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How Does the Coronavirus Emergency Relief Package Impact You, Part 3: Cash Flow Relief

In our previous posts this week on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, we discussed cash distributions and changes to retirement account rules.  In this post, we will discuss how the CARES Act aims to provide cash flow relief to individuals and families through changes to unemployment, mortgage forbearance, student loan deferral, and incentives for charitable giving.

Unemployment Benefits.  The devastating economic toll of the coronavirus can be seen most clearly right now in terms of its impact on jobs.  Nearly 10 million Americans filed initial claims for unemployment benefits in the last two weeks of March.  (By comparison, the number filing initial claims in the last two weeks of February was around 437,000.)  In light of this dire situation, the CARES Act significantly expands the amount of unemployment benefits and the range of individuals eligible for them. 

  • Dollar Amount of Benefits.  The CARES Act provides federal funding that will enable states to increase unemployment benefits by up to $600 per week for a period of up to 4 months.  The new provision will more than double the amount of unemployment benefits in many states.  This includes Virginia, where the maximum benefit is currently $378 per week and the minimum is $60 per week, depending on your level of wages prior to unemployment.
  • Duration of Benefits.  The CARES Act extends the maximum amount of time that individuals will be eligible for unemployment by an additional 3 months.  Most states (including Virginia) offer a maximum benefit period of 6 months, but that will now be extended to 9 months.
  • Waiting Period Waived.  Generally, individuals must wait a week before they are eligible for unemployment benefits.  The CARES Act allows for individuals to file an unemployment claim immediately, without the one-week waiting period.
  • Benefits Extended to Other Workers.  The CARES Act also extends unemployment benefits to self-employed workers, those seeking part-time employment, and those with limited work history, who would not qualify for unemployment benefits under normal circumstances.  With the increase in independent contractors and gig economy workers over the past decade, this change will impact a significant number of individuals.  The states are racing to catch up with the legislation, however, so these workers might face delays in receiving benefits as states try to figure out what documentation to request in order to prove income prior to unemployment (usually, they just ask for your W-2!).

Mortgage Forbearance.  Under the CARES Act, any individual with a federally-backed mortgage loan can request forbearance for up to 6 months if they are experiencing financial hardship as a result of the current crisis.  This allows you to pause (or reduce) payments on your mortgage without incurring any fees or penalties.  If you are still unable to pay your mortgage after the first 6 months, you can request another 6 months of forbearance.  Privately-held mortgages may be eligible for a forbearance program as well, even though they are not covered by the CARES Act.  Many loan servicers are offering 90-day forbearance for privately-held mortgages.  If you need mortgage relief, the first step is to contact your loan servicer.  They will be able to tell you whether your mortgage is held by a federal agency or private entity (since most borrowers do not know off-hand whether they have a “federally-backed mortgage”).  They will also be able to tell you the terms that they are offering for forbearance—e.g., whether interest will accrue during the forbearance period, when missed payments will need to be repaid, etc. 

Student Loan Deferrals.  For those with federal student loans, the CARES Act suspends payments due until September 30th.  During that time, interest will not accrue on the loans, and your credit score will not be affected if you choose not to make payments.  This means that for the next 6 months, federal student loans are essentially 0% interest loans.  Paying them down is still a good idea if you have plenty of income, but if you are concerned about how the current economic situation might impact your job and you don’t have an adequate emergency fund, suspend payments and use the money to build up your savings in the bank instead.

  • Planning Opportunity.  Interestingly, if you are eligible for any loan forgiveness program, the CARES Act stipulates that the months of April through September will still count toward your requirements, even if you do not make a payment during that time.  Payments will continue to occur automatically though unless you contact your loan provider and ask to suspend them.  Therefore, if you are working toward qualifying for loan forgiveness, you should suspend payments immediately—and just be sure to put a note on your calendar to restart payments as of September 30th!  In addition, the Department of Education is making this period of suspended payments retroactive to March 13, 2020, so if you are eligible for loan forgiveness and made a payment any time after March 13th, you should call your loan servicer to request a refund.

For both student loan and mortgage requests, loan servicers are currently overwhelmed with calls, so you may face a lengthy wait time in order to speak with someone who can help.  Just be persistent, ask for written documentation of any changes to the loan agreement and/or payments, and then monitor your loan statements as well as your credit report during the relevant period and the months thereafter to ensure that all goes according to plan.

Charitable Giving.  This final section doesn’t address direct cash flow relief to individuals, but rather provisions aimed at spurring donations to charity, which will hopefully result in relief for individuals and families.  To encourage those who can afford to give, the CARES Act provides two tax incentives:  1) for small amounts of charitable giving in 2020 and beyond, and 2) for large amounts of charitable giving in 2020 only. 

  • First, taxpayers who do not itemize deductions can now deduct up to $300 of charitable giving per year from their taxable income, provided that the donation was made in cash (rather than appreciated securities or other non-cash donations) and that it was made directly to a public charity (rather than through a donor advised fund or private foundation).  This tax deduction does not have significant monetary value—even for taxpayers in the highest marginal tax bracket (37%), it only amounts to $111 of tax savings—but it will hopefully spur more charitable giving to those in need (possibly reversing some adverse side effects of the 2018 tax law, which reduced incentives for charitable giving since fewer taxpayers now itemize deductions). 
  • Second, for those who give a very substantial amount to charity relative to their income, the CARES Act increases the amount of charitable donations that they can deduct.  Typically, an individual can only deduct cash contributions to charity up to a maximum of 60% of their adjusted gross income.  In 2020, they can deduct up to 100% of adjusted gross income and carry over any excess contributions for up to 5 years.  Again, this only applies to cash donations made directly to a public charity, not through a donor advised fund or private foundation.  This incentive will only apply to a very small subset of taxpayers, who can afford to make charitable gifts equal to their annual income, but this group has the potential to make a significant impact if they increase their giving to those in need this year.

If you are one of the 10 million who are newly unemployed or face a reduction in hours and/or salary and are trying to figure out how to manage your finances during this crisis, please call or email us.  We are here to help.

     
 

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