Coronavirus, Aid, Relief and Economic Security (CARES) Act
Congress and the President passed the largest relief package in the history of the United States into law, estimated to cost over $2 trillion. Given the breadth of the relief provisions, we thought it important to provide a CARES Act translation for individual taxpayers. There is approximately $560 billion of relief available to individual taxpayers.
Direct Cash Relief
The CARES Act provides direct cash relief to individuals in the form of “recovery rebate” checks issued through the IRS with base amounts of $1,200 for single taxpayers and $2,400 for joint filers. Those amounts increase by $500 for every qualifying child. A qualifying child is a dependent of the taxpayer who is under age 17, including a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them.
These relief amounts begin to phase out when adjusted gross income (AGI) exceeds $75,000 for single taxpayers and $150,000 for joint filers. Payments are reduced by $5 for each $100 by which a taxpayer’s AGI exceeds the phase-out threshold, and relief phases out completely when a taxpayer’s AGI exceeds $99,000 (for single filers) or $198,000 (for joint returns).
A taxpayer’s AGI for the phase-out calculation would be based on a taxpayer’s 2019 federal income tax return if it has been filed. If a 2019 return has not been filed, AGI would be based on the taxpayer’s filed 2018 return.
Increased Access to Retirement Funds
Withdrawals: The CARES Act waives the 10 percent early withdrawal penalty (those under 59½) for distributions of up to $100,000 from qualified retirement plans to cover emergency expenses related to the coronavirus. Income tax on the distributions is payable over three years, and withdrawn amounts can be recontributed within three years.
Loans: The CARES Act allows participants to take plan loans during the 180-day period beginning on the date of enactment and up to $100,000 or 100% of the account balance. Typically, plan loans are limited to $50,000 or 50% of the account balance. The loan can be repaid over six years, instead of the typical five years.
To be eligible for withdrawal or loan relief, an individual must be:
- Diagnosed with COVID-19;
- Have a spouse or dependent diagnosed with COVID-19; or
- Experiencing financial hardship as a result of being quarantined, furloughed, or laid off; a reduction in work hours; inability to work due to lack of child care due to COVID-19; the closing or reduction in hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
Suspension of Required Minimum Distributions
The CARES Act suspends all required minimum distributions from IRAs, annuities under 403(a) and 403(b), retirement accounts for 2020. This applies to plan participants as well as beneficiaries of an inherited account. In addition, the year 2020 doesn’t count for any distribution requirement subject to a five-year payout.
Extension of IRA Contribution Deadline
Although not part of the CARES Act, it’s worth reminding that the IRS has extended the due date for any contributions to an IRA until July 15, 2020. It is implied that this extension applies to all various forms of IRAs, including Roth, SEP and simple IRAs.
Expanded Rules for Charitable Deductions
For 2020, the CARES Act temporarily eliminates the current 50% of AGI limitation on deductions for charitable contributions by individuals who itemize their deductions. Taxpayers can use charitable contributions to deduct up to 100% of their AGI. For non-itemizers, the CARES Act provides an above-the-line deduction of up to $300 for cash contributions to charities in 2020.
Expanded Exclusion for Employer-Provided Educational Assistance
The CARES Act permits employers to pay up to $5,250 annually to provide a studTent loan repayment benefit to employees on a tax-free basis. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (for example, tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after the date of enactment and before January 1, 2021.
Health Care-Related Tax Provisions
The CARES Act provides that Health Savings Accounts and Archer Medical Savings Accounts can be used to pay for menstrual care products as eligible expenses. Additionally, the CARES Act states that such accounts can be used for the reimbursement of such expenses incurred after December 31, 2019.
These highlighted provisions are a CARES Act translation for individual taxpayers and create new planning opportunities. We carefully review and discuss how they can benefit our clients and families. If you don’t have a trusted wealth manager helping you in this way, give Budros, Ruhlin & Roe a call.
Co-CEO and Chief Planning Officer