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SECURE Act and CARES Act – Year-End Planning

| September 30, 2020

It’s been quite a year so far, where we saw volatility in the market, a global pandemic that lingers, and significant policy action by Washington D.C. to assist our citizens.  For those who have taken advantage of some of these policy changes, we want to make you aware of some year-end planning considerations.

“Stimulus Check”

Officially known as Recovery Rebates, these payments are considered pre-payments/advances of a 2020 refundable tax credit.  The money received is not taxable, nor is it a loan that needs to be repaid. 

If you were not eligible for the rebate checks (or only eligible for a partial amount), you may want to keep an eye on your income as the year comes to a close. If your 2020 income was lower than 2018 or 2019 (usually the basis for determining eligibility and amount of your rebate), you may be eligible to claim the tax credit when you file your 2020 tax return.

Withdrawal from a retirement account

Many took advantage of the ability with withdraw money from their retirement account penalty-free if they fit the specific criteria to be a Coronavirus-Related Distribution.  Up to $100,000 of qualified distributions can be repaid within 3-years to reduce or avoid taxation as well.  Early withdrawal penalties are waived as well.  Any taxation is spread evenly over three years, and any repayment will be treated as a direct trustee-to-trustee transfer. 

As an example, let’s assume you took a $15,000 qualified withdrawal from a retirement account, but don’t repay any amount until 2021 or later, $5,000 of this withdrawal will be included as taxable income in 2020.  If you decide to repay $10,000 in 2021, you may be entitled to a refund of the taxes paid in 2020. If you plan to repay a portion or all of a withdrawal, it’s a good idea to establish a plan.  It’s imperative that you work with your tax professional in this plan as well, as guidance from the IRS continues to evolve. 

PPP Loan

For business-owners and self-employed individuals who received a loan via the Paycheck Protection Program (PPP), there are a few key things to consider as we near year’s end.

Many banks are not accepting loan forgiveness applications until 24 weeks have passed since receipt of the loan, which in many cases is not until October or November.  While you wait for forgiveness applications to be taken, be sure you are:

  • Keeping thorough documentation. Document how the money from the loan is being used.  Payroll filings (IRS Form 941) can assist with payroll costs.  Mortgage interest or business rent pursuant to lease agreement in force before February 15, 2020 is potentially forgivable along with certain utilities.  It’s a good idea to keep a file of not only receipts of the use of PPP funds, but also lease agreements, mortgage statements and the like.  More documentation is better than less
  • Keeping your non-payroll use of PPP funds below 40% of the entire amount received if your objective is to maximize the forgiveness. Forgivable non-payroll expenses include mortgage interest, rent payments, and utilities.  Utilities include: electricity, gas, water, transportation, telephone, and internet access.  Diligence in tracking this use is imperative.
  • Working with your lending bank/institution to be kept in the loop regarding requirements as well as when the forgiveness applications will be accepted. Each bank will have their own process, often web-based, for forgiveness.  They should be in communication with you, but be proactive if you don’t hear word, especially as you approach the end of your 24-week period.

In a year of such profound disruption, it’s important to keep up to date with your trusted advisors.  If there have been significant changes to your situation or you have questions regarding your accounts, please, as always, feel free to contact our office.  If you need a referral to a CPA, an attorney, or another professional, we are happy to provide one. 

Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.