On March 27, 2020, President Trump signed into law the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) to help provide financial stability and relief for individuals, investors, and business owners affected by COVID-19.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act (“The Act”), is very broad and details will be provided over the weeks and months to come.
The IRS already announced that the April 15, 2020 deadline for filing an individual tax return for 2019 has been extended to July 15, 2020. This is also the new due date for making IRA contributions for the 2019 tax year. While this change was not actually made as part of the CARES Act, it results from the coronavirus pandemic.
HERE IS A BRIEF SUMMARY OF SOME OF THE MAJOR PROVISIONS OF THE CARES ACT:
Individual Tax Rebates
All individuals with adjusted gross income up to $75,000 ($150,000 if married), and who are not claimed as a dependent on another person’s tax return, are eligible for a $1,200 ($2,400 if married) economic impact payment, as well as an additional $500 per child (under age 17).
Although the law refers to this as a rebate, the payments will be provided to all individuals who have filed a tax return in 2018 or 2019, or who are present in the records of Social Security. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. Thus, the rebate phases out for an individual earning over $99,000, a head of household earning $146,500, and married tax payers with no children earning $198,000.
Changes to IRA and Required Minimum Distribution Rules
The Act allows Required Minimum Distributions (RMDs) which were otherwise required to be taken in 2020 to be suspended without penalty until 2021. This includes any RMDs that would have been required by April 1, 2020 for IRA account owners who reached age 70 ½ in 2019. The SECURE Act, passed in December 2019, does not require RMDs to begin until age 72 for anyone who would have reached age 70 ½ after 2019.
Retirement Plan Loans
The maximum loan permitted from a 401(k) plan is increased under the new rules from $50,000 to $100,000, and from 50% to 100% of a participant’s vested account balance. The Act also delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for 1 year. To take advantage of these provisions, the employee has to be impacted by COVID-19 but expectations are that employees will be allowed to self-certify that to the plan administrator under rules which the IRS is expected to issue shortly.
Retirement Plan Distributions
The new law allows COVID-19 related distributions from retirement plans and IRAs up to $100,000 to be taken by individuals during 2020. The law permits in-service distributions and provides an exception to the 10% early distribution penalty. Furthermore in the case of distributions from 401(k) plans, these will be exempt from the mandatory 20% withholding. Income tax on the distribution would still be owed but could be paid over a 3–year period. Amounts distributed may be re-contributed to a qualified plan or IRA within 3 years.
Relief for Student Loan Payments
The law suspends student loan payments for federal student loans through September 30, 2020, without penalty or interest. Also, it allows employers to provide employees with a tax-free benefit of up to $5250 annually toward the repayment of the employee’s student loans. This rule applies to any student loan payments made by an employer for an employee before January 1, 2021.
Changes to Charitable Contribution Deductions
The Act changes some of the rules concerning how taxpayers deduct charitable contributions. In particular, it allows taxpayers to deduct up to $300 in charitable contributions even if they do not itemize. Also, for those taxpayers who do itemize, the normal rule which limited charitable contributions to 50% of AGI (60% under the Tax Cuts and Jobs Act) has been extended to allow a deduction of up to 100% of AGI for cash contributions made during 2020. This would not include any contributions made to a donor advised fund, but would be permitted for most direct contributions to public charities.
Deferral of Payment of Payroll Taxes by Employers
Employers are given an extension under the new law for the deadline to pay their portion of Social Security payments due. The Act states that one half of the amount deferred must be paid by the end of 2021 and the other half by the end of 2022.
Expansion of Unemployment Compensation
The law creates a new, temporary unemployment assistance program through December 31, 2020, which provides benefits to individuals who are not typically eligible for unemployment benefits such as self-employed individuals, independent contractors, and people with limited work history who are impacted by the coronavirus pandemic. Benefits will not be provided to individuals who are able to work from home for pay, or receive paid leave or sick time for extended benefits under a state unemployment program.
The law also provides an additional $600 weekly to each recipient for up to 4 months. Also, anyone whose state unemployment benefits are exhausted is eligible to receive up to 13 weeks additional benefits through December 31, 2020.
The law made some technical changes to encourage the use of telemedicine in response to COVID-19. It also expanded the definition of eligible medical expenses to include menstrual products beginning in 2020 for flexible spending accounts, so that these products can now be purchased using pretax dollars.
Some of the most significant provisions of the new law are designed to allow employers and businesses to survive the economic downturn caused by the coronavirus pandemic. In particular, several of the major changes are intended to encourage employers to retain employees until their business’s returns to normal. For example, qualifying employers may obtain loans which may be forgiven based on a number of considerations, including the retention of workers. The portion of the loan that is forgiven will be tax free.
Employers will also have the opportunity to delay the payment of a portion of their social security taxes incurred in 2020 and pay the deferred tax in 2021 and 2022 as noted above. In addition, the law provides a payroll tax credit to employers whose business declines by more than 20% in a calendar quarter compared with the same quarter in the prior year. These provisions are intended to be temporary and will be covered by rules and guidelines to be issued shortly.
April 3, 2020
Vice PresidentSenior Estate Planner, Janney Montgomery Scott, LLC.
All information relating to the Coronavirus COVID-19, or the CARES Act, is based on the most current information we have as of the date of publication, April 2nd, 2020. As such, the positions stated herein do not constitute medical, legal, tax, or accounting advice. Please visit https://www.irs.gov/coronavirus for the most current information from the IRS for application to your particular tax situation. This piece does not address the question of what individuals personally should or should not do in response to the Coronavirus COVID-19 or the CARES Act. Depending on when you’re reading this content, there may be more current information available. Please contact your Financial Advisor to discuss your specific situation.
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