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The CARES Act Extends Relief by Karen Elise Kilbride

May 26, 2020

On March 27, 2020, the President signed into law the CARES Act which is designed to help provide financial relief to both businesses and individuals from the impact of the Coronavirus pandemic. The Act is very broad in reach and contains many provisions backed by an estimated $2 trillion dollar spending package. Below is a summary of the changes which impact individuals and families.

1. Recovery Rebates – these are tax credits which will be applied against your 2020 income. The amount of the credit will be calculated based upon your adjusted gross income on your 2019 tax return, if filed, otherwise your 2018 tax return. The credit is $2,400 for couples who file married filing jointly (MFJ) and $1,200 for single filers or those filing other than MFJ, plus $500 for each child under the age of 17 that qualifies for the child tax credit.

The credit is subject to a phaseout if your income exceeds the following thresholds:

$150,0000 Married Filing Jointly

$112,500 for Head of Household

$75,000 Single

The credit phases out at $5 per $100 of income over your applicable threshold. So, for every $100 of income which exceeds the associated threshold, the credit is phased out at $5 per $100 of income in excess of the threshold.

This is a refundable credit with the Treasury indicating checks will be sent to taxpayers within the next 3 weeks to bank accounts already set up to receive direct deposits authorized with the IRS or the Social Security Administration. There will be a notice to individual taxpayers giving information on the calculated credit, where the rebate amount was sent and phone number to call if your payment was not received.

There will be a true-up on the calculated credit amount when you file your 2020 tax return. The good news is if your 2020 income amount is higher than the income from your 2019 filed, or if not filed, your 2018 return used to calculate the initial rebate check, there is no claw back on the overpayment of the credit to you. If your income is lower in 2020, then you may see an additional credit amount for your 2020 return when filed.

2.Coronavirus Related Distributions from IRA’s and Qualified Employer Retirement Plans – relaxes some of the distribution rules surrounding IRA’s and retirement plans if you need to use some of these resources to meet living needs.

Up to $100,000 in aggregate can be distributed from IRA’s or Qualified Retirement Plans but the need for the distribution must be because of the following:

  1. Account owner has been diagnosed with Covid-19,
  2. You have a spouse or dependent who is diagnosed with Covid-19,
  3. You experience adverse financial consequences as a result of being quarantined, furloughed, laid off or having work hours reduced because of Covid-19,
  4. You are unable to work because you need to care for a child as result of Covid-19,
  5. You own a business that closed or operated under reduced work hours because of Covid-19

What you need to know about the Covid-19 related distribution rules:

  • If you are under age 59.5, you are exempt from 10% early withdrawal penalty
  • If you are taking a COVID-19 distribution from an employer retirement plan, you are not subject to the mandatory 20% Federal income tax withholding
  • The distribution can be repaid over 3 years like a rollover to the IRA or Qualified Plan
  • The distribution is still taxable as income but can be spread out over 3 years (if 2020 is a low- income year may not want to). The election is either all income to be taxed in 2020 or spread out over 3 years.

3. Enhancement to Loan Provisions within Employer Retirement Plans – this expands upon the ability of account owners to take a loan from a 401K plan or other employer retirement plan which allows loans.

Maximum allowed to be taken as a loan is now the lower of $100,000 or the balance within the account with 100% of the vested plan balance now available as a loan.  Repayment of the loan back to the plan can be delayed by up to one year.

4. Required Minimum IRA Distributions are waived for 2020 – If you do not need to take the IRS calculated required minimum distribution in 2020 from your pre-tax retirement accounts to meet spending needs, you may defer distributions until 2021. This change applies to IRA’s, inherited IRA’s, and also employer retirement plans. 

5. Expanded Eligibility for Unemployment Compensation Benefits - benefits while unemployed have been extended in duration and the amount received will be increased each month with the Federal Government backstopping State unemployment programs. The Federal Government created and is funding a pandemic unemployment insurance program. This program also expands assistance to self -employed individuals. Changes include:

  • Elimination of waiting period for first week of unemployment
  • Bonus check – regular unemployment benefit bumped by $600 up to 4 months only
  • Extension of benefits – 13 extra weeks of unemployment insurance

6. Federal Student loan payments can be deferred until 9/30/20. There are no required Federal student loan payments until 9/30/20 with no interest accrual during this time on loans. However, you will have to stop the payments yourself as this will not be done for you.  Required payments are suspended but voluntary payments are not prohibited. Suspension of payments will not count against you for any loan forgiveness programs.

7.Expansion of Health Savings Account and Related Rules – Health savings account, flexible spending account, and medical savings account rules are expanded to help taxpayers meet additional medical expenses.

  • Eligible medical expenses now include over the counter medication and additional female care products.
  • High deductible health plans can cover the cost of any COVD-19 testing before meeting a deductible.
  • The ability to use accounts for telehealth services is temporarily covered by HSA eligible accounts.
  • Medicare Part D participants can request up to 90 days of medication supply.
  • A no-cost Covid-19 vaccine when available is to be received by Medicare beneficiaries.

8. Finally, a new $300 deduction for cash contributions to qualified charities is available for taxpayers who do not itemize deductions. This deduction is an above the line deduction rather than itemized so a direct deduction to income. The contribution must be in cash that goes directly to a 501(c)3 charity.

The CARES Act is a positive step towards providing some financial relief to individuals and families facing hardship due to the COVID-19 pandemic.  Beyond the possibility of receiving a rebate check, there are many changes under the new law which can help expand access to needed resources with the added benefit of a reduced tax impact.  

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