It’s amazing what a couple of weeks can do for the psyche of an investor. Two weekends ago, many investors were reeling from another week of market losses. The “what if” fears were piling on faster than people could find answers. As predicted, the bad investment behaviors started quickly after the market bottomed. Unfortunately, that was about the worst timing as the market staged close to a 15% rally over the last 2 weeks. Equally as important as the stock market rally was the bond market returning to rational trading virtually eliminating the losses in the most conservative positions.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) stabilized and eliminated some of the fear that had been driving the market. At $2.2 trillion dollars, this is the largest stimulus package ever passed. It has wide-ranging implications for individuals and small businesses. Here is your guide to maximizing the benefits available.
The CARES Act provides cash payments up to $1,200 for individuals, $2,400 for married couples, and $500 per child for children under 16. The stimulus checks are income dependent. The payment starts decreasing for single filers when their adjusted gross income is above $75,000 and married (filing jointly) when their adjusted gross income is over $150,000. The ability to qualify is eliminated at $99,000 and $198,000 if there are no children. The amount is slightly higher if there are children under 16.
The income threshold is based on the 2019 tax return. If the 2019 tax return hasn’t been filed, the 2018 return can be used. All tax filers should review their 2018 adjusted gross income verse their 2019 adjusted gross income. Plan to use the lower of the two which may mean expediting or delaying 2019 tax return. The checks should be distributed within the next 3 weeks so time may be of the essence. If the IRS has banking information, the check will be direct deposited. The money is tax-free.
Tax Filing Deadline
The April 15th deadline to file and pay a tax liability has been extended to July 15th. The deadlines to make an IRA contribution and a health savings account contribution have been extended to July 15th as well. If a refund is expected, a return should be filed as soon as possible. If a tax liability is expected, there are now three additional months to pay it without a failure to pay penalty.
October 15th is still the extension deadline.
Required Minimum Distributions
Required minimum distributions for 2020 have been suspended for all retirement accounts, including inherited IRAs. This presents tremendous investment and tax planning opportunities. Taking money out of an investment that has lost value locks in the loss. If the money is not needed for living expenses, consider leaving it in the IRA to recover. The next required withdrawal could be delayed as long as December 2021 giving an additional 20 months to recover. If the RMD has already been withdrawn, consider rolling it back into the IRA, as long as the 60-day window has not passed. To be 100% non-taxable, any taxes withheld must also be rolled back into the IRA. Taxes withheld will be a credit on the 2020 tax return. Only one 60-day rollover is allowed every 12 months.
Roth conversions should also be considered. Using the reduction in income from the RMD relief could be used to pursue a Roth conversion. The low current tax rates and expanding national debt suggest higher tax rates in the future. In addition, converting during a downturn will allow all future gains to be tax-free. A careful tax analysis and projected Medicare premiums should be reviewed before proceeding.
The tax law changes of 2018 eliminated most tax filer’s ability to itemize deductions. This eliminated the tax benefit of charitable gifting. The CARES Act allows a $300 cash gift to charity to be an above the line deduction which gives a tax benefit even if the standard deduction is used.
No one likes to lose money. However, in addition to higher returns than a bank account, volatility is part of investing. It wasn’t a matter of if, it was a matter of when the markets were going to correct. MBM has accounted for this in your financial plan and portfolio design. We stick to the fundamentals that drive long-term performance.
Additional volatility is likely over the next couple of months and retesting the market bottoms should be expected. During times like this, it helps to focus on what you can control and stop trying to control the uncontrollable. The markets are going to do what the markets need to do to prove the greatest number of people wrong. Instead of stressing over the daily market movements, direct your efforts towards capitalizing on the recent CARES Act.
We appreciate the continued trust of our clients. Please monitor your email and connect with us on social media for continued helpful information. Share this with family and friends so that as many people as possible can benefit.
The CARES Act is comprehensive and contains substantially more provisions and benefits than could be discussed in this update. Please call if you have specific questions on how the various benefits can be utilized as a part of your overall financial plan. The full text of the CARES Act can be found here:
Photo by Joshua Newton on Unsplash