The CARES Act - What does it mean for you?
March 31, 2020
In late March 2020, Congress passed a $2 trillion stimulus package called the CARES Act - the Coronavirus Aid, Relief, and Economic Security Act1.
The primary features of the Act include boosts to unemployment insurance payouts as well as some changes to retirement accounts that should help ease the financial burdens currently faced by many Americans. (NOTE: Don’t assume that we’re in the clear because the government is pumping $2 trillion into the economy. If we were in the clear, the House wouldn’t be working on the next stimulus package, which they are. Assume more ups and downs in the stock market over the next few months, or longer.)
The new law impacts how we plan for our clients' lives, so we wanted to share some highlights:
- Required Minimum Distribution (RMD) requirements waived for 2020 - The requirement to take a mandatory withdrawal from your retirement plan (including but not limited to IRAs, inherited IRAs, 401(k)s, 403(b)s, and 457s) is waived for 2020. The goal here is to prevent retirees from having to sell assets when they're down in order to take a required taxable distribution. Note that any required minimum distributions taken year-to-date can only be reversed via the 60-day IRA rollover provisions.
- Unemployment insurance payouts - Unemployment insurance has been expanded considerably. According to NPR.org2, "First, the bill would extend regular unemployment benefits to last an additional 13 weeks. In most states, laid-off workers can get a maximum of 26 weeks of benefits. The bill would also add four months of $600 weekly payments on top of the usual weekly unemployment checks. That is a large bump compared with usual unemployment benefits. According to the Labor Department, the average weekly benefit as of the end of February was about $372."
- Relief checks - Individuals will be eligible to collect relief checks of $1,200 while those filing jointly can collect up to $2,400. In addition, there’s the benefit of an additional $500 per child (for each child under the age of 16). Relief checks are not available to all taxpayers. Single tax filers earning up to $75,000 ($150,000 if filing jointly) will be eligible to receive the checks, though payouts will be reduced beyond those amounts, completely phasing out once income reaches $99,000 for single filers ($198,000 for joint filers). "Income" will be based on the adjusted gross income (AGI) listed on the 2019 tax return. If a return hasn’t been filed for 2019; it will be based on the 2018 tax return.
- Qualified Charitable Contributions - Not to be confused with Qualified Charitable Distributions (when one donates directly to a charity using their RMD), a Qualified Charitable Contribution allows individuals to take an above-the-line deduction of up to $300 of cash contributions, regardless of whether you itemize (note that gifts of appreciated securities, written about here) wouldn't apply - gifts must be in cash to apply for the deduction. As you might recall, the Tax Cuts and Jobs Act of 2017 doubled the standard deduction, significantly reducing the number of taxpayers who itemize (thereby significantly reducing the number of people who receive tax incentives for donating to charity). The CARES Act reverses that trend. Also worth noting, the ability to make Qualified Charitable Contributions is not a temporary change - it's now part of the current tax code.
- Penalty-free withdrawals from retirement plans - Withdrawals of up to $100,000 made from qualified retirement accounts after January 1, 2020 will be free of the standard 10% penalty provided they're made for coronavirus-related purposes (defined as you or your spouse being diagnosed with coronavirus or experiencing financial hardship due to the virus). While you won't be penalized on the withdrawal, ordinary income taxes will apply, payable over three years. Additionally, you may re-contribute the withdrawn funds to an eligible retirement plan within three years. The CARES Act also provides some flexibility for loans from certain retirement plans when made in connection with coronavirus relief.
- Student loans - The CARES Act includes several positive provisions for individuals with student loans. The bill includes a provision that effectively suspends Federal loan payments until September 30, 2020. During this period, no interest accrues on outstanding loans. Also, a provision was included allowing employers the ability to pay up to $5,250 of a student loan tax-free.
With the CARES Act, Congress provided some financial incentives to help ease Americans' financial burdens. This is the first step; it likely won't be the last. If you think you might benefit from any of the provisions listed above, gives us a call so we can review it with you.