The 2020 CARES Act – An Overview of Some Key Provisions

COVID-19 Updates and Cares Act
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While it’s far too early to say or know that we’ve seen the current bear market’s bottom conditions have improved. Last week, the S&P 500 rose by 10.3%. On Monday it gained another 3.4%. The S&P has declined 22.4% from its record high of February 19th. At the same time, it’s jumped 17.4% from its March 23rd low.

One of the key drivers of the improved performance is likely the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It was signed into law on March 27th. The largest stimulus package in U.S. history will directly impact most Americans. The CARES Act provides unprecedented economic and health care relief. It should help Americans get needed support during the coronavirus crisis. The following Q&A summarizes some of the Act’s key areas.

Who benefits from the CARES Act rebates and by how much?

Individuals with adjusted gross income (AGI) up to $75,000 annually are eligible for a $1,200 payment. (Not sure what your AGI is? You can find it on line 7 of your 2018 1040 or line 8b on your 2019 1040.) Your payment gets reduced by $5 for every $100 in income above $75,000. You will not receive a current payment if your AGI is $99,000 or more.

Couples filing joint tax returns with AGI of up to $150,000 a year can receive a $2,400 payment. This payment is reduced by $5 for every $100 in income above $150,000. If a couple has no children, then they don’t receive any payment once their income reaches $198,000. Married couples also receive an extra $500 for every dependent child under the age of 17.

Let’s say a married couple with two children under age 17 files a joint tax return. The AGI on their 2019 tax return was $175,000. Their benefit would be:

·       $2,400 (joint benefit)

·       + $1,000 (child benefit)

·       – $1,250 (phaseout of income above $150,000): $175,000 – $150,000 = $25,000 * 0.05 = $1,250

·       $2,150 net benefit amount.

NOTE: Assume this couple files their taxes for 2020 and their AGI is below $150,000. They will receive an additional $1,250 in 2021 when they file their 2020 tax return.

Head of household filers with AGI of up to $112,500 annually will receive the full $1,200 payment. They also receive an additional $500 for each child under age 17. Their payment is also reduced by $5 for each dollar in income above $112,500. With no eligible children, a head of household filer does not receive payment once her AGI reaches $137,000.

This credit is one-time, but policymakers may consider additional rebates if the downturn is prolonged.

How (and when) will you get your CARES Act rebate?

You don’t have to do anything. The IRS will deposit the amount into your bank account, based on the AGI and bank information on your 2019 return. If you haven’t filed your 2019 return yet, then the information from your 2018 return will be used. If your return doesn’t include any bank information, you will receive a check in the mail.

If the IRS has a valid account number from your 2018 or 2019 return, you can expect to receive the rebate via direct deposit in about three weeks. Checks should start arriving in six-to-eight weeks.

NOTE: Those who receive Social Security income are eligible for the rebate, too. Your rebate will be deposited in the same account as your monthly social security benefit.

If you moved, you may want to consider filing Form 8822 to update your address file with the IRS. If you have an old address or direct deposit information on your 2018 tax return and have not yet filed your 2019 tax return, you may want to consider filing for 2019 ASAP to ensure you do not have delays in receiving your payment.

What if I didn’t qualify for the CARES Act rebate based on prior year income, but my income falls in 2020?

Technically, the stimulus rebate is a 2020 refundable tax credit. Your payment is considered an IRS advance. If your income in 2020 is lower than in 2019, and your rebate was reduced by the income threshold, you’ll receive a credit for the difference on your 2020 return. If for some reason, you receive too much of an advance payment, you do not have to repay the excess.

For example, assume a single taxpayer with $35,000 in income receives a $1,200 advance rebate. If the AGI on her 2020 return is $100,000, she would not have to “repay” the rebate on her return. On the other hand, assume a single taxpayer has $100,000 in 2019 income. They would not receive an advance rebate. But they would receive the $1,200 credit on their 2020 return if their income in 2020 fell below the phaseout level.

How does the CARES Act affect my tax returns for 2019 and 2020?

The tax return deadline for 2019 was delayed from April 15th to July 15th. This includes payments due with that return. You also have until July 15th to make any retirement plan and Health Savings Account (HSA) contributions. Note that this may not apply in every state. See this chart for more information.

Your first-quarter estimated tax payment (previously due by April 15th is also due July 15th). Please note that so far, there has been no change to the due date for second-quarter estimated tax payments. They are currently due on June 15th.

What are the CARES Act changes related to my retirement accounts?

For 2020, you will not have to take a required minimum distribution (RMD) from your IRAs or workplace retirement savings plans — like your 401(k) or 403(b) plan. This provision also applies to those who turned age 70 1/2 in 2019 and had to take their first RMD by April 1, 2020. This keeps you from having to sell investments that may have fallen in value, which would lock in losses.

NOTE: As of this moment, it’s unclear if inherited/beneficiary IRA RMDs are suspended as well. The IRS has not yet provided definitive guidance on this issue.

If you’re fortunate and don’t need the money now, you can let the investments sit and hope they recover. You may even want to increase any Roth conversions by the amount of any RMD you don’t have to take.

You can also return unwanted RMDs that you have already received. If the distribution took place within the last 60 days, you can consider an IRA-rollover. Even if more than 60 days have passed, if the COVID-19 crisis has affected you, you can still complete a rollover. You have three years from the date you received the distribution to complete the rollover.

You are also allowed to receive penalty-free coronavirus-related distributions* from retirement accounts of up to $100,000. These distributions must be made in 2020. Such amounts are exempt from the 10% early withdrawal penalty if you are under 59 ½. They are, however, still subject to regular income tax. Mandatory tax withholding is not required. You can spread the taxable income over up to three years.

What changes did the CARES Act make to charitable contributions?

You can claim an above-the-line deduction of up to $300 for charitable gifts (this is a permanent change). This applies even if you can’t itemize your taxes. To qualify, you must donate CASH to a qualified charity and not a donor-advised fund. If you’ve given money since January 1, that contribution counts toward the $300 cap.

For 2020, the 50% AGI limit on cash charitable contributions was suspended. The 10% limit on corporate deductions also increased to 25%.

Does the CARES Act provide any relief for student loan borrowers?

Interest on all federal student loans is waived through September 30th. During this period no interest will accrue on this debt. Borrowers may also skip payments through September 30th. Be careful. By default, payments will continue. You must proactively contact your loan provider and pause payments. You may have a hard time contacting many of the loan servicers right now, so check your account online in the coming weeks. After logging in, look for the current amount due. You should be able to tell if the servicer has reset its billing systems to show that you have no payment due.

Importantly, this period will continue to count toward any loan forgiveness programs. Note that if you are paying your loan through a forgiveness program, you should refrain from making any payments during this period. Otherwise, you are repaying debt that would be wiped clean regardless of whether you make payments during this period.

Employers can also take advantage of a special rule allowing them to aid employees paying down student debt. They have through year-end to provide employees with up to $5,250 for purposes of student loan debt payments. Such amounts can be excluded from their income. Normally, these amounts would be taxable to the employee.

Does the CARES Act make it easier to borrow money from my retirement plan?

The maximum amount you can borrow from an employer plan increases from $50,000 to $100,000. This applies if the loan is for “corona-related purposes.” * The CARES Act also allows an affected individual to borrow from their plan on a dollar-for-dollar basis up to the maximum amount of $100,000. Under current rules, you can only borrow up to 50% of the plan amount up to a maximum of $50,000 loan. Plus, any payments that would otherwise be owed on the loan from the date of enactment through 2020’s end may be delayed for up to one year.

Any income attributable to such distributions would be subject to tax over three years. In addition, funds may also be re-contributed within three years without regard to that year’s cap on contributions.

What relief does the CARES Act provide related to the payment of payroll taxes?

Employers are eligible to defer payroll taxes from the date of enactment, through year-end, until the end of 2021 and 2022. In other words, 50% of the payroll taxes otherwise due during this period may be deferred until December 31, 2021. The balance is due on December 31, 2022. Importantly, this applies to self-employed persons as well. But only to the ‘employer equivalent’ (6.2%) portion of their self-employment taxes.

Did the CARES Act make any changes made to unemployment benefits?

Unemployment insurance (UI) provisions now include an additional $600 per week payment to each recipient for up to four months. Self-employed workers, independent contractors, and those with a limited work history can receive extended benefits. The federal government will provide temporary full funding for the first week of regular unemployment for states with no waiting period. They may also extend UI benefits for an additional 13 weeks through December 31, 2020, after state UI benefits end.

I hope this overview of some of the key provisions from the CARES Act helps. Please feel free to schedule a call if you have any questions.

Any last CARES-Act related thoughts?

The stimulus package provides several new ways to leverage retirement accounts. Most important, they can be used to help. Families desperate for funds to keep their small business alive or cover the loss of a job have another tool in their toolbox.

On the other hand, if you’re one of the lucky ones, they provide additional tax planning strategies. Please note that the discussion above represents only a basic overview of complex matters. It is recommended that you discuss them with a professional.

Unfortunately, for most this crisis is not a buying or re-balancing opportunity. Don’t be embarrassed if you need to access your retirement funds. Surviving another day takes precedence over saving for retirement.

May you all stay safe and healthy during this difficult time.

We hope you find the above posts valuable. If you would like to talk to us about financial topics including your investments, creating a financial plan, saving for college, or saving for retirement, please complete our contact form. We will be in touch. We can schedule a call or a virtual meeting via Apprise Wealth Management’s Zoom account.

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* A coronavirus-related distribution is a one made to an individual:

(1)       Who is diagnosed with COVID-19;

(2)       Whose spouse or dependent is diagnosed with COVID-19; or

(3)       Who experiences adverse financial consequences as a result of having been quarantined, furloughed, laid off, had work hours reduced, been unable to work due to lack of childcare due to COVID-19, closed or reduced hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

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