The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27th. This $2 trillion to $6 trillion package contains a number of items for individuals to be aware of. Below are a few components of the legislation.
Cash to Taxpayers
Rebate checks will be going to taxpayers. If a taxpayer’s 2018 or 2019 adjusted gross income (whichever most current tax returns are on file) are less than:
- $75,000 for an individual
- $112,500 for head of household
- $150,000 for a joint return
Then taxpayers will receive up to $1,200 for individuals or $2,400 for married filing jointly. There is an additional $500 for each child under age 17. Taxpayers with higher incomes will have their checks reduced $5 per $100 of additional income if over these thresholds.
If a person’s 2019 income is lower than 2018 and they do not qualify on their 2018 income, they will want to be sure to file their 2019 tax return as soon as possible. Taxpayers who do not qualify for the check based on their 2018 or 2019 tax returns, but who do ultimately qualify in 2020, will need to wait until they file their 2020 taxes to reap the benefit of this provision (which will come in the form of a tax credit). If a person qualifies for a rebate check but has income in excess of the limits in 2020, they get to keep the rebate.
The funds will come to a taxpayer based on how they paid their most recent taxes: either via electronic transfer to their bank account or a check. For those who moved, it is important to file tax form 8822 to complete a change of address. For individuals receiving Social Security benefits, they will receive their rebate check in the same account they receive their Social Security benefits.
Tax / Retirement Provisions
Early Distribution Penalty Waived
Those under the age of 59 ½ who have been affected by the coronavirus may take up to $100,000 from their combined Individual Retirement Accounts (IRAs) or employer plans without penalty if they are experiencing the following circumstances:
- Must be diagnosed with COVID-19.
- Have a spouse or dependent diagnosed with COVID-19.
- Experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced because of the disease.
- Are unable to work because they lack childcare as a result of the disease.
- Own a business that closed or operated under reduced hours because of the disease.
- Meet some other reason that the IRS decides is okay.
Additionally, there is no mandatory withholding from the employer plan and the funds are eligible to be repaid over 3 years. The distributions will still be taxable but the income may be spread out over three years. However, if 2020 is a low income year, the taxpayer may choose to recognize all the income in 2020.
These qualifying distributions will be exempt from the 10% penalty.
Loans from Employer Plans
There are some enhancements for the loans that can be taken from Employer Plans.
- The amount of loan is increased from $50,000 to $100,000.
- Employees can use 100% of their vested balance.
- Payments on the plan loan may be delayed one year.
Required Minimum Distributions Waived
The CARES Act waives the 2020 Required Minimum Distribution for those that are age 70 ½ from both Individual Retirement Accounts as well as employer sponsored plans. Those first timers who delayed 2019 into 2020 are able to suspend both RMDs. This suspension of RMDs includes inherited RMDs as well as the inherited 5-year rule.
What if a person already took their RMD and would like to put it back? For 2020, IRA original owners will be able to put the funds back either as a 60-day rollover or a Coronavirus-related distribution. However, there is no roll back option for beneficiary RMDs from inherited accounts.
If the 60 days has passed, there may be another approach. If it can be shown that the individual has been impacted by the COVID-19 crisis enough to qualify for the liberal guidelines, then the rollover can still be completed anytime for the next three years from the date of distribution.
For 2020,the IRS offers up to $300 of above the line charitable deductions provided the gift was made in cash to a 501(c)(3) charity and not to a Donor Advised Fund.
Additionally, the Adjusted Gross Income (AGI) limit for charitable contributions is repealed for cash contributions. This increases the AGI limit from 60% of AGI to 100% of AGI. These gifts must go to a 501(c)(3) charity and not to a Donor Advised Fund.
As of March 27th the applications for unemployment reached 3.3 million. CARES Act provides some relief.
Pandemic Unemployment Assistance
Self-employed people or other individuals who are ineligible for regular unemployment will be eligible for up to 39 weeks of benefits.
Regular Unemployment Compensation is Bumped by $600 per week.
States will be able to increase their unemployment benefits by up to $600 per week with federally funded dollars.
The CARES Act offers to pay states to provide unemployment compensation benefits immediately. Normally, there is a one week waiting period to qualify for unemployment.
Analyzing the CARES Act: From Rebate checks to Small business Relief For the Coronavirus Pandemic. https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic/
Washington Post: Coronavirus stimulus package offers relief for retirees with RMD waiver and penalty-free 401(k) withdrawals. https://www.washingtonpost.com/business/2020/03/30/coronavirus-stimulus-cares-act/