Stimulus Payments: Round #2 (FAQs)

An economic relief package was signed by President Trump just over a week ago creating a second round of stimulus checks for many American taxpayers.

How much will I be receiving?

The max amount per taxpayer is $600, half of the first round’s stimulus payment.  An additional $600 is also included for any dependents under 17 years of age (up from the $500 for dependents in the previous round).

Who is eligible for a stimulus payment?

Individuals with an adjusted gross income on their 2019 return of less that $75,000 will receive the full $600.  Individuals who file as Head of Household will receive $600 if their income is under $112,500.  Married couples will earn $1,200 ($600 per person) if their AGI was less than $150,000.

For taxpayers who make more than the income limit, the stimulus payment is reduced by $5 for every $100 earned above the limit.  For example, a single filer with an AGI on their 2019 return of $76,000 should expect a stimulus payment of $550 ($1000 / 100 = 10 x 5 = $50).  Married filers with a 2019 AGI of $156,000 should expect a stimulus payment of $900 ($6000 / 100 = 60 x 5 = $300).

An additional $600 will be added for each claimed dependent under the age of 17.

How will I receive my stimulus money?

If your last return was filed with direct deposit information for a refund OR if you provided your direct deposit information through the IRS website for the last round of stimulus checks, you should receive your refund via direct deposit.  If DD information wasn’t provided, you will receive your payment by check.  The IRS is the best resource for questions about the status of your payment or the method by which you will receive it.  View their stimulus resources here.

I didn’t receive the first round of stimulus money because of my income, but I’m eligible based on 2020 income.  Will I receive it now?

If you missed out on either or both stimulus payments because of previous years’ income but are eligible based on 2020 income, you can claim the “recovery rebate credit” on your 2020 return.

I hadn’t yet filed my 2019 return when the first round of stimulus checks went out and was ineligible based on 2018 income.  My 2019 return has since been filed and I am now eligible.  How much will I receive?  

You should expect to receive the appropriate amount of the current round of stimulus money based on your 2019 tax return.  The first round of stimulus checks will not be included in this payment, but the rebate for that amount should be claimed on your 2020 return.

I only received a portion of the total available rebate because my AGI exceeded the limit, but my 2020 income is much lower.  Will I receive any of the missed rebate? 

A decrease in your 2020 income may result in all or some of the missed portion of the rebates becoming available to you in the form of the recovery rebate credit.  For example, a single taxpayer with no dependents and a 2019 AGI of $84,000 should have received $800 of the $1200 rebate available in round #1.  The same taxpayer should receive $200 of the $600 available in round #2.  If the taxpayer’s 2020 income decreases to $60,000, for example, he/she would be eligible for the full $1800 distributed over both rounds of stimulus payments.  Since he/she would have already received $1000 in stimulus, the remaining $800 should be claimed on the 2020 return as a credit.

I added a dependent in 2020.  Can I claim the credit for dependents retroactively? 

The amount of the missed credits (up to $1100 per dependent) can be claimed as part of the recovery rebate credit on your 2020 return.

If I claim the credit on my 2020 return, how do I receive the stimulus money?

If you are eligible for the payment on your 2020 return, the credit will either reduce your balance due OR be added to your refund.

What documentation do I need to provide at tax time for any stimulus money I’ve already received? 

Taxpayers should receive documents titled Notice 1444 (for stimulus round #1) and Notice 1444-B (for stimulus round #2) that will list the amount of stimulus money received.  Confirm that the numbers listed match the amount you actually received each round.  Both of these documents, if applicable, should be provided to your tax preparer.

Pros and Cons of 529 Plans

So you want to start saving money for college? With the cost of higher education doubling in the last 30 years, starting to save early is a great idea. Whether it’s for your own kids, grandkids, nieces/nephews, or maybe even your God children, helping a child you love cover at least some of the expenses associated with higher education is an amazing gift. A great option for starting to build an education-specific savings account is a 529 plan. These incredibly popular plans also offer a few tax benefits.

529 plans first came onto the scene in the mid-1980s and originally functioned as a pre-paid tuition account. By the 1990’s, Section 529 (hence the name 529 plan) was added to the Internal Revenue Code, allowing for a tax-free status for certain tuition programs. These accounts grow on a tax-deferred basis (meaning tax isn’t owed on the earnings) and if the recipient makes withdrawals from the account for higher education expenses the withdrawals are not taxed either.

Every state has at least one 529 plan available. However, you do not have to invest in a plan in your state or even the resident state of the intended recipient. Additionally, for most plans, the choice of college is not affected by the state that sponsored the plan. Currently more than 6,000 U.S. colleges and universities and 400 foreign colleges and universities will allow students to utilize a 529 plan for tuition and other education expenses.

What expenses are approved?
Tuition, room and board, and textbooks were the original expenses included in the plans approved costs. In recent years, the original definition of “higher education expenses” has been expanded to reflect the changing landscape and increasing costs of education. These expenses can now include computers, up to $10,000 annually in k-12 tuition, student loan payments, and even the costs of apprenticeship programs.

What are the tax benefits?
From a federal tax perspective, 529 plans offer significant benefit in terms of tax-free growth and tax-free withdrawals. 529 plans can be invested in many ways, such as guaranteed returns and even mutual funds or stock market investments. In a typical investment account, any growth would be considered taxable income. With 529 plans, the accounts can see significant growth and if the withdrawals are made for approved, educational purposes, no tax will be paid on that growth.

State-specific tax benefits generally are enhanced or dependent on the plan being an in-state plan (i.e. the state in which the contributor resides and pays income tax). There are a few exceptions to this: Arizona, Kansas, Maine, Missouri, Montana, and Pennsylvania are referred to as tax-parity states and offer income tax benefits regardless of the state plan utilized.

How much money can I invest in a 529 Plan?
With the gift tax exemption amount (2020) of $15,000, 529 accounts can be funded in large amounts. This means that a married couple can contribute up to $30,000 ($15,000 per contributor) per child each year without having to file gift tax returns. Better yet, for grandparents with the desire to make a large contribution, a 5 year election rule is in place. This means that grandparents can elect to contribute 5 years’ worth of the gift tax exemption at one time, totaling a contribution of $75,000 all at once. While a gift tax return would have to be filed, the use of the 5 year election has no impact to the overall estate exemption.

Unfortunately, there are some funding limitations that do exist. Generally, 529 plans cannot have amounts greater than $235,000 in the plan. However, if the plan does cross that threshold, only contributions need to be suspended.

What if my child doesn’t go to college?
In some cases, children opt out of college education or receive scholarships and grants that cover college expenses. In this case, there will unfortunately be a tax bill to be paid if funds are distributed for a non-qualifying expense. Taxes on distributions of that manner include income taxes on the earnings, as well as a 10% withdrawal penalty. To top it off, many states require the tax benefit to be repaid for funds distributed in this manner.

For families with multiple children or qualifying relatives, there could be a much better way. 529 plans allow owners to add beneficiaries even after the account has been funded. By adding a beneficiary, owners can avoid taking taxable withdrawals as well as provide funds to another child or beneficiary. Adding a beneficiary does not cause a taxable event, so no taxes will be due because of the additional beneficiary either.

Questions about 529 plans or other tax planning strategies? Get in touch with our office!

Co-Signing on a Mortgage? Here’s What it Means for Your Taxes

It’s not uncommon for parents or grandparents to call us about the possible impact on their personal taxes should they co-sign a mortgage with a child/grandchild.  This has become increasingly common in 2020 with plummeting interest rates.  It’s important to understand the obligations that come from agreeing to this as well as the possible negative impact on the cosigner.

Typically, someone is asked to cosign a mortgage for credit reasons; the individual looking to purchase a home has the financial means to do so but lacks the credit history for loan approval.  The higher credit score and additional income created by adding a cosigner makes a loan more appealing to lenders and their underwriters.

When it comes to cosigners, mortgage companies are looking for a few key factors: low debt-to-income ratio, stable income, and a good credit score.  An approved cosigner would appear on the mortgage application and other loan documents, but not typically on the property itself.  In other words, the cosigner does not generally have rights to the property.  They do, however, have an obligation to ensure that payments are made timely. This means that if the primary mortgage holder fails to make payments, the bank will look to the cosigner.

There are a few concerns that a cosigner should keep in mind before signing on the dotted line.  First, there is a risk to the cosigner’s credit score.  If payments go unmade, this will negatively impact the cosigner’s credit in addition to the primary mortgage holder’s.  Next, the cosigner’s debt to income (DTI) ratio is affected.  Even though the cosigner is unlikely to be responsible for making the mortgage payments, on paper the mortgage will appear as a liability for the cosigner.  Should the cosigner find him or herself in need of a loan, lenders will see the DTI as less attractive.  There is also the risk of creating a tense situation amongst family members.  If you decide to cosign for someone, we highly recommend that you have a very frank, business conversation about the realities of this agreement and possible outcomes.

What about taxes?

In short, you can cosign a mortgage without creating any impact on your personal taxes, though there is a risk to your credit and personal expenses.  However, for tax treatment, if your child takes sole responsibility for the home and expenses and your name is only on the mortgage as a formality, he/she can claim all the tax deductions from mortgage interest and property taxes paid.  Additionally, when the property is sold, all the proceeds from the sale can be solely on his/her return, thereby creating zero tax impact for the cosigner (so long as the seller maintained the property as a primary residence).

Alternatives to cosigning

Do you still want to help your child or grandchild purchase a home but find yourself unwilling to take on the risk of cosigning a mortgage?  There are a few alternatives:

Hold the mortgage yourself.  Some potential cosigners have the financial means to purchase the home themselves.  They could then rent the home to their child or owner finance the property until the child has the financial means to purchase it from the parents.

Down payment or closing cost assistance.  Sometimes a less than ideal credit situation for the purchaser can be remedied by increasing the closing costs contribution or down payment.  Often, however, the purchaser lacks the additional cash to do this.  Instead of cosigning, a parent could gift the additional funds to the child.  Remember that some gifts may create a need for a Gift Tax Return.  Alternatively, the parent could loan the child the additional funds.  Be sure to check with your financial advisor or CPA for specific rules and regulations regarding family loans.

Legal Considerations

There are important legal factors that should be considered before entering into this type of agreement.  What happens if one party passes away?  Who inherits the property?  Can the deceased’s estate be targeted by the mortgage holder?  What about different types of ownership?  Does one make more sense than the others?  Consult with your CPA, attorney or real estate professional to discuss how you could be affected.