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Highlights of the CARES Act


Mar. 30, 2020

Congress and President Trump have come to an agreement on a $2 trillion relief package, called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to ease the economic impact of the Coronavirus pandemic. This legislation touches all areas of the economy, and we have summarized some of the key details below.

Direct Cash Rebates

The Federal government will be sending a one-time “advanced refundable tax credit” to qualifying individuals with valid Social Security numbers. The amount is limited to $1,200 for individuals, $2,400 for couples filing jointly, and an additional $500 for every child, under the age of 17.

Individuals with adjusted gross income less than $75,000 (or $150,000 for couples) will receive the full credit amount, based on 2019 returns for those who have already filed and 2018 returns for those who have not. The credit amount is reduced by $5 for every $100 of income exceeding the limits. Therefore, individuals with no children and income in excess of $99,000 ($198,000 for couples) will not receive a credit.

Checks will be mailed by the IRS to the address on your last tax return or will be directly deposited based on bank information provided from past tax refunds. Payments are not expected until May and will be tax-free.

Required Minimum Distributions

Counter to most of the provisions in the bill, this one waives a rule that forces withdrawals from retirement accounts. All Required Minimum Distributions (RMDs) have been waived for 2020. This applies to both Roth and Traditional retirement accounts. Individuals required to take minimum distributions from retirement accounts can completely forego, not just postpone, the distribution for 2020. Likewise, RMDs from inherited IRAs have been waived. This allows people to avoid withdrawing assets when the market is down, assuming they can afford to do so.

Furthermore, if withdrawals were already taken, less than 60 days ago, to satisfy the 2020 RMD, then the amount withdrawn can be redeposited (rolled over) into the IRA. Unfortunately, this option does not apply to beneficiary RMDs from inherited IRAs. Any taxes withheld will need to be paid from non-retirement account money or the withholding amount will be reported as a taxable distribution.

Qualified Coronavirus-Related Retirement Account Distributions

Amounts withdrawn from retirement accounts to address virus-related financial hardship, up to $100,000 from IRAs or employer plans, will not face the 10% early withdrawal penalty. This penalty applies to account owners 59 ½ or younger. Although withdrawals are still taxable to the owner, the default option is to spread that income over the three-year period. The account owner can replace the distribution amount within three years to avoid taxation.

Loans from Retirement Plans

Similarly, for additional access to retirement accounts, the amount that can be borrowed from qualified retirement plans has been increased to $100,000, from the usual $50,000. This does not apply to IRAs, since loans from IRAs are prohibited. Any amount not repaid according to the plan rules will be considered a taxable distribution with possible penalties, although the Act does allow for an additional year to make loan payments.

Expands Unemployment Benefits

The CARES Act includes a $600 per week increase in unemployment benefits for up to four months, through July 31, 2020. This also expands benefits to individuals that are not usually eligible, such as the self-employed and independent contractors, with the creation of a temporary Pandemic Unemployment Assistance program running through the end of 2020. In addition, the bill extends the duration of unemployment benefits for 13 more weeks and aims to repeal any waiting periods imposed by states. The goal of this provision is to replace as much income as possible due to the virus’ impact.

Relief for Small Businesses

$349 billion will be allocated to small businesses with less than 500 employees to assist in covering expenses and payroll until June 30th. This only pertains to companies who do not lay off any employees between February 15, 2020 through June 30, 2020. Amounts are limited to $10 million and any amount used to cover payroll, mortgage interest, rent, utilities, and health insurance will be forgiven.

Defers Student Loan Payments

Federally owned student loan payments may be deferred for six months, through September 30, 2020. However, if you want to take advantage of this option, it is not automatic, and the deferment will have to be requested through your loan provider.

Moratorium on Mortgages and Foreclosures

Borrowers with a federally-backed mortgage loan may request forbearance, or a pause, in their payments without penalties, fees, or interest due to financial hardships caused by the virus. An initial forbearance of 180 days must be granted and possibly extended for another 180 days. Further, it prohibits servicers of these mortgages to initiate any foreclosure process for at least 60 days beginning March 18, 2020.

Charitable Giving Provisions

The CARES Act creates a new above-the-line deduction, up to $300, for any cash donations to qualifying charitable organization. This deduction is not available for those who itemize deductions. In addition, the Act increases the Adjusted Gross Income limit on cash donations to charities from 60% to 100%. It’s worth noting, due to their increased popularity in recent years, that contributions to Donor-Advised Funds do not qualify under either of these provisions.

2019 Tax Filing and IRA Contribution Date Postponed

While not explicitly part of the CARES Act, the IRS announced the traditional April 15th deadline for filing your 2019 Federal income tax and paying your first quarter 2020 estimated tax payment has been postponed to July 15th, 2020. This is an automatic change, so no special forms or requests are necessary. You will not incur penalties or interest so long as you file or request an extension by the new July date. This change also extends the deadline for 2019 contributions to IRAs, Roth IRAs, and HSAs.

It is important to note the June 15th deadline for second quarter 2020 estimated tax payments has not changed, meaning the second quarter payment is due before the first quarter payment. Earlier versions of the CARES Act would have moved the first, second, and third quarter estimated tax payment deadlines to October 15th, 2020, but this change did not make the final version of the bill.

Lastly, the relief does not apply to any other taxes, such as estate and gift taxes, or for the filing of any federal information return. Likewise, this does not apply to state taxes, although many state and local tax authorities are following suit and providing tax relief.

You may also be interested in our recent article, Your Financial Planning Questions, Answered, where we share our thoughts on how to respond when the markets get shaky.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this paper is not intended as legal or tax advice.

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