Financial Planning, Tax Planning

Insight On The CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is releasing a whopping $2 trillion in government aid. Since there are countless resources outlining the details of the new Act, my goal is not to recreate the wheel, but to provide insight on actions you should consider as you navigate the provisions specific to you and your family.

Individual Economic Relief

The Tax Foundation estimates over 90 percent of Americans will receive this one-time tax credit. To be eligible for the tax credit, your adjusted gross income (AGI) for 2018 or 2019, needs to be below a specified threshold. In addition to individual relief, there will also be relief for families with children. Here is a chart that shows AGI thresholds, the credit available, and examples of total credit amounts for those with children.

What You Need to Know

  • The AGI threshold will be based on 2018 or 2019 tax returns, whichever is the most recent tax return.

  • There are phase-out limits for the credit. For example, an individual who made $85,000 in 2018 will be eligible for a partial credit.

  • If your income was under the AGI threshold for 2018, but over in 2019, you may want to delay filing your 2019 tax return to receive the full or partial credit now. The 2019 tax filing deadline was moved from April 15, 2020 to July 15, 2020.

  • If your 2018 AGI was over the threshold, but your 2019 income was below the threshold, you may want to consider filing your 2019 tax return as soon as possible to receive the full or partial tax credit now.

  • If you had a child in 2019 and your AGI was under the threshold in 2019, you may want to consider filing as soon a possible to receive the $500 credit per child.

  • If your income in 2018 and 2019 exceeds the threshold, but your 2020 income doesn’t, you will be eligible for the tax credit when you file you 2020 taxes in 2021.

Coronavirus-Related Distributions

If you were impacted by the Coronavirus, you may be eligible to access retirement funds without the 10 percent early-withdrawal penalty. Below is a list qualifying scenarios:

  • You, your spouse, or dependent was diagnosed with COVID-19

  • You experience adverse financial consequences from being laid off, quarantined, or furloughed or worked reduced hours because of COVID-19

  • You are unable to work because of lack of childcare as a result of COVID-19

  • You own a business that has closed or is operating with reduced hours because of COVID-19

  • You meet some other reasons that the IRS decides to say are OK

What You Need to Know

  • Up to $100,000 may be taken from IRAs, employer-sponsored plans (ESP), or a combination of the two without incurring the standard 10 percent penalty for early distributions. As a reminder, you will still pay income tax on the amount distributed.

  • Three-year Repayment of Distribution – A person who takes a distribution from an IRA or ESP will have up to three years to roll all or any portion of the distributions back into a retirement account. If rollover contributions take place, an amended return should be filed to claim a refund on the taxes paid attributable to the rolled-over amount

  • Three-Year Income Spreading – By default, the distribution from an IRA or ESP for Coronavirus-related distributions will be evenly split between 2020, 2021, and 2022. The taxpayer will also have the option to include the entire distribution as income in 2020. But, it’s either or. The tax payer will not be able to identify 80 percent as taxable in 2020, 10 percent in 2021, and 10 percent in 2022.

Required Minimum Distributions

Required Minimum Distributions (RMD) for 2020 will be suspended. This provision includes RMDs for the account owner and beneficiaries taking RMDs on an inherited IRA. 

Under previously established rules, Individuals who turned 70.5 in 2019 were required to take their first RMD by April 1, 2020 and their second RMD by the end of 2020. Due to the provisions in the CARES Act, neither RMD will be required.

RMDs Already Taken in 2020 – If you have already taken your required 2020 distribution, you have two options to get the money back into your IRA:

  1. 60-day rollover

  2. If you happened to take your RMD in early January and do not qualify for the 60-day rollover option, you are eligible for the three-year repayment option discussed earlier in this blog if you can show you were impacted by the Coronavirus.

Beneficiaries who have already taken RMDs are not eligible to put the distributions back into the IRAs

Student Loan Payments

Federal student loan payments will be suspended until September 30, 2020. In addition, no interest will accrue on the debt during this time period.

While required payments are suspended, voluntary payments are not. For example, if you have set up automatic payments through your bank, these payments will continue unless you stop them.

Reach out to your loan service company to discuss the options available to you.

Final Thoughts

The CARES Act is more than 800 pages. After digesting the provisions within the document, we found these to be the most impactful for the majority of our clients. If you have specific questions about unemployment benefits, business owner provisions, qualified charitable contributions, or any other provision within the Act, please reach out to us.