By Alexander J. Gross, CFP®, CPA/PFS®, AEP®
On Friday March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in response to the COVID-19 global pandemic. This $2 trillion stimulus package aims to soften the economic blow caused by the pandemic and includes a wide range of provisions for both individuals and businesses.
Recovery Rebates for Individuals
The CARES Act provides a refundable income tax credit of up to $1,200 for single filers and $2,400 for married couples filing a joint return. Taxpayers are also eligible to receive an additional $500 for each child the taxpayer has under the age of 17. Although these rebates represent “frontloaded” 2020 income tax credits, the amounts are phased out based on the taxpayer’s adjusted gross income (AGI) on their 2018 or 2019 income tax return (whichever latest return the IRS has on file). The phase-out begins when AGI reaches $75,000 for single filers and $150,000 for married couples. The credit is reduced by $5 for every $100 of income above these thresholds. The Treasury Department anticipates sending payments out by the end of April.
The CARES Act includes a favorable tax provision for individuals impacted by COVID-19 who could benefit from accessing funds in their retirement accounts. “Coronavirus-Related Distributions” of up to $100,000 can be taken from IRAs and employer-sponsored retirement plans during 2020 for “corona-related” purposes. Qualifications for “corona-related purposes” are broad and include, for example:
- Individuals, spouses, or dependents diagnosed with COVID-19
- Individuals who have experienced adverse financial consequences as a result of being laid off, furloughed, or quarantined
- Individuals unable to work because they lack childcare as a result of the pandemic
- Business owners who have had to close their businesses or forced to operate under reduced hours
Several tax benefits are available for Coronavirus-Related Distributions. One benefit is the elimination of the 10% early withdrawal penalty on distributions to individuals under the age of 59½. Also, income taxes relating to these distributions can be spread over three years. Funds withdrawn from retirement accounts may be re-contributed back within three years, regardless of the contribution limits for that year. Taxpayers taking advantage of these distributions will need to closely examine their expected 2020-2022 income tax brackets when determining the most favorable tax recognition/repayment strategies.
Another important provision in the CARES Act relating to retirement accounts is the suspension of 2020 Required Minimum Distributions (RMDs). The suspension applies to both account owners and beneficiaries (such as beneficiaries of inherited IRAs). Account owners who have already taken 2020 RMDs have the ability to return contributions within 60 days of their distribution(s) under certain rollover provisions.
Forgoing RMDs in 2020 could bring about several planning opportunities for taxpayers. From an income tax standpoint, this likely results in lower taxable income, potentially reducing the tax rates for both ordinary income and capital gains (as well as the 3.8% net investment income tax). Taxpayers who traditionally use their RMDs to fund Qualified Charitable Distributions (QCDs) might want to consider suspending the QCD strategy in 2020 and fulfill their charitable giving using appreciated securities from taxable accounts. Finally, forgoing RMDs in 2020 allows more time for investment accounts to recover from the recent stock market correction.
Paycheck Protection Program
Certain small businesses, non-profits, and self-employed individuals will be eligible to take out federally guaranteed loans through the Small Business Administration (SBA). In order to qualify for the program, businesses must meet certain requirements. Loans must be applied for by June 30, 2020, and businesses generally must have fewer than 500 employees. These businesses are required to make a good-faith certification that the loan is necessary due to the economic conditions caused by COVID-19.
Loan amounts are available up to a maximum of the lesser of $10 million or 2.5 times the average monthly payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person). Loan proceeds can be used to cover payroll, utilities, mortgage interest, rent, and group health insurance premiums. The period covered for this loan is February 15, 2020 through June 30, 2020. The maximum interest rate that can be charged on a loan under this program is 4%, another substantial benefit for small businesses.
Without a doubt, the most significant benefit of a loan taken out under this program is the potential for the loan to be partially or entirely forgiven. The amount of forgiveness applies to proceeds used on payroll costs, rent, utilities, and group health insurance during the first eight weeks after the loan is made. Businesses must also maintain their payroll during the crisis, which makes sense as a significant component of the CARES Act focuses on keeping people employed and businesses running. There are other tests businesses need to pass in order to qualify for loan forgiveness, as well as other CARES Act benefits for small business. For more details, please see The Small Business Owner’s Guide to the CARES Act posted on the sbc.senate.gov website.
Other Notable Provisions
Several other provisions are included in the almost 900 page CARES Act. For those taxpayers who do not itemize deductions, there is a new $300 above-the-line deduction for qualified charitable contributions. This deduction is effective for tax years beginning in 2020. Also along the lines of charitable giving, the 60% AGI limit on gifts to public charities (excluding Donor Advised Funds) is increased to 100% of AGI in 2020. Unemployment benefits have increased $600/week with an additional benefit period of 13 weeks, and federal student loan payments can be deferred through 9/30/20.
The CARES Act brings emergency relief to millions of Americans impacted by the COVID-19 pandemic. Over the past few weeks, business activity in many industries has stalled and unemployment claims have skyrocketed. While the CARES Act does not guarantee a reversal of economic contraction, the hope is this stimulus bill will help buy enough time for our country to weather this storm and rebound stronger when the crisis abates.
Print version: COVID-19 and the CARES Act