Update on the CARES Act – Federal Stimulus Plan (Part 2)

On March 28, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. This stimulus package covers a lot of ground and allocates more than $2 trillion to support both businesses and families as we continue to struggle through these unique and difficult times.

Our summary of the support for small and medium size businesses, distributed in a prior email, can be found here.

Part 2: Personal Finances

It is important to understand how changes in legislation, rules, and regulations will affect you and your family – because they will in some way, shape, or form. Here is a summary of the changes and what actions can be taken.

Defer Your Tax Filing

While not officially part of the CARES Act, this may be the simplest rule with the biggest impact for many. The federal income tax filing due date has been extended from April 15, 2020, to July 15, 2020. Taxpayers can also defer federal income tax payments otherwise due on April 15, 2020, to July 15, 2020, with no penalties or interest. This applies to all taxpayers, including individuals, trusts and estates, corporations, and other non-corporate tax filers, as well as those who pay self-employment tax.

Please keep in mind that states may or may not follow these rules, so contact your CPA to determine the appropriate next steps.

Forgo 2020 Required Minimum Distribution

The CARES Act officially suspends all required minimum distributions (RMDs) in 2020. This applies to all retirement accounts, including individual IRAs, inherited IRAs, and any work-related retirement plans.

While RMDs are suspended for 2020, voluntary distributions are still allowed, including qualified charitable distributions (QCDs) up to $100,000 for IRA owners age 70½ or older.

If you have already taken a distribution from a retirement account in 2020, there are ways to roll the money back in. However, it can be complicated based on the timing and circumstances. Please reach out if you need help.

Using Retirement Accounts as a Resource

While some folks don’t want or need to tap into retirement accounts in 2020, many people will. Thankfully, for those who need to rely on their retirement funds to get through this crisis, there are several options.

Coronavirus-Related Distributions: Distributions of up to $100,000 from IRAs, employer-sponsored retirement plans, or a combination both, can be taken out in 2020 by an individual who has been impacted by COVID-19. (Definitions of impact can be found here.) These distributions are exempt from the 10% penalty for those under 59½ and are not subject to any mandatory tax withholdings. Some or all of these distributions can be re-contributed into the account at any time over three years. If not re-contributed, then income related to the distribution can be spread over three years, instead.

Loans from Employer-Sponsored Retirement Plans: Many employer-sponsored retirement plans allow participants to borrow a portion of their retirement assets. For individuals impacted by COVID-19, the loan amount will increase from $50,000 to $100,000, and from 50% to 100% of vested balance. Any payments will be deferred for up to one year.

Donations to Charity

Small Charitable Donations: The CARES Act allows for an above-the-line deduction of up to $300 for qualified contributions. Cash donated directly to charities are considered qualified contributions. Donations of appreciated securities or donations to donor-advised funds are not. While this deduction is relatively small, it is meant to impact those who make donations, but do not currently itemize their deductions.

Large Charitable Donations: There will also be a temporary increase in the adjusted gross income (AGI) limits on cash contributions made to charities. Traditionally, cash donations are maxed at 60% of AGI. Under the CARES Act, qualified contributions can offset up to 100% of AGI, which can have a huge impact on generous donors. The same definition of qualified charitable contributions referenced above applies.

Take Advantage of Other Personal Benefits

Relief for Student Loan Borrowers: Required payments on federal student loans are suspended until September 30, 2020. During this time, no interest will accrue, and this period will still count toward qualified loan forgiveness. Details can be found here.

Employers Help Pay Off Student Debt: In addition, employers can provide up to $5,250 to employees to pay down student debt without the amount being considered compensation.

Take Advantage of Unemployment Benefits

In this environment where many non-essential businesses have closed and laid off or furloughed workers, demand for unemployment benefits have skyrocketed. Thankfully, the CARES Act provides several resources to help workers in these difficult times. While unemployment is managed and administered on the state level, the Federal Government is providing the following benefits: 

  • Self-employed individuals (who are generally ineligible for unemployment benefits), qualify for benefits for up to 39 weeks.
  • The Federal Government will offer states the funding for the first week of unemployment benefits. (Normally, applicants are ineligible the first week of unemployment.) 
  • The CARES Act provides states with the ability to increase their unemployment benefits by up to $600 per week with federally funded dollars, for up to four months.
  • Unemployment compensation can be extended by 13 weeks.
Recovery Rebates

The CARES act was set up to provide a safety net for businesses hurt by the pandemic, stimulate the economy, keep people employed, and provide immediate financial support to every American citizen. In theory: everyone gets a check. In reality: well, it depends.

Recovery rebates (also referred to as Economic Impact Payments) will provide $1,200 for each individual taxpayer and $2,400 for joint filers, with the addition of $500 per child. A typical family of four is eligible for a $3,400 rebate.

However, there are income thresholds, which kick in when AGI exceeds $75,000 for single filers, $112,500 for head of households, and $150,000 for joint filers. For taxpayers with AGI above these thresholds, the rebate amount is reduced by $5 for each $100 of income that exceeds the threshold. Since rebates are issued based on the number of filers and their dependent children, the phase-out calculation will be unique to each filer. Relevant examples would include rebates that are completely phased-out when AGI exceed $99,000 for individuals; $146,500 for head of household with one child; $198,000 for joint filers with no children, and $218,000 for a typical family of four.

If you are above the AGI thresholds and will not qualify, feel free to skip to the end. Otherwise, here are further details. The rebate will not be considered taxable income and under ideal circumstances, the rebate will appear in the mail or in your bank account if the following criteria are met:

  • Your 2018 or 2019 tax return has been filed and the AGI numbers are within the thresholds mentioned above. (If your 2019 return has not yet been filed, the IRS will use your 2018 return to calculate your qualification.) 
  • The IRS has an accurate way to process your rebate – you currently receive Social Security payments as a direct deposit or by paper check; or the IRS has issued tax refunds directly to active bank accounts and/or your address from 2018/2019 returns are current. (If your address has changed since your last filing, you can submit IRS Form 8822 to update your address, although it is not clear if this will guarantee proper receipt of the rebate check.)

The rebate is ultimately based on 2020 income, but if a taxpayer’s 2020 income is higher than 2018 or 2019, there will be no claw back. If a taxpayer’s income is lower in 2020 than in 2018 or 2019, they may be eligible for a tax credit when filing their 2020 tax return. Unfortunately, in difficult scenarios where income was relatively high in 2018/2019 but low in 2020, the rebate benefit will not likely be received until spring of 2021.

There are several other scenarios that will require adjustments along the way – children born recently who do not show up as dependents on 2018/19 returns but still qualify for $500 rebates; young adults who were listed as dependents on prior returns but are currently independent filers; people who have died; and couples who have divorced. These are complicated rules for a $1,200 check.

We will continue to update you as new information becomes available. As always, please call us at (901) 850-5532 if you have any questions.

We're all in this together.

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