How provisions of the CARES Act will impact you

By March 30, 2020May 6th, 2021PFA Ponderings

Last week, Congress passed, and the President signed the most sweeping fiscal stimulus bill in history, The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), aimed at cushioning the economic impact that has come from the virtual shutdown of the majority of the country.  To call this Act massive is to understate it. At $2 Trillion dollars in paid benefits (plus another $4 Trillion in loan guarantees) the size and scope of this Act eclipses any fiscal stimulus action in the history of our country by good measure.

There are a number of provisions in the Act that provide for aid to businesses, both large and small, and to municipalities.  For now, however, let’s focus our attention today on those that will impact individuals directly.

RECOVERY REBATE

The first, and likely most widespread benefit, is the ‘Recovery Rebate’.  The current estimate is that 90% of taxpayers will receive one of these rebates.  The credit amount is up to $1,200 for single filers, $2,400 for married couples filing jointly, and then increased by $500 for every child the taxpayer has under 17.

There are phaseouts to this benefit, as follows

  • Married Joint: $150,000
  • Head of Household: $112,500
  • All Other Filers: $75,000

If a taxpayer exceeds these levels, the amount of the rebate will be reduced by $5 for every $100 over.  Therefore, for example, a single filer with more than $99,000 in 2019 adjusted gross income on their 2019 tax return will be ineligible for any rebate check, at least right now.

Ultimately, the rebate is based on 2020 income.  However, since no one really knows what people’s 2020 income is, the rebates will be distributed based upon 2018 or 2019 tax return information, whichever is the most recent year filed.  In other words, someone whose income was too high to qualify for a rebate still will get one on their 2020 tax return, filed in 2021, if their 2020 income would have qualified them.  That is somewhat thin gruel for someone who made enough money in 2018 or 2019 not to qualify for the rebate, but who is currently laid off and will make a low enough amount in 2020 to qualify.  They may need the money most now, but it’s with next year’s tax return that they’ll actually receive it.

These rebate payments will likely go out either by mailing address or by direct deposit to the same bank account set up to receive tax refunds by the taxpayer.  While this may cause problems for taxpayers who have moved or whose bank account has changed, there will be a central number that taxpayers can call to sort it out.

UNEMPLOYMENT BENEFITS

Unemployment Insurance benefits are generally administered by the state in which one files, but there are now going to be Federal supplements to those benefits.

The first week of unemployment is usually not covered, as an incentive for someone who can find work quickly to not bother filing.  This first week will now be covered by the federal government.

Standard unemployment benefits (which average less than $400/week) are going to be increased by $600/week, which is a significant increase, and which may help a lot of displaced workers get through this disaster.

Of significance, these unemployment benefits go to self-employed people as well (a group who generally does not qualify for unemployment coverage).  This would include the wide range of ‘gig workers’ out there, driving Ubers and other small enterprises.  This coverage can go as long as 39 weeks.

IRA and RETIREMENT PLAN DISTRIBUTIONS

People who have been impacted by the coronavirus, either directly because they or their spouse have been diagnosed with COVID-19, as well as people who have been financially impacted, are eligible to remove up to $100,000 from a qualified retirement plan or IRA.

Some special provisions apply in this case.  First, the 10% penalty for pre-age 59 ½ distributions is waived for qualifying distributions.  Also, there is no mandatory tax withholding (most qualified retirement plan distributions such as 401k or 403b distributions mandate a 20% tax withholding, normally).

Taxes due on these distributions can be paid evenly on the 2020, 2021 and 2022 tax returns.  Additionally, at any time up to three years from the distribution, the money can be paid back and any taxes previously paid can be adjusted with an amended tax return.

Loan limits (on plans that allow loans) have been widened as well.  Typical loan restrictions on qualified plans are 50% of balance up to $50,000.  Under the CARES Act, these limits (both dollar and percentage) double.  Someone can borrow up to $100,000 or 100% of their balance, whichever is less.  And, to make it easier on people who have to go to the extreme measure of borrowing from their retirement, there are no payments required for the first 12 months after a loan is distributed.

REQUIRED MINIMUM DISTRIBUTIONS SUSPENDED

Similar to the Global Financial Crisis back in 2008, Required Minimum Distributions from qualified retirement plans like 401(k)s and 403(b)s, along with IRAs, are suspended for 2020.  The same applies to beneficiaries taking distributions from inherited IRAs.  People who have already taken their 2020 RMDs but who want to put them back are allowed to do so (although this is not an option for beneficiaries of inherited IRAs who have already taken their distribution.)

For estates, charities, and non-see-through trusts, which are subject to a 5-year distribution requirement normally, 2020 will not count as one of those 5 years.

CHARITABLE DEDUCTIONS

Doubtless, this is a difficult period for non-profit charitable organizations who are finding it difficult to carry out their missions, whose donor base may be financially stressed, and who have needed to cancel fundraising type events.  Since the large increase in the standard deduction ushered in at the beginning of 2018, very few taxpayers actually have the ability to deduct contributions they make to charities.  In 2020 (and perhaps beyond – there isn’t a specific end date in the Act), up to $300 of charitable deductions will be considered ‘above-the-line’.  In other words, this reduces adjusted gross income directly, before any deductions (standard or itemized) are considered.

This seems like (and is) a minor benefit to the taxpayer.  For someone in the 22% tax bracket, this only represents $66 in savings.  However, with any luck, it will encourage people who otherwise wouldn’t have any benefit from their charitable giving to look anew at some opportunities to help within their community.

For the very charitably inclined, the Tax Cuts and Jobs Act of 2017 placed the charitable deduction limit at 60% of adjusted gross income.  The CARES Act increases that to 100%, with up to a 5-year carry-forward on amounts that drive the taxpayer’s taxable income below zero.

DELAY IN TAX DEADLINE

The normal April 15th deadline is now moved back three months to July 15th.  This is for federal tax returns AND federal tax payments, including the estimated tax payments that would normally be due on April 15th for 2020 taxes.

This applies to most everything with the April 15th deadline.  2019 IRA contributions, for example, normally due on April 15th, are now due on July 15th.

Here in Maine, there was some initial confusion, because the state had not moved its filing date back to July.  Since Maine’s income taxes take the AGI number from the federal taxes, it made the federal extension a bit moot.  However, at the end of last week, Maine coordinated with the federal tax folks, and moved their tax deadline of July 15th.

DEFERRAL OF STUDENT LOAN PAYMENTS

Federal student loan payments may be deferred until September 30, 2020.  During this time, no interest will accrue on those loans.  For people with time-based student loan forgiveness eligibility, that clock continues to run through the deferral period.  This is important, because generally someone angling toward 20- or 25 year loan forgiveness is utilizing payment methods that ensure they pay as little as possible (maximizing forgiveness).  If they do nothing, scheduled payments will continue to be made, so they should certainly consider pausing those payments immediately.

There are certainly a lot of programs and rules in place that provide some flexibility for the majority of individuals impacted by the economic effects of containing this virus.  There will still be people who fall through the cracks.  While looking through this, think of anyone you might be able to help, either with information or some other form of assistance.  While we do our best to ‘flatten the curve’, be sure to take care of yourself and of those close to you.  Be well.