CARES Act – What May Affect You

The COVID-19 (COVID-19) pandemic has left its mark on global and domestic markets. Government guidelines to practice “social distancing” has significantly impacted commerce as consumers are staying at home. The U.S. stock market ended its historical bull run of eleven years in mid-March. Many businesses have suffered in this time, unfortunately resulting in many employees being laid off.

The United States Congress scrambled to create a stimulus relief bill to help aide the economy and the American people. The Senate passed the COVID-19 Aid, Relief, and Economic Security (CARES) Act on March 25, 2020. On March 27, 2020, the House of Representatives passed the bill, and it was signed into law by President Trump just hours later.

This bill is an estimated $2 trillion emergency fiscal package, marking the largest stimulus bill ever passed. The bill is quite expansive, totaling 335 pages in length. It covers quite a few areas including aide to state and local governments, aide to specific business industries, tax credits to businesses, and support to states for paying unemployment benefits. For the purposes of this article, the topics discussed will primarily focus on a few areas deemed applicable to a large portion of Americans.

Tax Updates & Changes

Prior to the CARES Act, Steven Mnuchin, Secretary of the U.S. Treasury, announced that the tax filing and payment deadline for 2019 would be moved to July 15, 2020. This also results in estimated tax payments for 1st quarter 2020, which are also normally due on April 15th, being delayed until July 15th. Estimated tax payment due dates for the remaining quarters of 2020 remain unchanged for now.

One change the CARES Act has implemented is a brand new income adjustment (above the line deduction) called a Qualified Charitable Contribution. This deduction can be claimed for up to $300 in charitable donations to qualifying charitable entities. To be eligible for the deduction, the donation must have been in cash only (appreciated-asset donations do not qualify). Cash used to fund a Donor Advised Fund is not eligible either. To claim the deduction, the taxpayer must not itemize deductions, meaning they take the standard deduction.

If you have questions about anything tax related a result of the bill, we recommend you speak with your Financial Planner or CPA.

Rebate Checks

One area of the bill that many Americans will benefit from is the “Recovery Rebate”. These rebate checks are being issued in the form of a refundable credit against 2020 income. The goal for these checks is twofold: Put money in the hands of Americans who have lost some of their income, but also help stimulate the economy with consumers spending more money. Each individual taxpayer may receive up to $1,200 (Married couples filing jointly eligible for $2,400) based on income levels from their 2018 or 2019 tax return; whichever is last on file. Each dependent child that is 16 and under also qualifies the taxpayer for an additional $500 credit. These checks will be issued in the coming weeks, while those who have a bank account on file from a tax refund are expected to receive their Recovery Rebate via direct deposit.

Although the credit is pegged against 2020 income, income levels from your most recent tax return on file (2018 or 2019) are used for eligibility. To be eligible for the full rebate check, a married couple filing jointly must have adjusted gross income (AGI) under $150,000. For those filing head of household, AGI must be under $112,500. A single taxpayer’s AGI must be under $75,000 to be eligible for the full amount. For every $100 of income over the AGI threshold, the rebate check will be decreased by $5.

Example: Charlie and his spouse Karen last filed their taxes in 2018. They have 2 children, ages 14 and 19. Charlie and Karen file their taxes as married, filing jointly. They are eligible for a maximum rebate check of $2,900 (2,400 + 500). Their AGI on their 2018 tax return was $178,000. This means their rebate will be reduced due to being over the income threshold. Their rebate check would be reduced by $1,400 (178,000 – 150,000 = 28,000; 28,000/100 = 280; 280 * 5 = 1400). The rebate check received will be $1,500.

As mentioned earlier, the rebate check is in the form of a refundable credit against 2020 income. There is good news for those that made too much money in 2018 or 2019 and are not considered eligible for the rebate check. If they face hard times in 2020 with a large reduction in income, they may become eligible for the credit once they file their 2020 taxes in early 2021. Also, for those whose income increases in 2020 and may no longer qualify, they will not have to repay the amount they received in 2019. Please note that the Recovery Rebate is considered a tax credit; therefore, it is not taxable income.

Required Minimum Distributions (RMDs)

The CARES Act has suspended RMDs from applicable retirement accounts for 2020. Even better news is that individuals who turned 70.5 years old in the second half of 2019, and chose to delay their 2019 RMD until 2020 (under old RMD rules prior to the SECURE Act), can also suspend taking RMDs until 2021 as well. For those that have already taken their 2020 RMD, but would like to undo it, there may be an option. This option would be in the form of a “rollover”. Rollovers that are not performed trustee-to-trustee can be completed as long as the individual moves assets from one account to the other within a 60-day period.  Since it is now early April, an individual who took their RMD in early February or after may be eligible for this option. They would just need to simply make a contribution back into the account for the same amount as the RMD previously taken within 60 days of the distribution.

This suspension of RMDs also applies to beneficiaries who now own an Inherited IRA. Owners of an Inherited IRAs (who took ownership of the account prior to 2020) can stretch distributions from the account over the course of their lifetime. The account owner of an Inherited IRA must take an RMD each year following the year they acquire the account. Unfortunately, there is no way to undo the distribution and place the assets back into the account.

COVID-19 Distributions

The bill also introduced a distribution that can be taken in 2020 from an IRA or employer-sponsored retirement plan in wake of the COVID-19 outbreak. This distribution can be taken for an amount up to $100,000 for individuals that have been affected or impacted in some way financially by the COVID-19 pandemic. Those that are considered impacted by the COVID-19 outbreak must be diagnosed with COVID-19, had a spouse or dependent diagnosed with COVID-19, laid off from work, owned a business that closed or reduced hours during the pandemic, or meet other criteria deemed appropriate by the IRS. A perk to the distribution is that it can be “paid back” over the next three years starting from the date the distribution is taken. This means those that had to take a COVID-19 Distribution will indeed be able to make contributions to that account in excess of normal maximum contribution levels for a three-year period. 

This COVID-19 Distribution will avoid a 10% early withdrawal penalty for those that take the distribution under age 59.5. Another perk to this distribution is that the income can either be reported all in 2020, or spread evenly over three years (2020, 2021, 2022). From a financial planning perspective, spreading the distribution income over three years may be more appropriate for some individuals, as this might keep them in a lower tax bracket and be more efficient in terms of tax savings. For those on Medicare that choose to take the COVID-19 Distribution in 2020, and report all the income in the same year, it may cause their Medicare premiums to increase in 2022 due to a two-year look back period for IRMMA.

Federal Student Loan Payments

Another major change brought forth by the CARES Act is the suspension of Federal student loan payments through September 30, 2020. During this time, interest will not accrue on these loans. Be sure to contact your custodian to ensure automatic payments are suspended. Payments are optional during this time. The great news about this suspension of payments is that borrowers who are in route for student loan forgiveness can still count the suspension period as months of payments towards their forgiveness payment plan.

For a complete look at the bill in its entirety, please visit the following link: