by Jeff Deiss
CFP, AEP, Wealth Advisor
March 28, 2020
The Coronavirus Aid, Relief and Economic Security Act, (CARES Act) of 2020 is a historic emergency relief program focused on keeping American Workers Paid, Assistance to Workers, Families and Businesses, Supporting America’s Healthcare System in the fight against the Coronavirus, and the Economic Stabilization of the U.S. Economy.
There is a lot in this bill and we’ve summarized below some highlights of the provisions that apply to individuals.
Stimulus Checks
The CARES Act provides $1,200 for each adult and $500 for each child under 17. To qualify for a stimulus payment, you need to have a social security number and not be a dependent of someone else (so adults get the $500 payments for their children).
Payments are phased out for those with an adjusted gross income (AGI) above $75,000 for individual taxpayers and $150,000 for married couples filing jointly. Payments are reduced by $50 for every $1,000 of AGI above these thresholds and completely phased out for individuals with AGI of $99,000 and couples with AGI of $198,000.
Payments are based on your 2019 income (or 2018 if that is all that is available to the IRS). The final amount will be determined based on 2020 income and settled on your 2020 income tax return. In the end, those who qualify for more than they receive this year (if their income dropped) should get the rest through a larger tax refund or smaller tax payment in 2021. Those who ultimately qualify for less than they got this year (their income rises) do not have to pay it back.
There has been no schedule announced as to when payments will be made. The time frame to begin payments is targeted at three weeks. Those who have filed their 2019 tax returns and have direct-deposit information on file with the IRS are likely to see payment sooner while those who have not yet filed, or need a paper check, will be delayed.
Temporary Suspension of RMDs for 2020
The Act suspends the minimum required distributions for those who must take them from tax-deferred 401(k)s and individual retirement accounts (IRAs). This affects retirees who turned 70 ½ by 2019 or were turning 72 this year. The provision also suspends 2020 RMDs for “inherited” IRAs, 401(k)s and Roth IRAs.
The RMD suspension is similar to the measure Congress enacted in 2009 and helps those who would otherwise have to take RMDs, based on their account balances as of Dec. 31, 2019, when the stock market was near all-time highs. The suspension gives those who can afford to leave their nest eggs alone more time to recover losses and leaves more dollars in their accounts if the market rebounds.
For those IRA owners who use their IRAs to make Qualified Charitable Deductions (QCDs) to offset their annual RMD, you can continue to do so as QCDs are excluded from income anyway, however, you may want to write a check this year instead (see Charitable Contributions below) if you prefer not to take funds out of your IRA for this purpose.
IRA owners who were due to take their first RMD in 2019 and elected to delay their first distribution until April 1, 2020 do not have to take their 2019 withdrawal.
Anyone who has already taken their RMD from an IRA should be eligible to roll it back into their IRA (and avoid income taxes on the same) as long as two conditions are met. First, the rollover back into the IRA has to be completed within 60 days of taking it out (if you took your RMD on January 1, for example) then it’s too late to put it back). Second, you can only do one rollover per year. The rollover provision does not apply to inherited IRAs since they are not eligible for a 60 day rollover.
Charitable Contributions
To encourage individuals to continue to contribute to their churches and other charitable organizations, the Act allows an “above the line” deduction of up to $300 in cash contributions for 2020 and future tax years to qualified charities, whether or not the taxpayer itemizes deductions.
For those who do itemize, the bill also calls for a temporary suspension of the existing limitation on deductions for cash contributions (“qualified charitable contributions”) made in 2020. Taxpayers can elect to deduct up to 100% of their AGI for 2020, which is an increase from the current 60% of AGI limit. Any excess cash contributions that are not deducted in 2020 can be carried forward subject to the current 60% of AGI limit for the succeeding five years.
Hardship Distributions from Retirement Accounts
To qualify for the hardship distribution, the account owner or his or her spouse or dependent must have been diagnosed with the coronavirus or lost income due to a layoff, business closure, quarantine, reduction in hours, or inability to work due to a lack of child care.
People affected by the coronavirus crisis can access to up to $100,000 of their retirement savings without the 10% penalty that normally applies to money taken out before age 59½. Hardship withdrawals will be taxable, but account owners can pay the income tax due on the withdrawal ratably over three years, rather than in the first year.
Alternatively, they can elect to put the money back into a 401(k)-type plan or an IRA within three years, and skip the tax payments by treating it as a rollover. Such a repayment will also not impact the normal annual contribution amounts (i.e. $6,000 for an IRA) in any particular year.
Loans from 401(k)s and similar plans
IRAs do not permit loans, but for the next six months, the bill doubles the amount that 401(k) participants, who have been diagnosed with the virus or affected by economic losses, can borrow to the lower of $100,000 or 100% of the account balance.
The deadline for repayment of 401(k) loans —new or existing—is extended by one year.
Extended Deadline for 2019 IRA Contributions
Concurrent with the extension for 2019 federal income tax filing, individuals have until July 15, 2020 to make IRA contributions for 2019. Given the extension until July, pay attention to making sure that such contributions are properly coded for 2019 and not 2020.
Also, not every state has extended its tax filing deadline consistent with the federal government. You may still need to file state income taxes despite the fact that you have until July 15 to file your federal income tax return.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
The Act eliminates the prohibition for over-the-counter medicines (non-prescribed) being excluded as a “qualified medical expense”. Owners of HSAs and flexible spending accounts can use funds to cover over-the-counter medical products, including those needed in quarantine or for social distancing, without a prescription.
Coverage of Testing and Preventative Services
Health insurers/group plans must reimburse providers for the cost of testing for COVID-19. Health insurers/group plans must also cover preventative measures (any item, service or immunization intended to prevent or mitigate COVID-19) as they become available, with no cost-sharing obligation.
Please see the separate Medicare Coverage Updates with additional details for Medicare beneficiaries.
Unemployment Insurance Provisions
The CARES Act provides federal funding for unemployment compensation to gig-economy workers adversely impacted by COVID-19 where such workers are not otherwise covered by unemployment compensation laws or have exhausted their state benefits. Gig-economy workers are to receive the same benefit as regular employees covered under each state’s law.
The Act provides states with the opportunity to enter agreements with the federal government to provide enhanced benefits including an additional $600/week for up to four months and an additional 13 weeks for participating states. There is also a provision for states to work with the federal government to provide “short-time compensation” to subsidized employees who have had their hours reduced in lieu of a layoff.
The goal of the today’s commentary was to summarize the highlights that may affect you individually. There are numerous business provisions included as well and we’ll follow up with any planning opportunities we find as we digest these changes. Medicare has also relaxed some its rules as a result of the COVID-19 outbreak, which we’ve covered in a separate update. If you have any questions, please reach out to your ACM Wealth Advisor.
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