CARES Act — What you need to know

In lieu of the 2020 coronavirus pandemic, President Donald Trump signed into law the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. This massive stimulus bill was drafted and put into place to “provide emergency assistance and health care response for individuals, families, and businesses” impacted by COVID-19. In total, the estimated cost of the CARES Act is over $2 trillion with about $500 billion coming from allocated tax changes.
This bill contains provisions for citizens and businesses in many different financial situations. In this post we have summarized sections for our individual clients to better explain the changes they can expect and how this act will aid them during this difficult time.

Individual rebates
In response to the question of loss of income during this pandemic, the CARES Act enacts the distribution of individual stimulus checks based on income. Taxpayers who are eligible will receive up to $1,200 ($2,400 for married filing jointly), as well as $500 for each qualifying child in the house. Any taxpayer can get this rebate regardless of if he or she has current income. However, individuals and nonresident aliens claimed as a dependent on another person’s tax return are not qualified to receive it. Each individual and qualifying child must provide a valid social security number or taxpayer identification number if the child is adopted or placed for adoption.
To receive a full rebate, individuals must have an adjusted gross income (AGI) of less than $75,000 ($150,000 for married filing jointly). If an individual’s income exceeds this threshold amount, the rebate is reduced by $5 for every $100 over the limit. Consequently, the rebate is fully phased out when AGI reaches $99,000 ($198,000 for married filing jointly).
Rebate payments will be made by direct deposit to the taxpayer’s bank account if he or she chose to use direct deposit for their 2018 or 2019 tax return, otherwise, they will receive a check in the mail. Either way, these rebates can be expected to come as “rapidly as possible” and the IRS will notify taxpayers within 15 days of payments.
Although this is a 2020 benefit intended to be based on 2020 income, there is an advance funding mechanism used by the IRS to determine rebates for individuals. Initially, the IRS will calculate a taxpayer’s rebate based on their 2019 federal tax return. If the individual’s 2019 taxes haven’t been filed yet, the IRS will look to his or hers 2018 tax return. If there is no 2018 return, the IRS can use information from 2019 social security benefit statements. Based on the most recent information provided, the IRS will calculate and distribute the rebate without any action required by the recipients.
If an individual’s advance funding mechanism results in the maximum rebate, then he or she will receive that amount. However, if an individual gets less than the full rebate based on the initial IRS calculations, he or she will be able to use the difference as a refundable credit on their 2020 tax return. That is if they meet the 2020 tax year rules described above.

Withdrawals from retirement plans
During this time of uncertainty, many people are thinking of taking money out of their retirement plans as an extra financial cushion. The CARES Act allows withdrawals for
coronavirus-related purposes up to $100,000 (in the aggregate) from qualified plans, including IRAs, to receive several favorable tax treatments. These special tax treatments include:
● If the withdrawal is for coronavirus-related purposes and $100,000 or less, anyone under the age of 59 and a half can take out from qualified plans and IRAs during 2020 without a 10 percent early withdrawal penalty.
● Any amount withdrawn for coronavirus-related purposes may be repaid to the plan or to an IRA in one or more payments any time during a 3-year period beginning on the day after the distribution is obtained. Additionally, the repayment(s) will be considered a tax-free rollover, without regard to any contribution cap.
● Distributions that are not repaid within the 3-year period will be treated as taxable income, but the amount can be included in income and taxed ratably over 3 years.
A withdrawal can be considered for coronavirus-related purposes if you, your spouse, or dependent is diagnosed with COVID-19 (or SARS-CoV-2). In addition, if you, your spouse, or dependent experiences financial consequences as a result of: (i) being quarantined, furloughed, laid off or having to work reduced hours because of the virus; (ii) not being able to work due to lack of child care because of the virus; (iii) having to close or reduce hours of a self-owned or operated business due to the virus; (iv) or other factors as determined by the Secretary of the Treasury.
Under this provision, you need to be sure the withdrawal is coronavirus-related if you want to take from your own IRA. In order to withdraw from a company-sponsored retirement plan, the company administrator may rely on an employee’s certification that it is a coronavirus-related withdrawal.

Retirement plan loans
As long as it is a coronavirus-related distribution, the current limit for loans from a qualified retirement plan is $50,000. However, loans up to $100,000 that don’t exceed the account balance from qualified plans will be permitted during the 180-day period beginning on March 27. Any outstanding loans from qualified retirement plans on or after March 27 that have a payment due in 2020, the payment due date delayed for 1 year.

Required minimum distributions
The required minimum distributions (“RMDs”) for certain defined contribution plans such as 401(k) and IRAs are waived for the 2020 calendar year. You will not need to withdraw an RMD for 2020 if you have been taking out annual RMDs or if you turned 70 and a half in 2019 but deferred the first RMD to April 1, 2020. Consequently, if you have already taken an RMD for 2020, it’s now not considered to be an RMD and it can be rolled over within 60 days of withdrawal.

If the 60 days have already passed since your RMD, you might still be able to roll it over. Congress passed a similar law in 2008 that waived RMD requirements for 2009, and the IRS issued a formal notice stating that the 60- day rollover deadline would be satisfied if done by a certain date later that year. We expect that the IRS will make a similar statement in the near future. Though the rule that limits rollovers to once every 12 months has not been changed by the CARES Act.
Under this same provision, if a retirement plan owner died, any beneficiaries who inherit the plan and are required to satisfy the 5-year rule for distributions can ignore 2020 — effectively making it a 6-year distribution rule.

Deductions for charitable contributions
For taxpayers who do not itemize, charitable contributions up to $300 can be deducted for any tax year beginning after 2019. However, for a contribution to be eligible it must be made in cash and cannot be made to a donor-advised fund, certain private foundations, or certain supporting organizations.
Taxpayers who do itemize can elect to increase the deduction limitation for certain charitable contributions to 100% of AGI. Partners of partnerships and shareholders of S-corporations can elect individually to qualify for this treatment. This provision is limited to charitable contributions made in 2020.

Federal student loan borrowers
To give more financial relief, all payments for federally-owned student loans (principal and associated interest) are suspended for 6 months, through September 30, 2020, without penalties.

Student loans can be paid by employers
The CARES Act adds to the existing provision that allows up to $5,250 per year of employer payments to be excluded from an employee's gross income for the employee’s education. This act adds student loan repayments made after the date of enactment (March 27) and before January 1, 2021 as a type of payments that can be made under this provision, as long as it’s done under an educational assistance program. These payments can be made to the student or the lender but must follow the overall $5,250 limitation for all educational payments.

Resources: https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+update

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The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and it advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.