As you’ve likely already heard, in response to the economic uncertainty created by the COVID-19 crisis, some emergency relief was recently extended to Americans through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed into law on March 27 by President Donald Trump.
If you have extra time on your hands, you may enjoy reading the entire H.R. 748 Act, but if other hobbies are keeping you busy, a summary of some of the high points of the act follows so you can identify what kind of relief you can expect.
- Direct payments/recovery rebates: Most Americans can expect to receive rebates from Uncle Sam. Depending on your household income, expect up to $1,200 per adult and $500 per dependent child. To calculate your payment, the federal government will look at your 2019 adjusted gross income (AGI) if it’s available or your 2018 AGI if it’s not. However, you’ll receive an extra 2020 tax credit if your 2020 AGI ends up lower than the figure used to calculate your rebate.
- Retirement account distributions for coronavirus-related needs: You can tap into your retirement account in 2020 for a coronavirus-related distribution of up to $100,000 without incurring the usual 10% penalty or mandatory 20% federal withholding. You’ll still owe income tax on the distributions, but you can prorate the payment over three years. You also can repay distributions to your account within three years to avoid paying income taxes or to claim a refund on taxes paid. While this may be a tempting thought, you should consider long-term impacts on your retirement preparedness before withdrawing from your retirement accounts. Speaking with a financial adviser would be a great resource to help you explore your options.
For retirees (and retirement account beneficiaries)
- RMD relief: Required minimum distributions (RMDs) are waived in 2020 for retirees, as well as beneficiaries with inherited retirement accounts. If you’ve not yet taken your 2020 RMD, consider passing this year. If you have, get in touch with your financial adviser to explore potential options to return some of your RMD to your IRA account.
For charitable donors
- “Above-the-line” charitable deductions: You can deduct up to $300 in 2020 qualified charitable contributions (excluding donor-advised funds), even if you are taking a standard deduction.
- Donate all of your 2020 AGI: You may be able to effectively eliminate 2020 taxes owed, and then some, by donating up to, or beyond your adjusted gross income (AGI). If you donate more than your AGI, you can carry forward the excess up to five years. Donor-advised fund contributions are excluded.
For business owners (and certain not-for-profits)
- Payroll tax credits and deferrals: Available for qualified businesses who are not taking a loan.
- Employee retention credit: An additional employee retention credit (as a payroll tax credit), “equal to 50% of the qualified wages with respect to each employee of such employer for such calendar quarter.” Excludes businesses receiving PPP loans and may exclude those who have taken the EIDL loans.
- Net operating loss rules relaxed: Carry back 2018-20 losses up to five years on up to 100% of taxable income from these same years.
- Immediate expensing for qualified improvements: Section 168 of the Internal Revenue Code of 1986 is amended to allow immediate expensing rather than multiyear depreciation.
- Dollars set aside for industry-specific relief: Again, it’s important to speak with your financial adviser for a more detailed discussion about whether your entity may be eligible for industry-specific relief (e.g., airlines, hospitals and state/local governments).
For employees/plan participants
- Retirement plan loans and distributions: Maximum amount increased to $100,000 on up to the entire vested amount for coronavirus-related loans. Delay repayment up to a year for loans taken from March 27 to year-end 2020. Refer to the section “For Everyone” above for additional advice on distributions.
- Paid sick leave: Paid sick leave benefits for COVID-19 victims are described in the separate March 18 H.R. 6201 Families First Coronavirus Response Act and are above and beyond any benefits received through the CARES Act. Your financial adviser can provide details on whether you are an employer or an employee.
For employers/plan sponsors
- Relief for funding defined benefit plans: Due date for 2020 funding is extended to Jan. 1, 2021. Also, the funding percentage (AFTAP) can be calculated based on your 2019 status.
- Relief for facilitating pre-retirement plan distributions and expanded loans: As described above for employees/plan participants, employers “may rely on an employee’s certification that the employee satisfies the conditions” to be eligible for relief. The participant is required to self-certify in writing that they or a direct dependent have been diagnosed or they have been financially impacted by the pandemic. No additional evidence (such as a doctor’s release) is required.
- Potential extension for filing Form 5500: While the Department of Labor (DOL) has not yet granted an extension, the CARES Act permits the DOL to postpone this filing deadline.
- Exclude student loan pay-down compensation: Through year-end, employers can help employees pay off current educational expenses and/or student loan balances and exclude up to $5,250 of either kind of payment from their income.
For unemployed/laid-off Americans
- Increased unemployment compensation: Federal funding increases standard unemployment compensation by $600/week and coverage is extended 13 weeks.
- Federal funding covers first week of unemployment: The one-week waiting period to start collecting benefits is waived.
- Pandemic unemployment assistance: Unemployment coverage is extended to self-employed individuals for up to 39 weeks. Plus, the act offers incentives for states to establish “short-time compensation programs” for semi-employed individuals.
- Student loan payments deferred to Sept. 30: No interest will accrue either. Plus, the deferral period will still count toward any loan forgiveness program you’re in. So, be sure to pause payments if this applies to you, lest you pay on debt that will ultimately be forgiven.
- Delinquent debt collection suspended through Sept. 30: Including wage, tax refund and other federal benefit garnishments.
- Employer-paid student loan repayments excluded from 2020 income: From the date of the CARES Act enactment through year-end, your employer can pay up to $5,250 toward your student debt or your current education without it counting as taxable income to you.
- Pell Grant relief: There are several clauses that ease Pell Grant limits while not eliminating them. It’s best to speak with an adviser about whether this relief applies to your situation.
The CARES Act is complex legislation that is working to provide relief to individuals, families and businesses who are affected by the COVID-19 pandemic. I expect continued updates, clarifications, additions, system glitches and other adjustments to the above points as time progresses given the unprecedented current conditions.
If you have an interest in learning more about how any of the above information applies to your specific circumstance you should consult with your trusted advisers.