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.
