Key Points:

• On March 27th, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act—a $2.3 trillion stimulus package intended to support households and businesses—was signed into law.

• The CARES Act provides for several relief benefits for individuals and households, including direct payments from the government and relaxed retirement plan rules.

• The CARES Act also provides relief through increased charitable giving tax benefits; suspension of federal student loan payments and interest; and expanded unemployment insurance benefits.

Businesses and individuals across the world are currently experiencing an unprecedented level of emotional and economic strain amidst the Coronavirus (COVID-19) pandemic. To combat some of the economic stress created by the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.3 trillion dollar stimulus package intended to support American households and businesses, was signed into law on March 27th, 2020.

While the CARES Act provides relief to many small businesses, it also includes provisions for aid to individuals and households who may need it the most during this time. The stimulus package will provide government payments directly to individuals, assisting those who have lost their jobs or have seen their income reduced during the shutdown. The bill also relaxes various retirement plan rules, offering some help to those with retirement savings accounts. Additionally, CARES Act expands benefits related to charitable contributions and unemployment insurance; it also temporarily suspends payments and waives interest on federal student loans.

DIRECT PAYMENTS FROM THE GOVERNMENT

The CARES Act includes relief for individuals in the form of “Economic Impact Payments.” According to the Treasury Department and the Internal Revenue Service, distribution of these payments could begin within the next two weeks. The payment is actually a credit against 2020 income taxes but will be distributed in the form of immediate payment to provide faster assistance. Those that qualify and receive the payment will reduce the tax credit available on their 2020 income tax returns by the amount of the advance payment.

Qualification for payment

The qualification for the payment will be based on adjusted gross income (AGI) levels reported on an individual’s tax return. Individuals with AGI up to $75,000 for single filers and $150,000 for joint filers should receive full payment. For those that have income levels above those amounts, a graduated reduction in the payment will occur until income levels reach $99,000 and $198,000, respectively, when the payment will be phased out.

The payment amount, if qualifying in full, will be $1,200 per individual. The Act also provides for a payment of $500 per qualifying child (children age 17 or younger). Therefore, a family of four with household income under $150,000 could expect to receive a total payment of $3,400.

How will payments be calculated

Although there was originally some concern over how payments would be calculated, the IRS has provided guidance that if a 2019 tax return has been filed, this information will apply to determine if an individual is eligible for the stimulus payment. If a 2019 income tax return has not been filed yet, the 2018 income tax return will be utilized to calculate the payment.

For lower-income individuals, including Social Security recipients, who have not filed tax returns for 2018 or 2019, the IRS will use Form SSA-1099 or Form RRB-1099 to determine the payments. One issue with this process, however, is that it would not include any additional payment for qualifying children. For individuals who do not receive Social Security and do not have to file an income tax return, the IRS is recommending that they file a tax return as soon as possible.

Capstone Takeaway: Those who may be eligible for an Economic Impact Payment and have not yet filed a 2019 tax return, should compare their income from 2019 and 2018 prior to filing the 2019 return. The comparison should be done to determine if filing the 2019 tax return now would reduce (or increase) the qualifying payment amount. Keep in mind that the modified due date for 2019 income tax returns is July 15, 2020.

How will payment amounts be distributed

The payments are expected to be distributed electronically, using the bank account information that was reported on the most recently filed return. This could pose some additional issues for both the IRS and individuals that need this stimulus if banking information has either changed or has not been provided. If an electronic payment or deposit was not included on the filed return, a check will be sent in the mail to the last known address.

For renters or those who do not own a home, receiving checks by mail could also be problematic. To combat some of these discrepancies, the Treasury is expected to develop a web-based portal for individuals to provide their banking information online to the IRS.

RELAXED RETIREMENT PLAN PROVISIONS

In addition to the Economic Impact Payments, the CARES Act also provides relief to some individuals through the relaxation of various retirement plan rules.

Extension of Contribution Due Date

Normally, a contribution to an Individual Retirement Account (IRA), either traditional or Roth, would be required to be made by April 15th of the following year. With the recent extension of time to file 2019 income tax returns, the due date for contributions to an IRA has also been extended to July 15th. This will provide some additional time for those individuals who usually contribute each year but may be less confident about their current cashflow situation.

Waiver of Required Minimum Distribution (RMD) Requirement

One of the most impactful provisions related to retirement plans is the waiver of required minimum distributions (RMDs) for 2020. This is a good thing for those who are subject to RMDs in 2020 since the calculation of the distribution would have been based on December 2019 account values. In almost all cases, account values in December 2019 were substantially higher than what the values are today. This would have required many retirees to withdraw and pay tax on a much higher percentage of their current IRA balance.

For those who need the funds in their IRA for general living expenses, this provision will not provide much relief. However, for those who have some flexibility with their withdrawal options, this change could significantly reduce their overall tax liability for the year.

The waiver applies to RMDs payable during 2020, even for those retirees who turned 70 ½ during 2019 and deferred their distribution to 2020. The RMD waiver can also apply to inherited IRAs, even if subject to the 5-year distribution rule. For those who inherited an IRA under these rules, in 2015 or later, that 5-year distribution rule became a 6-year requirement under the CARES Act.

The CARES Act may also allow for the “unwinding” of RMDs already taken during 2020. If the distribution is not considered an RMD, this could allow for the withdrawal to be deposited back into the retirement account, if within 60 days. The unwinding would also only be allowed if no other IRA rollover had occurred within the 365-day period prior to the original receipt of the funds. It should also be noted that since inherited IRAs are not eligible for rollover, this added relief would not be available for those RMDs already taken in 2020.

Waiver of Distribution Penalties

The CARES Act also provides relief for those that need to access funds early from their retirement accounts due to hardships caused by the pandemic. Normally, a 10% penalty would apply to distributions from a retirement plan that were considered “early distributions.” Under the Act, the 10% early distribution penalty is waived on up to $100,000 of distribution taken during 2020 by an “affected individual”. Ordinary income tax would still be due on the distribution, but the CARES Act allows for the deferral of this tax in part, providing for a spread of the tax liability over a three-year period.

Increased Limit on Retirement Plan Loans

The CARES Act expands available loans from retirement plan accounts as well. Normally, the loan limit imposed on retirement plan accounts would be the lesser of $50,000 (including other outstanding loans) or 50% of the total account balance. For qualifying individuals, the CARES Act doubles the current retirement plan loan limit up to the lesser of $100,000 (including other outstanding loans) or 100% of the account balance. The new provision applies to loans taken now, through mid-September of 2020.

Capstone Takeaway: With regard to the relaxation of retirement plan rules—such as the waiver of distribution penalties and the increased limit on retirement plan loans—savers should be deliberate about decisions on withdrawing from their accounts at this time. Withdrawing from a retirement account is almost like going to cash: one may miss a significant market run-up, especially after the recent market downturn. We would caution people to try not to tap into their retirement savings as a first resource but rather, as a last resource if absolutely needed.

OTHER RELIEF PROVISIONS

Increased Charitable Giving Tax Deductions

During 2020, cash charitable contributions can now be deducted up to 100% of AGI. Normally, this limit would be 60% of AGI, a change made after the Tax Cuts and Jobs Act. For those individuals who do not itemize their deductions, and instead use the standard deduction, they will be able to take a $300 above-the-line adjustment to taxable income in 2020. This new provision applies to cash contributions made directly to a charitable organization, rather than a Donor Advised Fund. As of this writing, this new provision does not have an ending year, so it could continue to be applicable for future years as well.

Suspension of Student Loan Payments and Interest

The Act provides significant relief to many student loan borrowers. Monthly payments on qualifying federal student loans will be suspended, and interest accrued on these loans will be reduced to 0%. These provisions currently apply until September 30, 2020.

Expanded Unemployment Insurance Benefits

The CARES Act provides several benefits related to unemployment benefits, with an estimated $260 billion related to enhanced and expanded unemployment insurance for millions of workers. Until July 31st, 2020, the Act provides for Pandemic Unemployment Compensation (PUC), which will allow for an additional $600 per week in unemployment benefits. There are also provisions extending state unemployment benefits for a period of 13 weeks. The CARES Act also expands the application of benefits to include those that normally would not qualify under the state unemployment benefits, including independent contractors.

CONCLUSION

The CARES Act is a wide-reaching stimulus plan meant to address the economic hardship being felt by many individuals and businesses due to the coronavirus pandemic. The provisions of the CARES Act aimed at individuals include direct payments from the government and the relaxation of various retirement plan rules. Additionally, increased charitable giving tax deductions; suspension of student loan payments and interest; and expanded unemployment insurance benefits should provide some necessary relief to individuals impacted by this virus.

If you have any questions regarding The CARES Act, or how the provisions may apply to you or your family, please reach out to Capstone for additional information.

Sources:

https://www.congress.gov/bill/116th-congress/house-bill/748/texthttps://gop waysandmeans.house.gov/the-senate-cares-bill-helping-small-business/

https://www.irs.gov/coronavirus

https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know