MBJ Guest Column: Making the Best of a Bad Situation

The coronavirus pandemic has created unprecedented disruption of the national economy and our daily lives, and we feel deeply for individuals and businesses that are struggling. The health and safety of our clients and community remain our focus, as we move further into the fourth quarter of a crazy year. 

The CARES Act and other rules and regulations were passed by the federal government earlier in 2020. Some of the benefits from the law have expired, but others are still relevant. Given the longevity of the pandemic and the financial stress it may be causing, it might be useful to revisit some of the opportunities that still exist — either related specifically to CARES or simply based on current economic circumstances. Our goal is to help you make the best of this bad situation.

We also recognize that the pandemic has affected everyone differently. Therefore, please do not consider this general guidance to be financial or tax advice. We instead recommend that you work directly with a financial advisor, attorney, or tax accountant to explore solutions tailored to you and your personal situation. 

For Homeowners

If the pandemic has created financial hardship for you, forbearance of mortgage payments on your house for 180 days may still be available. 

If you don’t qualify for mortgage forbearance, refinancing may be worth considering. The Federal Reserve’s zero interest-rate policy has brought mortgage rates down to all-time lows. Mortgage refinancing can be complicated, and sometimes it may be better to apply for a credit line collateralized with your personal investments. Either way, low interest rates benefit borrowers, so maximize this opportunity.

For Workers

Retirement accounts are often one of the largest assets for individuals, but it can be hard for workers to tap into those assets without significant penalties or tax implications. 

Traditionally, withdrawals from a retirement plan prior to age 59 1/2 result in a 10% penalty. However, the CARES Act allows for penalty-free distributions from work-related retirement plans and Individual Retirement Accounts (IRAs). These special distributions have to be based on specific needs related to COVID-19, are capped at $100,000, and must be taken in 2020. 

Any tax liability can be paid over three years, and there is also an option to pay the distribution back within three years and negate the tax liability. The details are complicated, but if you need financial support, this may be an option worth considering. 

For Retirees

Under normal circumstances, anyone over age 71 is required to withdraw a minimum percentage from their tax-deferred retirement accounts. The amount is referred to as Required Minimum Distribution (RMD) and applies to work-related retirement accounts as well as traditional IRAs. The CARES Act stimulus package allows you to forgo RMDs in 2020. 

Every personal circumstance is different. If you do not need the money, it may benefit you to leave it invested and thus avoid the tax liabilities related to withdrawals. 

For Business Owners

The CARES Act Paycheck Protection Program (PPP) provided substantial relief for business owners and their employees through forgivable loans issued during the initial uncertainty of the pandemic. While PPP loans provided significant support, they are behind us now, and many businesses are still struggling. If your business is going to lose money in 2020, there are at least two things to consider.

First, the CARES Act provides multiple adjustments to tax filing for businesses, including the ability to carry back a net operating loss (NOL) for up to five years, which may result in meaningful refunds of prior taxes paid. 

Second, depending on the structure of your business, a NOL in 2020 may flow through to your personal return. If so, a Roth conversion may be worth considering. The NOL may offset any taxable income created by converting your tax-deferred retirement assets to a Roth, resulting in no current or future tax liability on your Roth retirement funds.

For Estate and Tax Planning

Many families have moved estate planning toward the top of their to-do list. The foundation of a good estate plan will ensure efficient and effective transfer of assets during life and at death. Tax planning can be a central consideration in this process, but, over time, taxation limits on inherited assets have increased dramatically, with fewer and fewer families exposed to any potential estate tax liability.

Current estate tax rules are set to expire in 2025 and could possibly change sooner under a new federal administration. As such, taxes may be higher and apply to more families going forward. The IRS has already issued guidelines eliminating claw back of tax liabilities related to gifts made under current tax laws, so exploring lifetime gifting strategies and opportunities with your financial advisor, attorney, or tax accountant may be advantageous to you.

This low interest rate environment also provides significant advantages for strategies such as intra-family loans, Grant Retained Annuity Trusts (GRATs), Charitable Lead Annuity Trusts (CLATs), and Installment Sales to Defective Grantor Trusts (IDGTs). This is not for everyone, but it may be very valuable for some. 

Our advice: Take back control.

One of the worst feelings of this pandemic is a lack of control. But there are practical steps you can take right now to help mitigate the disruption and create a more secure financial situation for yourself and your family. You can, in other words, take some of the control back with deliberative and considered responses.

This article was originally featured in the Memphis Business Journal.

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