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How Should You Put Recovery Payment to Work?

By Chiaki Hirate

You may have received, or soon will receive, a payment from the government as part of the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act. How can you make the best use of what you receive?

First, here’s what to expect: If you file taxes as a single person, you’re eligible for a one-time payment of up to $1,200, but this amount decreases if your adjusted gross income on your 2019 tax return (or 2018 return if you haven’t yet filed for 2019) was more than $75,000, and the payment is eliminated altogether if your income was $99,000 or more. If you’re married and file jointly, you’ll get up to $2,400, reduced for incomes over $150,000 and eliminated at $198,000. You’ll also get an extra $500 for each dependent child under age 17.

So, what will you do with this payment? Here are a few suggestions:

Use it for current expenses. 

Of course, you may well need the money to help meet your current expenses, particularly if your employment has been affected by the virus. However, first look for other ways to reduce these costs. For example, the CARES Act also provides assistance and payment deferral for federal mortgages and federal student loans.  Your financial institution also may be offering assistance if you do not have a federal mortgage or student loan.   You might also consider delaying your taxes until July 15, when they are now due.   

Build an emergency fund. 

In any economic environment, it’s a good idea to keep three to six months’ worth of living expenses in cash or a cash equivalent – and in these challenging times, this type of emergency fund may be more necessary than ever. Plus, by having such a fund at your disposal, you may be able to avoid dipping into long-term investments to pay for unexpected costs, such as a major car repair.   

Invest for other goals or reduce debts.

 If you already have an adequate emergency fund, and you feel that you’re financially stable, you could use your CARES payment to invest for retirement, education or any other goals you may have, and given the recent market downturn, with investment prices down, you may find some compelling opportunities. Or, you could use your payment to eliminate, or at least reduce, any high-interest, non-deductible debt you may be carrying.

Support charitable organizations. 

 During this difficult period, the demands on many charitable groups are greater than ever – and these groups could use as much support as possible. And now, thanks to another provision of the CARES Act, when you contribute cash to charitable organizations, you can receive a tax deduction – known as an above-the line deduction – of up to $300 from your taxable income, even if you don’t itemize. (This rule only applies to charitable contributions made in 2020.)

You can find some good uses for your CARES payment – so plan ahead and make the moves that are best for your situation.

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Chiaki is financial advisor at Edward Jones. Born and raised in Aichi Prefecture, she now lives with her husband, 13-year-old son and 11-year-old daughter in Bellevue. (425)883-8698 | chiaki.hirate@edwardjones.com