The CARES Act
This week the US Government and Federal Reserve took dramatic steps to stabilize the economy. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 was signed into law on Friday. This is a $2.2 trillion package, including nearly half a trillion dollars in individual rebate checks, another $500B for support of several severely-damaged industries, nearly $400B support including tax credits for wages and payroll tax relief, over $300B of support for state and local governments, and almost $150B for various initiatives to support hospitals and the health care system.
Below is a summary of the CARES Act (Source: https://www.kitces.com/). I wanted to share only the sections from my financial planning resource that might be applicable to your personal situation. If you own a small to mid sized business, I can email you those sections to learn more.
Please feel free to reach out to me if you have any questions on how this CARES Act impacts you. I’m still digesting it and if I don’t know the answer immediately, I can research and get right back to you with the answer. Please feel free to send your questions. Stay well!!!
Cares ACT (source: www.kitces.com)
Perhaps no single provision in the CARES Act has received more interest from the general public than Section 2201, Recovery Rebates For Individuals. In short, people want to know whether they should be expecting a check from Uncle Sam, and if so, how much the check will be for.
The good news is that according to estimates by the Tax Foundation, over 90% of taxpayers should receive some amount of Recovery Rebate. The bad news is that thanks to the way the law was drafted, there may be a substantial number of people who could really use help right now who won’t qualify, and even for those that do, practical issues with how such payments may be distributed could substantially delay their receipt!
CALCULATING THE AMOUNT OF A TAXPAYER’S RECOVERY REBATE ADVANCE
As a starting point, the CARES Act provides a refundable income tax credit against 2020 income of up to $2,400 (more on this in a bit) for married couples filing a joint return, while all other filers begin with a refundable credit of up to $1,200. The credit amount then increased by up to $500 for each child a taxpayer has under the age of 17.
Thus, a single taxpayer with one child would be eligible for up to a $1,200 + $500 = $1,700 refundable credit, while a single taxpayer with two young children would be eligible for up to a $1,200 +$500 + $500 = $2,200 credit. A married couple, on the other hand, with one child and who file a joint return, would be eligible for up to a $2,400 + $500 = $2,900 credit, while the same couple with four children would be eligible for up to a $2,400 + $500 + $500 + $500 + $500 = $4,400 credit.
If you’ve read the last two paragraphs closely, you probably noticed a lot of “up to”s in there. And there’s a reason for that. As a taxpayer’s income begins to exceed their applicable threshold, their potential Recovery Rebate Payment (their credit) begins to phase out. More specifically, for every $100 a taxpayer’s income exceeds their credit, their potential Recovery Rebate will be reduced by $5.
The applicable AGI threshold amounts are as follows:
Married Joint: $150,000
Head of Household: $112,500
All Other Filers: $75,000
Example #1: Mickey and Jackie are married and file a joint return. They have 4 children, ages 10, 13, 15, and 17, and have $176,000 of Adjusted Gross Income (AGI).
As such, they are eligible to receive a maximum Recovery Rebate of $2,400 + $500 + $500 + $500 = $3,900! (Note: Recall that the potential Recovery Rebate is only increased by $500 for each child under 17, so only three of the couple’s children qualify.
But while $3,900 is the maximum potential Recovery Rebate the couple to which the couple could be entitled, they have income in excess of their $150,000 threshold amount. More specifically, they are $26,000 over their threshold amount, so their recovery rebate must be reduced by $26,000 x 5% = $1,300.
As such, the ultimate Recovery Rebate check that Mickey and Jackie will receive will be $3,900 – $1,300 = $2,600!
RECOVERY REBATES WILL BE DISPERSED BASED ON 2018/2019 INCOME BUT ARE ACTUALLY FOR 2020
One of the more confusing aspects of the Recovery Rebate is that it has a bit of a ‘split personality’, in that the initial amount paid will be based on either a taxpayer’s 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), while it will ultimately be ‘trued up’ if a taxpayer is owed money based on their actual 2020 income.
Coronavirus-Related Distributions
Mirroring similar relief that has been provided to individuals in Federally declared disaster areas in the past (for things like hurricanes, wildfires, and floods), the CARES Act creates Coronavirus-Related Distributions. Coronavirus-Related Distributions are distributions of up to $100,000, made from IRAs, employer-sponsored retirement plans, or a combination both, which are made in 2020 by an individual who has been impacted by the Coronavirus because they:
Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
Are unable to work because they lack childcare as a result of the disease;
Own a business that has closed or operate under reduced hours because of the disease; or
Meet some other reason that the IRS decides to say is OK.
Given the laundry list of potential individuals who may qualify for relief under this provision, it seems rather clear that Congressional intent was to make this provision broadly available. The IRS will likely operate in kind, and take a liberal view of who has been impacted by the Coronavirus enough to qualify for a Coronavirus-Related Distribution.
There are a number of potential tax benefits associated with Coronavirus-Related Distributions. More specifically, these include:
Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access retirement funds without the normal penalty that would otherwise apply.
Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement. Plans can rely on a participant’s self-certification that they meet the requirements of a Coronavirus-Related Distribution when processing a distribution without mandatory withholding.
Eligible to be Repaid Over 3 Years– Beginning on the day after an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.
Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
(Nerd Note: Although, in general, spreading the income of a retirement account distribution over three years is likely to result in a better tax outcome than including all the income in just a single tax year, that may not be the case now. Notably, if an individual is experiencing significant financial difficulty, and to meet expenses they take a Coronavirus-Related Distribution, it likely indicates lower-than-normal income, at least temporarily, for 2020. If higher income is expected in future years as life returns to ‘normal’, it may be best to include all the income on 2020’s return. Plus, as an added bonus, if some or all of the distribution is later rolled over within the 3-year repayment window, it’s only one tax return to amend!)
Enhancements To Loans From Employer-Sponsored Retirement Plans
Many employer-sponsored retirement plans, such as 401(k)s and 403(b)s, offer participants the option of taking a loan of a portion of their retirement assets. For individuals who have been impacted by the coronavirus (using the same definition as outlined above for Coronavirus-Related Distributions), the CARES act enhances the ‘regular’ plan loan rules in the following three ways:
Maximum Loan Amount is Increased to $100,000 – In general, the maximum amount that may be borrowed from an employer plan is $50,000. The CARES Act doubles this amount for affected individuals.
100% of the Vested Balance May Be Used – In general, once an individual has a vested plan balance that exceeds $20,000, they are only eligible to take a loan of up to 50% of that amount (up to the normal maximum of $50,000). The CARES Act amends this rule for affected individuals, allowing them to take a loan equal to their vested plan balance, dollar-for-dollar, up to the $100,000 maximum amount.
Delay of Payments – Any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020 may be delayed for up to one year.
Required Minimum Distributions Are Waived In 2020
Section 2203 of the CARES Act amends IRC Section 401(a)(9) to suspend Required Minimum Distributions (RMDs) during 2020. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b) and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions.
In one somewhat surprising twist, the CARES Act not only eliminates RMDs for 2020 but any RMD that otherwise needed to be taken in 2020. More specifically, individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 (and thus, would have normally been required to take such a distribution by April 1st, 2020, as well as a second RMD for 2020 by the end of 2020) do not have to take either their 2019 RMD or their 2020 RMD! Thus, these procrastinators get to escape two RMDs instead of just one!
Relief For Student Loan Borrowers
The CARES Act includes several provisions aimed at providing relief to student loan borrowers, including the following:
Student Loan Payments Deferred Until September 30, 2020 – Section 3513 suspends required payments on Federal student loans though September 30, 2020. During this time, no interest will accrue on this debt. Unfortunately, though, while required payments are suspended, voluntary payments are not prohibited. And by default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.
Also notable is that this period of time will continue to count towards any loan forgiveness programs. As such, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt (such as via the Public Service Loan Forgiveness program) should immediately pause payments. Because whereas other borrowers who continue to pay Federal student loans during this time may simply be paying down what is effectively 0% debt (at least temporarily), those borrowers who will ultimately have their outstanding student debt forgiven (upon completion of whatever requirements are necessary for their particular loan forgiveness program) are paying down a debt that would otherwise be wiped clean anyway!
Finally, all involuntary debt collections are also suspended through September 30, 2020. This not only includes wage garnishment or the reduction of other Federal benefits, but the reduction of any tax refund (for student loan purposes). As such, borrowers of student debt who are delinquent on payments and would normally be subject to a reduction of their tax refund have an incentive to file their tax returns early enough so that the refund is processed before this relief expires.
Employers Can Exclude Student Loan Repayments From Compensation – Section 2206 provides employers a (very) limited window of time in which they can take advantage of a special rule to aid employees paying down student debt. In general, amounts paid by an employer to an employee which are used to pay student debt (or payments made by an employer directly to the loan provider) are considered compensation to the employee, and are subject to income tax.
Under Section 2206, however, employers have from the date of enactment of the law, through the end of the year, to provide employees with up to $5,250 for purposes of student debt payments, and exclude those amounts from their income. This amount, however, is coordinated with the ‘regular’ $5,250 limit that employers can provide employees tax-free for current education. As such, total maximum tax-free education assistance an employer can provide an employee in 2020 is $5,250.
Pell Grant and Subsidized Federal Student Loan Relief For Students Leaving School – Both Pell Grants and Subsidized Federal Student loans are subject to various limits. Section 3506 of the CARES Act excludes from a student’s period of enrollment any semester that a student does not complete due to a qualifying emergency. Section 3507 does the same with respect to the Federal Pell Grant duration limit.
Curiously, both provisions are contingent upon the Secretary of Education being “is able to administer such policy in a manner that limits complexity and the burden on the student.” Upon first glance, these provisions would appear to create far more “burden” for the Secretary of Education than they do on the student!
Finally, if a student withdraws from school during the middle of a semester (or equivalent) because of qualifying emergency, Section 3508(b) eliminates the amount of a student’s Pell Grant that would normally have to be returned, while 3508(c) cancels any direct loan that was taken to pay for the semester.
For the many who have already lost their jobs, and for the countless more who will likely find themselves subject to the same fate in the coming weeks, there is, thankfully, some (relatively) good news. Unemployment compensation benefits have been significantly expanded by the CARES Act. These enhancements include:
Pandemic Unemployment Assistance – Self-employed individuals (who are generally ineligible for unemployment compensation benefits), and other individuals who are ineligible for ‘regular’ unemployment, extended unemployment or pandemic unemployment insurance, or run out of such insurance, will be eligible for up to 39 weeks of benefits via this provision.
Uncle Sam Will Cover Unemployment for the First Week of Unemployment – In general, individuals are ineligible to receive unemployment benefits the first week that they are unemployed. It essentially amounts to an elimination period that’s meant to encourage people to try and get another job quickly so as to avoid the week without income. Of course, at present time, finding work quickly is difficult, if not impossible. And in recognition of this fact, the CARES Act offers to pay to states to provide unemployment compensation benefits immediately, without the ‘normal’ one week waiting period.
‘Regular’ Unemployment Compensation is ‘Bumped’ by $600 per Week – Section 2104 of the CARES Act provides states with the ability to increase their unemployment benefits by up to $600 per week with Federally funded dollars, for up to four months. This has the ability to dramatically increase the amount of money an individual is entitled to temporarily entitled to receive via unemployment compensation benefits, as the average weekly unemployment benefit nationwide is under $400! Thus, the many individuals will see their unemployment checks increase by 150% or more thanks to this part of the CARES Act.
Unemployment Compensation is Extended by 13 Weeks– In the event that people are nearing – and ultimately reach – the maximum amount of weeks of unemployment compensation provided under state law, Section 2107 of the CARES Act will allow them to receive such benefits for an additional quarter.
