable laws.
You are a part of a successful legal settlement against the school.
If you receive a Form 1099-C for cancelled student loan debt, conduct research to determine if one of these exclusions applies to your situation.
Refinance to lower your payments. Are you making two or more different student loan payments every month? Refinancing multiple accounts into one loan can lower your effective interest rate and your monthly payment. You can also lower your monthly payment by taking an existing loan and refinancing over a greater number of years.
Plan for tuition costs. Utilizing student loans to finance your education is a necessity for many people. However, you can cut down on future payments with early savings. For example, parents and grandparents can create 529 college savings plans. And as soon as you start earning income, earmark a portion of every paycheck for college. Grants and scholarships are another way to reduce tuition costs, so start researching early.
College debt can seem daunting. But by combining a long-term plan while taking advantage of tax benefits, the mountain of debt can become a manageable hill.
Are you one of the now 33% of Americans who work as either an independent contractor or freelancer?
If you answered yes, you are now a participant in the gig economy, a modern term for an economy characterized by workers who earn money through short-term contracts or freelance work.
Succeeding as an independent contractor can be challenging because it requires understanding a different set key success factors than being a full-time employee. Here are some tips on developing your skill set as an independent contractor and where to turn to if you need help.
Contract for companies with generous payment terms. The formula for companies to pay its contract workers varies from business to business. Investigate a company’s policy for paying its contract workers to make sure it’s what you’re expecting. Remember, cash is king!
Market your services by creating an online portfolio. If being a contract worker is your full-time job, you’ll need to always be looking for your next gig. One great way to market yourself to prospective businesses is to create an online portfolio that showcases the work you can perform. You can choose to build a website using a do-it-yourself service or hire a developer to create a custom website.
Stick to budget. As a full-time employee, you know the exact date you’ll receive your paychecks and usually the exact dollar amount. As a participant in the gig economy, however, you could earn a bunch of money in one month and hardly any money the following month. Prepare a financial budget so you can use income earned during your good months to cover costs during low income months.
Stay one step ahead of the IRS. Paying taxes is now your responsibility. Participating in the gig economy requires more knowledge about how to meet your tax obligations. So ask for professional help. Plus use other tools at your disposal. For instance, the IRS Gig Economy Tax Center gives guidance on how to figure out what you may owe the IRS. The website is https://www.irs.gov/businesses/gig-economy-tax-center.
Get advice from others. Working primarily by yourself can leave you isolated from fellow workers. Join a local group of self-employed workers that meets on a regular basis to network and learn what other workers are doing to be successful.
Remember you are not alone. The complex nature of tax obligations for contractors can easily be navigated with professional help.
For many folks, the lyrics of a 1960s rock song summarize the American dream: “Our house is a very, very, very fine house.” According to U.S. Census figures, about two-thirds of American families are homeowners.
But buying a house or condo may not be the best choice for every family in every situation. Renting offers the following advantages:
Greater flexibility. When renting a house, apartment, or condo, you have the option of moving at the end of the lease term. No need to contact a realtor, no hassle with buying or selling. For those who want to keep their options open, especially in terms of job location or dwelling size, renting may prove the better choice.
Opportunities to invest elsewhere. Instead of plowing your savings into a home, you might get a better return by contributing to mutual funds or other investments. Depending on the housing market in your city, the annual increase in your home’s value may barely outpace inflation.
Lower cost. Apartments are often smaller than homes, so heating and cooling expenses tend to be lower. If you don’t have a lawn, you won’t incur the cost of water to keep it green. Roof leaking? Appliances on the blink? Call the landlord. Home repair and maintenance aren’t normally your responsibilities.
Of course, as many realtors and financial analysts rightly point out, homeowners also enjoy significant advantages:
Greater flexibility. Ironically, homeowners enjoy certain freedoms denied to renters. If a homeowner wants to paint a wall or hang a picture, he or she doesn’t answer to a landlord. Installing a doggy door isn’t a problem. Hiring a remodel contractor to tear out a wall is perfectly acceptable. Don’t try this if you’re a renter.
Increasing equity. One of the greatest advantages to buying a home is the likelihood of increased equity over time. As long as your mortgage is being whittled down by monthly payments, you’re building equity—even if your property value remains stable.
Lower taxes. The ability to deduct mortgage interest and property taxes (if you itemize) can significantly lower your end-of-year tax bill. Renters must forgo this benefit.
Clearly, the choice to rent or buy a home depends on individual circumstances and tastes. If you’d like help with this important decision, give us a call.
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides individuals and businesses significant financial relief from the financial strain caused by the coronavirus epidemic.
Here is a snapshot of the unemployment benefits section of the bill and how it affects individuals and businesses.
WHO QUALIFIES TO RECEIVE STATE UNEMPLOYMENT BENEFITS? In addition to full-time workers who are laid off or furloughed, the Act provides individuals who are not already eligible for state and federal unemployment programs, including self-employed individuals and part-time workers, a set amount of unemployment compensation.
HOW MUCH WILL I RECEIVE? There are two different components to the new law’s unemployment benefits:
Each worker will receive unemployment benefits based on the state in which they work, and
In addition to their state unemployment benefits, each worker will receive an additional $600 per week from the federal government.
HOW WILL BENEFITS FOR SELF-EMPLOYED WORKERS BE CALCULATED? Benefits for self-employed workers are be calculated based on previous income and are also eligible for up to an additional $600 per week. Part-time workers are also eligible.
HOW LONG WILL THE STATE UNEMPLOYMENT PAYMENTS LAST? The CARES Act provides eligible workers with an additional 13 weeks of unemployment benefits. Most states already provide 26 weeks of benefits, bringing the total number of weeks that someone is eligible for benefits to 39.
HOW LONG WILL THE FEDERAL PAYMENTS OF $600 LAST? The federal payment of $600 per week will continue through July 31, 2020.
HOW DO I APPLY FOR UNEMPLOYMENT BENEFITS? You must apply for unemployment benefits through your state unemployment office. Most state applications can now be filled out online. Workers who normally don’t qualify for unemployment benefits, such as self-employed individuals, need to monitor their state’s unemployment office website to find out when they can apply, as many states need to update their computer systems to reflect every type of worker who is eligible to collect unemployment benefits under the CARES Act.
What to do NOW!
If you have lost your job, you must file for unemployment with your state as soon as possible. State offices and websites are being slammed, so the sooner you get in the queue the better for you and your loved ones.
The Families First Coronavirus Response Act is a new program that offers COVID-19 assistance for both employees and employers.
This new law provides businesses with fewer than 500 employees the funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members.
Here is a summary of the new law’s benefits for employees and employers:
Paid sick leave for workers. The new law provides employees of eligible employers two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay ($510 daily limit applies) where the employee can’t work because the employee is quarantined and/or experiencing COVID-19 symptoms and seeking a medical diagnosis.
Paid leave for workers. Employees can receive two weeks (up to 80 hours) of leave at two-thirds of the employee’s pay ($200 daily limit applies) if they need to care for someone in the following situations: The need to care for an individual subject to quarantine, to care for a child whose school is closed or childcare provider is unavailable for reasons related to COVID-19.
Extended leave. In some instances, an employee may receive up to an additional ten weeks of expanded paid family and medical leave at two-thirds the employee’s pay ($12,000 overall twelve week payment limit applies).
Companies will get paid back. Businesses who pay employees the mandatory sick and childcare leave according to the new law will get reimbursed through a payroll tax credit.
What it means for you
Employees can take the necessary time to recover from being infected with COVID-19, or to care for a loved one, without fear of losing their job or salary.
Employers can help their employees financially while navigating COVID-19 related shutdowns.
What you need to do now
EMPLOYEES. To take advantage of the Act’s paid leave provisions, you must provide your employer with documentation in support of your paid sick leave. There is yet no official application that needs to be completed. If you believe that your employer is required to provide paid leave but is not making paid leave available, or for other questions or concerns, you may call the Department of Labor’s Wage and Hour Division at 1-866-4US-WAGE or visit www.dol.gov/agencies/whd.
EMPLOYERS. While the details are being worked out on how to implement these new rules, here is what you need to do now:
Keep detailed records – Be prepared to defend your request for federal assistance. Keep good records of who’s asked for paid time off because of COVID-19 related circumstances. Ask your employee to provide a doctor’s note when appropriate, along with a narrative written by the employee describing who in their family is infected or suspected of being infected with COVID-19 along with symptoms. Make sure the note is dated and relates to an approved reason for leave.
Talk to your payroll provider – If you have someone doing your payroll, they are often the first ones who will know how you will receive reimbursement. This new law will take time to fully roll out. Payroll companies will eventually issue guidance on how to report paid leave provided under the Families First Act and which forms need to be completed to obtain the corresponding tax credits.
E-mail the notice! – An employer may satisfy the posting requirement by e-mailing or direct mailing the notice to employees, or by posting this notice on an employee information internal or external website. If your employees are working from home, this may be the only way to let them know the benefit exists.
Remember, there are upper limits to compensation that you may need to review and there are many other federal programs being rolled out. It will take time to implement them. Be patient, be safe and stay alert for any updates.
