It’s July — and we are seven months into what has been a tough year. With 2.9 million confirmed COVID-19 cases in the U.S. (11.4 million worldwide) and a predicted resurgence, the pandemic has taken not only a physical and emotional toll, but also, for many, a financial toll. When it comes to riding the fiscal storm, you need to know this: You can get through it. You got this. Stay informed as relief benefits evolve, learn about your options and don’t be afraid to ask questions. Many banks and lenders recognize that the global pandemic has caused hardship for millions and are willing to work with you.
In the meantime, these tips from certified financial planner Ben Smith, founder of Cove Financial Planning in Whitefish Bay, Wis., may help make the path to recovery a little easier.
If I received a stimulus payment through the CARES Act, will I have to claim it as income on my 2020 tax return?
If you receive a stimulus payment through the CARES Act, you get to keep the whole thing. Because it is technically a tax credit for 2020, it does not increase your taxable income for the year, and you will not need to pay income taxes on the payment.
I was furloughed or laid off and am claiming unemployment. Will I be taxed on unemployment benefits for the 2020 tax year?
Unlike stimulus payments through the CARES Act, unemployment benefits are considered taxable income and you will owe federal taxes — as well as potential state and local taxes — on this income.
I am working from home. Is there anything I can claim as deductible on my 2020 taxes (e.g. anything for which I should keep receipts, such as home office equipment or communications services not paid for by my employer)?
If you are a salaried employee, you are unable to deduct unreimbursed home office-related expenses from your income. The Tax Cuts and Jobs Act (TCJA) eliminated this benefit in 2018 for salaried employees. On the other hand, if you are self-employed, you are likely eligible to deduct business-related expenses from your income. Hold onto receipts related to expenses such as office equipment, internet or Wi-Fi bills, travel mileage, computers and other hardware or software. Measure the square footage of your home office space and ask your tax advisor if you can write off the percentage of your overall home that acts as an office (may vary by state).
A previous “Thrive” article discussed the importance of cash reserves. Right now, I have no income and am living off my cash reserves (savings) and unemployment. Should I stop paying down debt — or even making minimum payments — to preserve as much cash as possible? I might be penalized with late fees or an interest percentage hike, but is it better than running out of money?
This really depends on the interest rate associated with your debt and your current level of cash reserves. If you have a sizable cash reserve, try to continue making minimum payments toward high-interest rate debt. Either way, the best step you can take is to explain your situation to credit card companies, banks and other lenders. Ask if they are willing to defer repayment, given the global circumstances, or if they will work with you on creating a custom payment plan. Some may be flexible with their terms for a limited time.
I still have my job, but I am nervous about the future. Should I stop contributing to my 401(k) in order to have extra cash in my paycheck?
If you are maintaining a secure job and you have a reasonable cash reserve that you are comfortable with, I recommend you continue to contribute into your 401(k) up to the amount of your employer match, if your company makes matching contributions. For example, if your company matches 5 percent, I recommend you contribute at least 5 percent into your 401(k) to take advantage of the match. Direct excess cash flow into your cash reserve or additional contributions into your 401(k), depending on your situation.
What parts of the CARES Act affect tax-advantaged retirement accounts?
The CARES Act provides a few positive changes regarding tax-advantaged retirement accounts. First, it suspends all required minimum distributions (RMDs) from retirement accounts such as IRAs, 401(k)s, 403(b)s and 457(b)s for 2020. This also applies to retirement accounts that were inherited, such as beneficiary IRAs. This can allow tax-deferred retirement assets to continue to grow for investors who don’t necessarily need to take a withdrawal this year.
The CARES Act also provides more flexibility with loans from retirement accounts. Most plans allow participants to take loans up to $50,000 or half of their vested account balance and repay them over a fiveyear period through payroll deductions. The CARES Act allows participants to borrow up to 100 percent of their vested balance or $100,000, whichever is less, on loans taken through September 23. The act also allows for an extra year of repayment, effectively extending the payback period to six years. (That said, not all plans include loan provisions, so it’s important to ask your plan administrator how your specific plan deals with loans.)
Additionally, the CARES Act allows investors to take early withdrawals from retirement plans without incurring the normal 10-percent early withdrawal penalty. If an individual or spouse experiences adverse financial consequences caused by the coronavirus, he or she may withdraw up to $100,000 from retirement accounts prior to the age of 59.5 without incurring the 10-percent early withdrawal penalty. Keep in mind, this distribution is still taxed as ordinary income. For more information, see “What to do With Your 401(k) During Coronavirus.”
What are the pros and cons of taking a “hardship withdrawal” from my retirement account?
A pro for taking advantage of a hardship withdrawal from a retirement account is you will not necessarily incur the 10-percent early withdrawal penalty imposed by the IRS, if you take the withdrawal prior to the age of 59.5. If you’re in a bind, this can be a good alternative to racking up high-interest debt such as with credit cards.
The downside to this type of distribution is it lowers your retirement account balance. The longer your time horizon (meaning the length of time your retirement funds could be accruing value), the greater the impact your early withdrawal will have on your retirement portfolio over time. And again, remember that a hardship withdrawal is taxable as ordinary income for the year it is taken.
I am a student and my classes are now online. Can I claim any of the equipment or communications services not covered by my school as deductibles on my tax return?
The Tuition and Fees deduction allows eligible taxpayers to deduct up to $4,000 per year to help cover higher education costs. These expenses must be what is considered “qualified education expenses” and typically include books, supplies and equipment directly related to a course of study. That said, it’s important to consult with a tax professional about what expenses are eligible under this definition.
I have a combination of federal student loans and private loans from a commercial lender. Is there any relief for me regarding student loan payments? Student loan payments and interest have been suspended on federally held student loans through September 30. Most federal student loan borrowers are eligible for this suspension, and the suspension is being applied automatically, meaning you do not have to request it. Privately held loans are not included in this suspension, although some lenders are providing flexibility on repayment this year. If you have privately held student loans, contact your lender to learn about your options.
Have a question?
Follow and tweet Ben on Twitter at @BenSmithPlanner.
Coronavirus Disease. Google website. Updated July 5, 2020. Accessed July 5, 2020.