Financial Literacy for the Pandemic

**NOTE: Our “Financial Literacy for the Pandemic” Zoom calls, which were held weekly during the first few months of the pandemic, will move to monthly as the questions have subsided but many people still need help with financial issues as a result of COVID-19. We will be sending the usual invitation with dates to clients, so you can pass on the link.

Anyone — especially first-responders, nurses, doctors, grocery workers, and delivery people —  who have questions can send them in to postoffice (at) bluesparkfinancial.com and we will address it on the next Zoom Financial Literacy call.

The CARES Act

By now you know that Congress has passed a multi-trillion-dollar relief bill to help keep individuals and businesses afloat during these difficult times. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes many provisions that could be beneficial to you.

Here are some of the highlights of the CARES Act:

Retirement Plan Distributions

There are no RMDs for 2020. Required minimum distributions from IRAs and employer-sponsored retirement plans will not apply for the 2020 calendar year. That is for regular IRAs as well as inherited IRAs. In addition, the 10% penalty for “premature distribution” that would normally apply for distributions made before age 59½ (unless an exception applied) will be waived for Coronavirus-related retirement plan distributions of up to $100,000. The tax obligation may be spread over three years, with up to three years to reinvest the money.

Federal Student Loan Deferrals

For all borrowers of federal student loans, payments of principal and interest will be automatically suspended for six months, through September 30, without penalty to the borrower. Federal student loans include Direct Loans (which includes PLUS Loans), as well as Federal Perkins Loans and Federal Family Education Loan (FFEL) Program loans held by the Department of Education.
But be careful, private student loans are not eligible for the deferral. Some private lenders are extending their own versions of the CARES Act.

Help for Businesses

The CARES Act included several provisions designed to help self-employed individuals and small businesses weather the financial slam of the COVID-19 crisis.

Self-employed individuals and small businesses with fewer than 500 employees can get a Paycheck Protection Loan through a Small Business Association (SBA) lender. Businesses can borrow up to 2.5 times their average monthly payroll costs, up to $10 million. There has been a lot of fraud already, and many businesses are returning their loans. This loan can become a grant if an employer continues to pay employees during the eight weeks following the origination of the loan – so the employees are not taking unemployment — and uses the money for payroll costs (including health benefits), rent or mortgage interest, and utility costs. These loans have kept millions of businesses solvent during these tough times.

Also available are the emergency grants of up to $10,000 (that do not need to be repaid if certain conditions are met), SBA disaster loans, and relief for business owners with existing SBA loans. I have not heard of any businesses getting one of these emergency grants so far.

Businesses of all sizes may qualify for a refundable payroll tax credit of 50% of wages paid to employees during the crisis, up to $10,000 per employee. The credit is applied against the employer’s share of Social Security payroll taxes. You cannot use both the refundable payroll tax credit and the PPP loan, you have to choose one.

Recovery Checks

Many people will receive a one-time cash payment of $1,200. Each U.S. resident or citizen with an adjusted gross income (AGI) under $75,000 ($150,000 for married couples filing jointly) who are not the dependent of another taxpayer and have a Social Security number, should get the full rebate. Parents also receive an additional $500 for each dependent child who is 16 years old or younger.

These payments are not taxable income.

The $1,200 rebate amount will decrease by $5 for every $100 in excess of the AGI thresholds until it completely phases out. For example, the $1,200 rebate completely phases out at an AGI of $99,000 for an individual taxpayer and the $2,400 rebate phases out at $198,000 for a married couple filing a joint return.

The payments will be based on 2019 income tax returns (or 2018 if no 2019 return has been filed) and is being sent by the IRS via direct deposit or mail. People who didn’t qualify for the rebate based on 2018 or 2019 income might still receive a full or partial rebate when they file a 2020 tax return.

Extra Unemployment Benefits

The federal government will provide an extra $600 per week to those getting unemployment benefits as a result of COVID-19, on top of any state unemployment benefits an individual receives. This additional benefit is for up to four months (through July 31.) The federal government will also fund up to an additional 13 weeks of unemployment benefits for those who have exhausted their state benefits (for up to 39 weeks of benefits) through the end of 2020.

The CARES Act also provides assistance to workers who have been affected by the pandemic but who normally wouldn’t be eligible for unemployment benefits, including self-employed, part-time workers, freelancers, independent contractors, and gig workers. Those who had to leave work for coronavirus-related reasons also might be eligible for benefits.
 
 
 

529 Plans

The new law expands the definition of 529 plan “qualified education expenses” to include K-12 tuition. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan for tuition expenses related to enrollment at a K-12 public, private, or religious school (excluding home schooling). Such withdrawals are now tax-free at the federal level. However, part of the beauty of 529s is their tax-deferred growth over time, so we do not generally recommend using them for pre-college schooling.
In addition, the new tax law allows 529 account owners to transfer funds from a 529 account to an ABLE account without federal tax consequences, if certain requirements are met. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used for a qualified expense.

New calculation for kiddie tax

The tax reform law changes the way the “kiddie tax” is calculated. Previously, a child’s unearned income over a certain amount was taxed at the parents’ rate. Under the new law, a child’s unearned income over a certain amount ($2,100 in 2018) will be taxed using the compressed trust and estate income tax brackets. This change may make the use of UTMA/UGMA custodial accounts less attractive as a college savings vehicle due to the reduced opportunity for tax savings.

New tax on large college endowments

The tax law created a new 1.4% tax on the net investment income of large college endowments. Specifically, the tax applies to institutions with at least 500 tuition-paying students and endowment assets of $500,000 or more per student. Some 30 colleges are expected to be swept up in this net in 2018, including top-ranked larger universities and smaller elite liberal arts colleges. Some colleges have publicly stated that the tax will limit their ability to fund certain programs, including financial aid programs.

Loss of personal exemptions

Starting in 2018, the tax law eliminates personal exemptions, which were $4,050 in 2017 for each individual claimed on a tax return. So on their 2018 tax returns, parents of college students will lose an exemption for each college student they claim.
However, this loss may be at least partially offset by:
(1) a larger standard deduction in 2018 of $24,000 for joint filers (up from $12,700 in 2017); $12,000 for single filers (up from $6,350 in 2017); and $18,000 for heads of household (up from $9,350 in 2017); and
(2) a new family tax credit of $500 in 2018 for each dependent who is not a qualifying child (i.e., under age 17), which would include a dependent college student. The income thresholds to qualify for this credit (and the child tax credit) are significantly higher: up to $400,000 adjusted gross income for joint filers and up to $200,000 for all other filers.

College Board reports tuition increases

In other college news, the College Board has released college cost data for the 2018-19 school year in its annual Trends in College Pricing report. Here are the highlights:

4-Year Public Colleges (in-state students):

• Tuition and fees increased an average of 2.5% to $10,230
  • Room and board increased an average of 3.1% to $11,140
  • *Total average cost for 2018-2019: $25,890 ($25,290 in 2017-2018)

4-Year Public Colleges (out-of-state students):

• Tuition and fees increased an average of 2.4% to $26,290
• Room and board increased an average of 3.1% to $11,140
• *Total average cost for 2018-2019: $41,950 ($40,940 in 2017-2018)

4-Year Private colleges:

• Tuition and fees increased an average of 3.3% to $35,830
• Room and board increased an average of 3.2% to $12,680
• *Total average cost for 2018-2019: $52,500 ($50,900 in 2017-2018)
* Total average cost includes direct billed costs for tuition, fees, room and board, plus a given sum for books, transportation, and personal expenses, which vary by student.
 
 

College students were sad to see it will cost them more to borrow, as interest rates on federal student loans rose for the second year in a row.

Undergraduate students can expect to pay 5.04%  in interest on new Stafford loans instead of the current 4.45%. Graduate students will see the interest rate on new Direct loans climb from 6% to 6.59%. And parents who take on federal debt to help their children pursue a degree will be looking at paying 7.59% annually instead of 7%.

The federal government resets rates on student loans every year, based on the spring rate of the Treasury Department’s 10-year notes, plus a fixed margin. New rates took effect July 1.
For new loans made between July 1, 2018, and June 30, 2019, the specific rates are:

• Undergrad Direct Stafford Loans are 5.045%, up from 4.45% (subsidized and unsubsidized).
• Grad Direct Stafford Loans are 6.595%, up from 6% (unsubsidized).
• Parent Plus Direct Loans are 7.595%, up from 7%.

The interest rates are fixed for the life of the loan. With subsidized loans, the federal government pays the interest that accrues while the student is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized loans, the borrower is responsible for paying the interest during these periods. Only undergraduate students are eligible for subsidized loans, and eligibility is based on demonstrated financial need.