Key Components of the CARES Act for Individuals
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was recently enacted into law and many of the provisions of the $2 trillion package may be relevant to you. We compiled this summary along with other guides to provide the information you need to understand the provisions of the CARES Act. For CARES Act incentives for businesses, please read What Businesses Need to Know About the CARES Act.
First and foremost, the April 15th tax filing and payment deadline for individuals, trusts and estates and corporations has been extended until July 15th. Taxpayers do not need to file an extension or pay their 2019 or 2020 Q1 tax until July 15th. This creates the unique issue where the Q2 payment (due by June 15th) is now due before the Q1 payment (due by July 15th). There may be more changes coming. The extension also applies to gift tax returns. As of the date of this publication, 36 states have changed their filing and payment deadlines to conform with the July 15th Federal deadline. Seven states have changed to different deadlines. For updates on the list of states, please visit the American Institute of CPAs website.
Direct Payments for Some Taxpayers
The most widely known part of the act is in the form of direct rebate payments, known as Economic Impact Payments, to taxpayers expected to reach taxpayers’ mailboxes in May. The direct payments amount to $1,200 per individual or $2,400 for married couples plus another $500 per qualified child. If your 2020 adjusted gross income (AGI) is over $75,000 ($150,000 married filing jointly and $112,500 for head of household), the relief payments are reduced by 5% of the amount of AGI in excess. The relief payment is not available to you if you have no qualifying children and your adjusted gross income reaches $99,000 ($198,000 for married filing jointly and $136,500 for head of household). Your threshold is increased by $10,000 for each qualifying child. So, for example, if you have one qualifying child, your Economic Impact Payment will be zero once your AGI reaches $109,000 if filing single, $208,000 if married filing joint, and $146,500 if filing as head of household.
Although technically these payments will be based on your 2020 AGI, the rebate payments are being fronted now, and the payment you will receive will instead be based on the AGI reported on your 2019 tax return (or 2018 if 2019 has not been filed yet). Once your 2020 tax return is filed in 2021, there will be a true-up of what payment you received versus what you should have received. Currently, it appears taxpayers who received too much will not have to pay back the excess, while taxpayers who received nothing or too little will receive more upon filing their 2020 tax return.
While it is projected that over 90% of Americans will receive a payment, others may have to wait. For example, high-income earners in 2018/2019 may be totally phased out of a direct payment now, even though they are now laid off and have substantially less income in 2020. They will have to wait until their 2020 income tax return is filed in 2021 to finally receive their recovery rebate.
Relief for Use of Retirement Funds
Several changes to qualified benefit plans, like 401Ks, have been put in place to provide flexibility to individuals who may need to access retirement funds or who may not want to liquidate positions within their retirement accounts with the market selloff. Taxpayers can take up to $100,000 of Coronavirus-related distributions from IRAs and/or employer-sponsored retirement plans.
These distributions have several benefits, including:
- They are not subject to the 10% early withdrawal penalty for those taxpayers who are younger than 59.5.
- They are also not subject to the 20% mandatory Federal withholding.
- Individuals have up to three years to roll the distribution back into a retirement account and it will be treated as if they did a tax-free rollover.
Taxpayers will likely need to file amended tax returns if using this option. Finally, the income reportable on the distribution is treated as spread evenly over 2020, 2021 and 2022 unless you elect to include all the income in 2020.
In order to qualify for these benefits, you must have been impacted by the Coronavirus in one of the following ways:
- You were diagnosed with COVID-19.
- You have a spouse or dependent who was diagnosed.
- You experience an “adverse financial consequence” as a result of being quarantined, furloughed, being laid off or having to work reduced hours because of the disease or other factors as determined by the Secretary of the Treasury.
- You are unable to work because you lack childcare as a result of the disease.
- You own a business that has closed or operated under reduced hours because of the disease.
Consider this attractive Roth planning strategy: It appears taxpayers could take a $100,000 Coronavirus withdrawal, roll the proceeds into a Roth IRA and still spread the income out over 3 years.
Increase in Employer Retirement Plan Loan Limit
Employer-sponsored retirement plans offering loans will see benefits such as an increase to the maximum that can be borrowed (from 50,000 to $100,000) during the 180-day period beginning on March 27. Loan repayments are also delayed for up to one year.
Required Minimum Distribution Relief from Requirements for 2020
There are also favorable provisions for those taking required minimum distributions (RMDs). The RMD requirement is waived for 2020 distributions. This relief applies to both account owners and beneficiaries taking stretch-IRA withdrawals from inherited accounts. If you turned 70 ½ in 2019 and still haven’t taken your first RMD, you’re in luck. The first RMD withdrawal for 2020 is also waived. For IRA owners who have already taken a 2020 RMD, you are permitted to return the RMD – either via a 60-day rollover, or if this period has expired anytime over the next three years from the date the distribution was received if you meet the Coronavirus-related definition. The IRS recently issued Notice 2020-23 which indirectly allows an extension to the 60-day rollover rules until July 15th for a single distribution taken between February 1, 2020, and May 15, 2020. Unfortunately, multiple distributions, as well as single distributions taken in January do not currently qualify for the July 15th deadline, nor do distributions taken at any time during 2020 for non-spousal inherited IRA beneficiaries.
Student Loan Payment Deferral
Deferral of Federal student loan payments through September 30, 2020.
Beginning in 2020 there will be an above-the-line deduction for qualified charitable contributions of up to $300 for taxpayers who don’t itemize in 2020. These contributions must be made in cash (no property) and cannot be used for a donor-advised fund, a supporting organization or certain private foundations. For those taxpayers who do itemize, the AGI limitation for cash contributions to qualifying charities has increased from 60% of AGI to 100% of AGI. Any excess can be carried forward for up to five years.
Qualified Medical Expenses
The definition of qualified medical expenses for health savings accounts, Archer medical savings accounts and flexible spending accounts is expanded to include over-the-counter medications.
Enhanced Unemployment Benefits
Unemployment coverage is temporarily available to those who have used up their regular unemployment benefits, as well as to individuals who don’t normally qualify for unemployment benefits, such as self-employed proprietors and part-time workers. The enhancements extend unemployment for up to 39 weeks, as well as up to an additional $600 per week. More details can be found in the Department of Labor’s Unemployment Insurance Program Letter.
Be sure to contact your advisor or tax professional if you think any of the above provisions apply to you. There are still many unanswered questions and strict rules to follow, and we will provide updates with any future changes or additional guidance as they become available.