On Friday, March 27, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, and shortly after it was signed into law. It is the largest stimulus bill in modern history and provides help to many parts of the US economy. The CARES Act breaks down monetary stimulus as follows:
- Individuals / Families - $603.7 billion
- Big Business - $500 billion
- Small Business - $377 billion
- State and Local Government - $340 billion
- Public Services - $179.5 billion
Without having to page through the 880-page Act, many accumulators and pre-retirees are wondering how the $600 billion penciled in for Individuals and Families will affect their personal finances. For working individuals and families, we think there are five main aspects of the CARES Act to be aware of.
Probably the most discussed item in the Act, the Recovery Rebate is a refundable income tax credit against 2020 income of up to $2,400 for married couples filing jointly and up to $1,200 for all other filers. The credit is increased by up to $500 for each child a taxpayer has under age 17. As AGI increases, the potential Recovery Rebate Payment phases out:
- $150,000 married filing joint
- $112,500 head of household
- $75,000 all other filers
The recovery rebate is based on 2018/2019 income (whichever is the last return the IRS has on file) but is for 2020. Effectively, Congress is preemptively sending estimated rebate amounts based on your 2018/2019 incomes, but the amount may be adjusted in your favor when you file your 2020 tax return. (Note: If you receive a rebate based on your 2018/2019 tax return but end up being over the income limit when you file your 2020 tax return, you still get to keep the rebate! There are no clawbacks!) Unfortunately, some people will not receive their rebate until they file their 2020 tax return.
For people receiving Social Security, the rebate will be deposited in the same account as their Social Security benefits. For people who received a tax refund in 2018/2019 via direct deposit, the rebate will be deposited to this same account. Other payments will be mailed to the most recent address on file. Per the Act, rebates are to be sent as soon as possible. However, given the magnitude of this program, we would be surprised to see any payments go out before May 1.
Distributions up to $100,000 from IRAs, employer-sponsored retirement plans, or a combination of both made in 2020 by an individual impacted by coronavirus receive the following tax benefits:
- Exempt from 10% penalty for individuals under age 59½
- No mandatory withholding requirements
- Some or all the distribution may be repaid over 3 years in a single rollover or multiple rollovers.
- Income from the distribution may be split evenly over 2020, 2021, and 2022. (Note: This may not be the best tactic if income decreases in 2020 but normalizes in 2021 and beyond.)
Impacted by the coronavirus has a broad definition beyond just people who have been diagnosed with COVID-19.
For employer-sponsored retirement plans that offer loans, the maximum loan amount is increased to $100,000 from $50,000. The Act allows 100% of the vested balance to be used and payments on the loan may be delayed for up to one year.
While we generally do not recommend taking distributions from your IRA or employer-sponsored plan accounts, we understand that this may be a necessary option for some people. Please contact your existing financial adviser or a fee-only financial planner to discuss your options prior to taking any distributions from your IRAs or employer-sponsored retirement plans.
REQUIRED MINIMUM DISTRIBUTIONS (RMDS)
RMDs are waived in 2020. In addition, if you have already taken your 2020 RMD, it can be returned to your IRA.
However, the rules are slightly different for Inherited IRAs. If you already took your RMD from an Inherited IRA, you cannot return it. If you have not yet taken an RMD from your Inherited IRA, you will not need to take one this year.
Taxpayers can deduct up to $300 in cash contributions made to qualifying charities (not donor-advised funds) as an above-the-line deduction, meaning you don’t have to itemize your deductions in order to receive the benefit. This opens up the tax benefit of charitable contributions to all taxpayers. At this point, there is no end date for this provision. If you have questions on finding a nonprofit that is specifically working on coronavirus-related relief, please let us know and we can review some options with you.
In addition, the CARES Act temporarily increases the AGI limit on charitable cash contributions from 60% of AGI to 100% of AGI. Therefore, taxpayers can eliminate their 2020 tax liability with charitable contributions. Any excess may be carried forward for up to 5 years.
FEDERAL STUDENT LOANS
Student loan payments on Federal student loans are deferred until September 30, 2020. Voluntary payments are allowed. Please note that you must contact your loan servicer to pause payments.
For individuals working toward loan forgiveness programs (e.g. the Public Service Loan Forgiveness Program), this period counts toward their total number of payments. Therefore, individuals using these programs should immediately pause payment. For programs requiring 120 monthly payments, this would effectively bring the total number of payments down to 114 to still qualify for the program.
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