Information updated as of July 3, 2020
The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27, 2020. The act is meant to ease the financial burden that individuals and businesses have taken on as a result of the COVID-19 pandemic. The most notable provisions of the CARES Act are as follows:
The provision of the CARES Act that has received the most attention is the “Recovery Rebates for Individuals.” The rebate is structured as an advanced tax credit to be used against income in 2020 and is not to be viewed as taxable income. The rebate will be available for taxpayers that fall below certain income thresholds and will be based on 2018 or 2019 tax returns. The IRS will use the most recent tax return that they have on file for each taxpayer. If a taxpayer has not yet filed their 2019 tax return, the 2018 tax return will be used.
A single individual taxpayer with income under $75,000 will receive $1,200, with the phase-out range being between $75,000 and $99,000, and no payment will be received if an individual’s income is over $99,000. A married couple with income under $150,000 will receive $2,400. These payments would begin to phase-out at any income over $150,000 and any couple with income over $198,000 would receive no payment. The rebate amounts are reduced by $5 for each $100 that a taxpayer’s income exceeds the limit. Any taxpayer with a child under the age of 17 will receive an additional $500 per child.
Unfortunately, this provision will not immediately help taxpayers that may have been over the income thresholds in 2018 or 2019 and have had a reduction in income during 2020 as a result of the COVID-19 outbreak and would now fall under the thresholds. They would have to wait until next year when their 2020 income tax return is filed to receive any payment. On the contrary, any taxpayer that has had an increase in income during 2020 and may be above the thresholds would still receive payment if they met the requirements based on their 2018/2019 income.
If an individual is not normally required to file a tax return because they only receive Social Security benefits, they will likely still receive the rebate because the IRS will use their most recent Form SSA-1099 to determine eligibility. If they did not receive Form SSA-1099 in 2019, it is recommended that they file a 2019 tax return, even if they do not have taxable income, to ensure they receive the rebate.
The rebate checks are expected to be disbursed as soon as possible, which could be as late as May, and will be direct-deposited to the account that was indicated with the filing of a taxpayer’s most recent tax return. If this does not apply, checks will be sent to the last known address the IRS has on file.
Distributions Related to COVID-19
Any individual that has been diagnosed with COVID-19, has a spouse or dependent who has been diagnosed with COVID-19, or has experienced a financial burden as a result of being quarantined, furloughed, laid off, or has had hours reduced because of the disease can take a distribution of up to $100,000 from an IRA or employer-sponsored retirement plan.
These distributions must be taken in 2020, would not be subject to mandatory federal withholding of 20%, and the 10% early withdrawal penalty would be waived for individuals under the age 59 ½. An individual has up to three years to roll all or any portion of this distribution back into the IRA or retirement account. Finally, the income from this distribution (and subsequent tax payment) can be included in 2020 income or split evenly over a three-year period. The default option is for the income to be included ratably over a 3-year period, but an individual has the option to include all of the gross income in 2020.
Required Minimum Distribution Waiver in 2020
The CARES Act waives any Required Minimum Distributions (RMDs) that need to be taken from an IRA or other qualified accounts for 2020, including relief for beneficiaries taking RMDs from inherited accounts. This provision not only applies to any 2020 RMD but also to a 2019 RMD that may have been delayed until this year. Specifically, if an individual turned 70 ½ in 2019, their first RMD would be due April 1, 2020. If they did not take this in 2019, and were planning on delaying it until 2020, they no longer are required to take it.
Under usual rules, any distribution taken from an account is eligible to be returned to the account within 60 days. Under the CARES Act, the deadline for any distribution taken on January 1, 2020 or later has been extended to August 31, 2020. So the 60-day window is now the later of 60 days from the date of distribution or August 31, 2020. Additionally, any rollover back into the plan up to the amount of what would have been the RMD is not subject to the limit of one rollover per 12-month period. In other words, an individual that has taken their RMD over multiple distributions can return any or all amounts up to the amount of the RMD. Finally, the aforementioned relief now applies to both spousal and non-spousal beneficiaries of an IRA, so any inherited IRA RMDs taken on January 1, 2020 or later can be returned to the account on or before August 31, 2020.
Unemployment Compensation Changes
To aid the millions of individuals that have lost their jobs as a result of COVID-19, the CARES Act expands the benefits of unemployment compensation. Unemployment compensation benefits can begin immediately without the standard one-week waiting period. The act will add up to $600 per week to unemployment compensation that an individual was scheduled to receive. This additional $600 per week payment can last for four months, and the total unemployment compensation period is extended to 39 weeks (an increase from the standard maximum period of 26 weeks). They have also expanded the program to allow self-employed individuals and some others who are not normally eligible for unemployment to receive benefits.
Small Business Relief
The CARES Act provides relief to small businesses (defined as a company with 500 or fewer employees, with a few exceptions) through a variety of ways. Through the “Paycheck Protection Program,” small businesses may receive loans of up to $10 million or 2.5 times the average monthly payroll costs over the previous year (whichever is lesser). All loan terms will be the same. The loan has a term of 2 years and the interest rate will be fixed at 1.00%. The proceeds of the loan must be spent on employee salaries, paid sick or medical leave, rent, utilities, and group health insurance premiums. Payments on these loans will be deferred for 6 months, although interest will accrue during this deferment period. The application deadline for a loan is June 30, 2020.
The biggest potential benefit to these loan through the Paycheck Protection Program is the possibility for all or a portion of the loan to be forgiven. The amount eligible for forgiveness is the amount spent on payroll costs, rent, utilities, and group health insurance premiums during the first 8 weeks after the loan is issued. For the loan to be forgiven, the small business must maintain the same number of employees following the date of origination as it did from February 15th through June 30th 2019 or from January 1, 2020 to February 15, 2020. The amount of loan forgiveness will be reduced ratably to the extent that this requirement is not met. To encourage employers that laid off any employees during this period, any borrower that re-hires a worker that was previously laid off will not receive a reduction in their forgiveness amount. Any debt forgiven under this program is not included in taxable income for the year.
Another incentive for small businesses introduced through the CARES Act is an employee retention credit available to employers that have had operations fully or partially suspended due to the government-imposed limitations or has had less than 50% of the revenue from the same quarter in 2019. This credit is only available to employers that do not receive a loan through the Payroll Protection Program and is provided as a refundable payroll tax credit for 50 percent of wages paid by the employer, up to a maximum of $10,000 of wages per employee. For employers with 100 or fewer full-time employees, all wages up to the $10,000 maximum limit per employee count towards the credit; for employers with more than 100 employees, only wages paid to individuals, up to the $10,000 maximum limit, who are not working are eligible for the credit.
The deferral of payment of payroll taxes is another incentive available to small businesses that do not receive loan forgiveness under the Payroll Protection Program. This provision allows employers to defer 50% of their payroll taxes due through the end of 2020 to December 31, 2021, with the remaining 50% due on December 31, 2022. This also provides relief for self-employed individuals in regards to the employer-equivalent portion of their self-employment taxes, meaning 50% of an individual’s self-employment taxes through the end of 2020 are eligible for deferral.
Other Miscellaneous Details
- The maximum loan amount from employer-sponsored retirement plans has increased to $100,000 (up from $50,000.) Additionally, 100% of the vested balance is eligible for a loan (previously 50% of any balance between $20,000 and $100,000). Any payments owed on the loan that would be made in 2020 can be delayed for up to one year.
- Any taxpayer that claims the standard deduction for 2020 is eligible for an above-the-line Qualified Charitable Contribution deduction of up to $300. The contribution must be made in cash and cannot be used to fund a donor-advised fund.
- Non-designated beneficiaries have to distribute the full amount of the inherited account by the end of the fifth year in which the retirement account owner passed, otherwise known as the 5-Year Rule. For the purposes of this rule, 2020 will not be counted as one of those 5 years effectively making this a “6-Year Rule”.
- Required Federal student loan payments are suspended through September 30, 2020. During this time, no interest will accrue on the outstanding loan balance.
- The IRS has pushed back the deadline to file 2019 tax returns to July 15, 2020. This also pushes the deadline back to that same date to make an IRA contribution.
We all are experiencing an unprecedented and challenging time, but the initiatives of the CARES Act are meant to assist individuals and business owners with their short-term needs. Please stay in contact with your Financial Advisor at Hefren-Tillotson to ensure you are receiving proper guidance to achieve your goals through your personalized long-term financial plan.