COVID-19 has greatly impacted the world as we know it. Obviously, the serious health implications notwithstanding, this pandemic has caused nationwide panic, confusion and, in some cases, hysteria (e.g. toilet paper shortages). So too, it has also affected our country financially. In that regard, COVID-19 has not discriminated. From the business owner to the W-2 employee, the financial impact has been seen across the board. In response, Congress passed an unprecedented $2 trillion (yes trillion) stimulus package, more appropriately known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). While the CARES Act is 89 pages of riveting information, it provides, in pertinent part, financial relief in the form of stimulus checks (provided you qualify), provisions for jobless aid, ability to borrow from your retirement funds without taxes or penalty for this year, provides federally guaranteed loans to small businesses and establishes a $500 billion government lending program for distressed companies, among other relief.
How is all of this relevant in the divorce context? Here are a few of the highlights.
UTILIZATION OF RETIREMENT FUNDS “TAX FREE”
Section 2202 of the CARES Act provides an individual with the ability to remove before the end of the year as much as $100,000 in retirement funds, penalty-free, if you are “experiencing adverse financial consequences” due to COVID-19, or are facing personal or household COVID-19 diagnoses. The taxes would be due in three years from such time.
While this seems like an option that can help stop the proverbial bleeding, especially in a situation where one spouse in the midst of a divorce has lost his/her job, or for that matter, both spouses have lost their jobs, it is not typically recommended as other more fiscally prudent options may be available, like a Small Business Loan (SBL) or home equity line of credit.
However, given the number of unemployment claims, which continue to climb at a staggering rate, this may be the only viable option for those individuals who have no other income source to draw from or an extremely limited pool of funds to make ends meet (or pay support to their spouse and/or children). To the extent that these circumstances will be seen as merely temporary, Courts in New Jersey will likely not address your financial claims. However, given the unprecedented nature of these “temporary” circumstances, I would imagine there will be an influx of applications to the Court seeking a change of circumstances warranting modifications of financial obligations. Keep in mind, however, that Courts are slowly adapting to this COVID-19 landscape, and motions and hearings may likely be backlogged for months. Thus, you may need to rely on alternative sources of funds, such as a loan on your retirement funds to meet your obligations, much less your own expenses. Obviously, when the legal landscape returns to some degree of normalcy, there will undoubtedly be arguments made whether the loan is a debt to be distributed at the time of divorce or, rather, a source of income. Time will tell which argument prevails and it will likely be fact specific as is usually the case in family law matters.
In addition, once the market bounces back and jobs return, if you place the money back into your retirement account prior to the end of the three-year period, you will not be responsible to pay taxes. Thus, this loan could be a three-year, interest-free loan - certainly something to consider in these dire financial times.
STIMULUS CHECKS AND CHILD CREDITS
Section 2201 of the CARES Act addresses recovery rebates – a/k/a stimulus checks. While the receipt of stimulus checks sounds enticing, you need to determine whether you qualify. Generally speaking, how much you receive depends on your income. Single adults with Social Security numbers who are United States residents and have an adjusted gross income of $75,000 or less will receive the full amount. Married couples with no children earning $150,000 or less will receive a total of $2,400. Someone filing on their tax returns as a Head of Household (which is typically what a single parent with children would elect) will receive the full payment if they earn $112,500 or less.
Above those income figures, the payment decreases until it stops altogether for single people earning $99,000 or married people earning $198,000.
The Act also provides that if you earn less than $75,000, or you and your spouse collectively make less than $150,000, you'll also be entitled to $500 for each child under 17. Individuals with $99,000 in earnings (or $198,000 for a couple) may not entitled to any child credit. If you are above the income limits, you may still get a check for your kids. The payment will be reduced by $50 for every $1,000 you earn over the limit. So, if you make more money, the child credit decreases.
In the divorce context, what happens to this stimulus check or child credit if you are in the midst of a divorce or intending to file (especially after the involuntary confinement with your spouse during the pandemic)? If you are already divorced, this is an easier scenario. If the stimulus check is based upon your family status pre-divorce, it is reasonable to anticipate that this check should be equally divided. Thus, the receiving party should provide their ex-spouse with his/her equitable share thereof. If you are divorced and already know that you are filing individual tax returns for 2020, then you will likely keep whatever financial relief you may be entitled to without contribution to your ex-spouse.
If, however, you are in the midst of a divorce, the stimulus check is another issue that must be addressed, as it may be considered a dividable “asset.” This will require a comparative analysis and review of your tax filings for 2018 (if 2019 has not yet been filed) to determine whether it is fiscally prudent to file those 2019 returns more quickly (and get a larger stimulus check). In this instance, it is prudent to speak with your accountant to determine the best financial outcome. You should also check out a stimulus check calculator to see what if, anything, you would even be entitled to.
As to the child credit, this too is based upon differing factors. If you are in the midst of a divorce, this child credit is yet another issue to be specifically addressed. If you are already divorced and your settlement agreement allocates the tax exemptions for the children, then it is likely that the party entitled to the exemptions for that year would likely retain the payment. If there are an odd number of children, however, it may be judicious and equitable to somehow divide the credit between the parties. It should be noted that in either scenario, it may not even be financially worth fighting over what amount to $500.
EFFECT ON ARREARS
On a positive note, if you happen to owe past taxes, your check is unlikely to be reduced. However, if you owe past-due child support and are in arrears, and such amount has been reported to the federal government, your check may be garnished and/or reduced to pay such arrears. However, this wholly depends on the aggressiveness of the collecting State. Thus, if you are in arrears, your check may or may not be garnished. This remains to be seen.
SMALL BUSINESS OWNERS
If you are in the midst of a divorce, and you are a small business owner, the CARES Act provides for businesses with fewer than 500 employees — including sole proprietors and nonprofits— to have access to nearly $350 billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020. The loans, which are referred to as “paycheck protection loans”, are fully guaranteed by the federal government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date). It essentially provides federally guaranteed loans available at community banks to small businesses that pledge not to lay off their workers. The loans would be available during an emergency period ending June 30th and will be forgiven if the employer continued to pay workers for the duration of the crisis. A separate section of the CARES Act calls for a portion of the aforementioned paycheck protection loans to be forgiven on a tax-free basis.
Thus, whether or not you are in the midst of a divorce, if you are a small business owner and you are on the verge of closing, have closed, or intend to, this is certainly something to further explore.
In sum, the CARES Act is trying to do its part in ensuring that the economy continues to churn. It is in your best interest to determine how the various provisions of the Act, including but not limited to the stimulus check, child credit, utilization of retirement funds, and small business loans will impact you during your divorce, or, if you are contemplating one, how you can protect yourself.
To schedule a consultation with our legal team and receive legal assistance from one of our compassionate, highly experienced attorneys, contact us online or via phone at (973) 533-1100.