Over 70% of Americans have not prepared themselves for retirement. Of those who have, 68% assume they’re going to run out of money before they die. It is very important to me that I share retirement information to help you prepare for the future that lies ahead. With planning and with correct information, this can happen. My goal is to share tips, tools, and information to help you get to a tax free and risk free retirement.
It’s important that you understand all of the benefits that are available to you under the Cares Act that was passed on March 27, 2020. I am going to discuss the business benefits, individual benefits, and some retirement benefits that this act brought forth, that you can take advantage of to help put you in a better financial position.
There are two main programs I get asked about the most: the economic impact disaster loan and the Paycheck Protection Program or what we call the PPP. Why do people ask me about these programs? The biggest reason is both of them have segments or areas inside of them, where the amounts given to you can be forgiven. Under the economic injury disaster loan, there’s up to a $10,000 grant that can be forgiven. However, you need to understand that there are some new guidelines on who’s going to qualify for this and how this works. I know we’ve submitted tons of applications inside of our office. I know there are probably millions of applications that have been submitted across the country with people believing that they could get upwards to $10,000 in their account within three days.
Well, there are two things you need to understand: one, the government is so far behind that the three days they mentioned inside of the paperwork is not happening. In fact, it’s taking two to three weeks for people to get access to this money. Two, if you do not have any employees, you’re not going to get any of this grant money. They’ve come forward and said that the only people who will get this grant money will be those who have employees. How’s that going to be calculated? $1,000 per employee. If you have three employees, you could expect to get $3,000. If you have 20 employees, you’re going to be capped at $10,000. Now, it does not keep you from moving forward. If you’ve applied and are trying to get a loan, the economic impact disaster loans can be up to $2 million at a 3.75% interest rate. But be aware this loan will have to be paid back. That is going to be guided by the government on how much you would qualify for.
Under the Paycheck Protection Program, some cool things are available here, but there are some very strict guidelines that you need to be aware of. Number one is that you had to have been in business before February 15, 2020. I know there were many people, that once they saw that this program is available, immediately went out and started setting up companies, hoping they could get some type of benefit. You are not going to qualify if you weren’t in business before February 15. No benefits are coming your way.
Number two, you have to have employees. The employee could be you. If you’re an S corporation, pay yourself a wage, or if you’re in a sole proprietorship and you have taxable income at the end of your schedule C, or if you’re a partnership who’s paying guaranteed payments where you’re paying self employment tax, that employee can include you, so don’t assume that because you have nobody but yourself working in the company, you’re completely out of this program.
What are the benefits available to you? Under this program, they are going to calculate your average payroll over the last 12 months, and then multiply that by two and a half. That becomes the amount of your paycheck protection loan. Be aware that if it’s used correctly, you’re going to be able to have 100% of this forgiven at the end of the eight week program. You can use 25% of these funds for things such as rent, mortgage interest, and utilities; it doesn’t all have to be used on payroll. Be aware of when we calculate payroll, there are also other things that are included. Included in that are health benefits that you pay for your employees, any retirement benefits that you provide, and any state and local income taxes.
Let me give you an example and see if we can make this work and help you envision how this would work inside of your company.
Let’s assume that you currently have an annual salary inside of your company of $60,000. Let’s assume that your health benefits, retirement benefits, and state and local taxes are $12,000 for the year. What we do is we take that total amount $72,000, we divide by 12, we get $6,000 per month, and then it’s multiplied by two and a half. You would qualify for $15,000 under the Paycheck Protection Program. Now, if that payroll was made up of two employees, you would also then qualify for $2,000 under the EIDL economic injury program. Be aware that there is some good money that’s available.
Now, as long as you then use 75% of the money that you get over an eight week period of time to continue to pay for wages, none of this money is going to have to be paid back. The remaining 25% needs to be used for rent mortgage interest or utility. If you don’t use it for these purposes, at the end of eight weeks, you are going to have a payback portion.
Let’s say, for example, you were only able to use 60% of it. 40% would need to be paid back. You will negotiate the payment terms with the bank that you went through. It can go up to 10 years and up to 4% interest. However, there is a six month deferral period that could be extended up to 12 months. Our recommendation is that everyone who qualifies should apply. Try to get the money if available. If you can use it under the guidelines, that’s great. Use it. If not, go ahead and get it paid back. Know that you have that money available just in case things turn.
Be aware that while, currently, things are bad for many businesses, they’re great for others. That could change overnight as we’re in very uncertain times. Well, what if you applied for an EIDL loan previously, and what if you got one of these loans back in January? We had a few clients who did that. You can convert a portion over to PPP and have it forgiven. So if you went out and got a $200,000 loan, and your PPP benefits were going to be $50,000, you could convert 50,000 over and have that forgiven under the program.
When should you apply for this? The sooner, the better as the government does have limits on the amount of money that’s going to be given out. They realize, even at this point, that they’re going to run out. The expectation is that they will provide additional funding. You should get your application in as soon as possible. You can apply through your local bank. The banks are the ones monitoring this, and they’re the ones that are helping get the funding for the PPP process.
Now, other benefits that are not as popular but are available for businesses is the Employment Tax Relief Program. This is a program I would only use as a last resort. If you’re in a situation where you just cannot pay any of your bills and you could use every possible dollar available, the IRS is allowing you to defer the employer portion of your payroll taxes through 2020 and not pay them until 2021 and 2022. Why do I say only use it if you have to? This is because nobody wants to get in bed with the IRS. These taxes will have to be paid back at a future time. You don’t really want the IRS to be your primary lender.
This program only applies to the employer portion of the tax. This is not going to apply to the employee portion because that’s their money. So the employer portion is the smallest amount. Again, I don’t see this as a real viable option, but it’s good to know it’s out there.
The other option is the Employee Retention Credit. The Employee Retention Credit is not as good of an option to me as the PPP even though you can get up to $10,000 per employee. The PPP generally is going to provide a larger benefit. But if there’s a reason that it does not, be aware that you can get a credit back for half of your payroll and apply it against your payroll taxes.
How does this work? Let’s assume that you pay someone $6,000 and you have a $3,000 credit that you can apply towards your payroll taxes. You can then reduce the amount that you’re paying towards your employer payroll taxes by that amount. If the amount is too large, meaning your payroll taxes were only $1,000, then you can apply for a refundable credit. And for most people, this is not a real viable option. Therefore, I would make sure that you’re getting good advice. If you’re looking at this option, before you go forward, try to claim these credits on your payroll tax returns.
The big one that most people are excited about is the 1200 dollar stimulus check that most Americans are going to get. You may have already received this money. If you had direct deposit information on hand with the IRS, you’ve probably already got your 1200 dollars if you qualify at this point for the program.
If you don’t qualify now, you may qualify in 2020 when you file your tax return. Also keep in mind if you’d qualified in 2018, you wouldn’t in 2019, but you have not yet filed your tax return, hold off on filing the return because you’ll be able to qualify under 18. You then file the 2019, showing a higher income because there are income limits on this or whatever else the case may be. Once you get the money, you’ll be able to keep it. There’s no payback on any of this.
This does cover a three year period of time. If you have uncertainties there, it is very important to get your questions answered. If you’ve not gotten money because you don’t have direct deposit information on file with the IRS, know they will send out paper checks. Also, if you’ve not filed or you are afraid to, they don’t have their information on irs.gov. They do have a place where you can go and enter all your information in hopes of speeding up the process of getting you this money.
Another big question we get asked about is what about the $500 amount that’s given for dependents. This is only for qualified children and qualified children are your children that are dependents who are 16 or younger. If you’ve got college age kids that you’ve been claiming on your return, maybe so you could take the education credits, there will be no funds coming for them. They can’t apply themselves because you’ve claimed them as dependent. You’re not going to get any benefits as they have to be under age 17. So dependents have to be 16 and younger to get the $500. I have had a number of people asking about this over the last few days because they weren’t seeing the $500 come into their account for their kids. This issue is their kids are not qualified because they’re too old.
Another big adjustment is regarding charitable contributions. If you are feeling charitable, if you have a lot of money, now is the year to give it away. The IRS has said that there will be no limit on the amount of contributions you can give. Historically, the limit has been 60% of your income. Now, you can give away as much as you want to. There are no limits on the amount of charitable gifts you can give.
The other cool thing is for those of you who are now taking the standard deduction because you can itemize, there is a $300 above the line deduction that you’ll be able to take for contributions that you made during 2020. Another really big benefit for those of you who have businesses or have situations where you have operating losses if you have a trade or business is that those can now be carried back for five years. This is a huge benefit, and it does not apply only to 2020, but for 2018, 19, or 20. If you had losses over the last few years that were being carried forward, you may want to look and see if it wouldn’t benefit you to take those back five years and recoup some of that tax and put that cash in your pocket, so you don’t have to go forward under some of the current rules that are more restrictive.
There has been an extension to the tax deadline and your estimated payment deadline for the first quarter of 2020. That is now July 15. There is no extension that needs to be filed. If you owe money for that time, there’s not going to be any penalties until July 15. If you don’t pay by that point, you will need to file an extension if you want to wait to file, and then any payments after that time, if they were due, will start accruing interest in penalties.
What about your payments to your IRA retirement plans or your HSA? Typically, you have until the time you filed your return or up till April 15 to be able to make these contributions for the previous year. That has been extended till July 15. So, if you’ve not yet made your contribution for 2019, it’s not too late. You can continue to do that up until July 15th, 2021.
One of the other huge benefits out there if you fall in this category is the IRS is providing some big relief on enforcement right now. If you have an installment agreement, if you have an offer and compromise, or if you have any type of collection action, they’re going to suspend everything until July 15, 2020. Also, they’re not going to be doing any more audits until then. They’re going to put a suspension on there.
And last, they think there’s fraud or other issues that protect the government by moving forward. This is very interesting. I’ve never seen a situation where the government has taken this approach where they’ve put everything on hold for a three month period of time to help them bring in revenue and to help them move forward with the government responsibilities that they have.
I’ll address the simplest one first. If you are retired, and you have been happening to take out required minimum distributions because you’re age 72 or older, keep in mind those have been eliminated for 2020. You do not have to take out any distributions, you’re not going to get penalized, and you won’t have the excise tax. And basically, it will be as if 2020 never happened. When they open back up in 2021, it will be as if it were 2020 for you.
The other retirement benefit is a little more complex to explain and talk about, but there can be some big benefits here. This is where if you’ve been affected by the Coronavirus in some way, whether it be physically that someone in your house has been sick, you’ve been sick as a result of it, whether it’s because your business or your incomes gone down as a result of the virus, you have an opportunity to pull up to $100,000 out of your IRA tax free for now.
You need to put it back in within the three years after you pull it out in order for it to stay tax free. But you have three years to be able to put that money back in. What’s going to happen if you can’t pay it back in at the end of the three year period of time? You will owe tax on that money at that time. However, even if you’re under age 59 and a half, there will be no penalty. We don’t know all the planning things that will go on here. Obviously you’ve got to be very careful. Don’t just pull the money out and blow it. If you’re in a situation where maybe your business or maybe your home life is under pressure, maybe you’ve lost your job and you need money, there’s an opportunity for you to pull it out now, use it to cover those costs, and then get it back in sometime during the next three years and avoid paying tax. But I do warn you, you need to be diligent about getting it back into the account.
When we talk about retirement planning, we don’t want this to be a situation where the market went down, you then pulled out a bunch of money, and now it comes time for retirement, and there’s nothing left, and you’ve got to use all this. I tell you to use it with caution. I also believe there’s many opportunities here for planning. It is important that you get to a tax free environment during retirement. This may be a way for you to be able to do this, to transfer these assets into a tax free environment, to go ahead and pay the tax at historically low tax rates, and put yourself in a position in the future where you’re not having to worry about tax rate risk. If the taxes double, you’re not having to worry.