Information Regarding the newly approved Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
Both the Federal Reserve and the U.S. Congress have been taking a number of actions in the last few weeks to attempt to support the financial markets and our national economy. The latest item is the CARES Act. Over $2 trillion has been allocated to support the business community as well as the individuals and families who are being hit hardest during this difficult time. The text of the bill is robust however, we have selected information from that text which we believe to be both timely and pertinent. The focus of this piece is on how the measures in this bill may provide relief and support for taxpayer households. Please reach out to your financial advisor and your tax advisor before taking any action to make sure the decision is in your best interest.
Relief Payments – Roughly half of a trillion dollars has been set aside for the direct relief funds (recovery rebates) that will be sent to many taxpayers. Married couples filing jointly are eligible to receive a refundable tax credit for 2020 of up to $2,400, plus $500 for each child under 17. Individuals and all other types of filers will receive $1,200 and the same child credit as above. Thresholds based on the AGI (Adjusted Gross Income) of the household will determine how much credit each taxpayer household actually receives. These AGI levels are based on taxes filed in either 2018 or 2019, whichever is most recent for each household. For those MFJ taxpayers, the AGI threshold is $150,000, Head of Household filers have a threshold of $112,500 and for all other filers it is $75,000. If you would like to discuss your specific situation and estimate what your relief amount will be, please contact your tax advisor. The timing for delivery and method for distribution of these funds is still unclear at this time, but those with electronic deposit accounts on file with the IRS will receive the funds through this method.
RMD Waivers – Section 2203 of the CARES Act amends the previous rules regarding Required Minimum Distributions (RMD) for most retirement accounts as they apply to both owners and beneficiaries. Any RMD that was to be taken in the 2020 calendar year is no longer “required” to be taken. This includes Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, and governmental 457(b)s as well as Inherited IRAs. This also applies for anyone who turned 70 ½ in 2019 and was planning to take their first RMD by April 1st, 2020. Both this initial RMD and the subsequent “regular” RMD for 2020 are not required to be taken. If you have already taken your 2020 RMD, you may be able to recontribute that amount back to the account if desired. Please review this with your advisor to see if this is a possibility for you. It’s important to note that voluntary distributions are still allowed, and these voluntary types of distributions include Qualified Charitable Distributions. Additionally, if you do not itemize your deductions you may be eligible for the newly established $300 above-the-line credit for Qualified Charitable Distributions in 2020.
IRA Withdrawals and 401k Loan Revisions – For those who have IRA or 401k funds, the 10% early withdrawal penalty for early distributions before age 59 ½ has been waived for up to $100,000 for “Coronavirus-Related Distributions.” The definition for these distributions is broad. To be sure you qualify please review with your advisor before taking any action. The income tax owed as a result of these distributions is eligible to be spread out for up to 3 years, and each owner also has the option to recontribute the funds to the same account during that 3-year timeframe. There is no mandatory tax withholding for these distributions at the time they are taken. For those with 401(k) plans at work that allow loans to be taken, the rules have been enhanced from the regular loan provisions. You are now eligible to borrow up to $100,000 total and utilize up to 100% of your vested balance. Each of these limits are doubled from their previous levels. Participants may also delay the start of payments to repay these loans for up to one year, if desired.
Student Loan Payments Deferred – Federal student loan payments are now deferred through September 30, 2020 and no interest will accrue during this time period. It is important to note that voluntary payments are still permitted, even though mandatory or minimum payments are not required. For those wishing to take advantage of this option, each borrower will need to contact their loan servicer and request a pause on their payments.
2020 AGI Limits for Cash Charitable Contributions – Section 2205 of the CARES Act allows for a temporary increase to the AGI limits on cash contributions to charities. This limit was 60% of AGI and is now increased to 100% of AGI for 2020. It’s important to note here that any excess contribution is allowed to be carried forward as a charitable contribution for up to five years.
Reminder of Tax Filing and IRA Contribution Deadline Extensions – One final reminder, is that the IRS extended the deadline to file and pay taxes to July 15, 2020. Along with this deadline is the ability to make any 2019 IRA contributions up to the date you file your 2019 taxes or the July 15, 2020 deadline, whichever comes first.