CARES Act Snapshot
By Stuart Sutphin, CFP®
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act[i], was recently passed on March 27th to provide a wide range of economic support as we continue to drive through rough terrain. While expected to cost trillions of dollars, it begs the question of how might this matter apply to myself, or the population at large? Below is a summary of some items we at Heritage Financial, LLC believe are of most relevance to our clientele. Immediately following the list is a detailed summary of what each section represents or implies.
Stimulus funds of $1,200 for singles and those who file as head of household, $2,400 for married couples, and $500 per child.
RMDs (required minimum distributions) for 2020 are waived (including inherited IRA RMDs).
Early withdrawal penalties may be suspended for qualified accounts for COVID-19 related reasons[ii].
401(k) loan provisions expanded.
$300 above-the-line deduction for cash donations to 501(c)(3) charities (does not apply to those who itemize).
Charitable giving for those who itemize and have cash donation adjusted gross income (AGI) limitations expanded from 60% to 100% of AGI. Must be given to 501(c)(3) charities not 509(a)(3) charities or Donor Advised Funds.
Unemployment benefits enhanced and extended.
Small Business Administration (SBA) or other hardship related financial aid available and provisions expanded:
Economic Injury Disaster Loan (EIDL)
Paycheck Protection Program (PPP) Loan
Employee Retention Tax Credit
Delay of Payment of Employer Payroll Taxes
Net Operating Losses (NOLs) claimable expanded and enhanced.
Student loan payment requirements suspended through September 30 and no interest will accrue (Private loans are not included for 0% interest).
Healthcare benefits expanded.
Mortgage relief for federal loans (FHA, USDA, VA, Section 184 or 184A, backed by Fannie Mae, or backed by Freddie Mac) may enter fee and penalty free Forbearance for a up to six months with possible extension for another six months for single family homes.
Tenant protection for those who rent from a property owner with federally backed loan, or that receive a federal subsidy.
Stimulus Funds: Stimulus checks will be paid based on 2018 or 2019 tax filings (whichever is most current on record with the IRS). Single filers with AGI at or below $75,000 and head of household filers at or below $112,500 AGI will receive $1,200 either by check of electronic deposit. Joint return filers receive $2,400 (seen as $1,200 to each filer) if their AGI is at or below $150,000. For those with kids, an additional $500 credit for each child under age 17 per the rules of IRC Section 24(c) i.e. the Child Tax Credit. Phaseout, or reduction/elimination of your potential benefit, of benefits occurs at 5% above the typical AGI thresholds. Essentially, the complete phaseout for a single filer is $99,000, head of household is $136,500, and joint filers is $198,000. If your AGI is between the complete phaseout and the typical AGI threshold, you will receive a reduced stimulus amount. Funds will be sent to the most recent tax return’s address or listed bank account for electronic transfers. For those who have moved addresses, closed bank accounts, want to add direct deposit, etc. the Treasury has plans to create an online resource so you can inform them of your current bank account for direct deposits. For address changes, file form 8822 ASAP; though, if you can still sign up for the direct deposit features to be rolled out by the Treasury it may be a good idea to do so.
Some of you may have taken a lump sum distribution as part of a retirement incentive, Roth conversion strategy, or investment gains reporting from sale of assets in either 2018 or 2019 that compromises your ability to claim stimulus check(s). Since this is considered a refundable advance refund as a 2020 tax credit based on previous tax returns, it is implied that it could still be claimed if your income is within the AGI thresholds when you file your 2020 taxes. However, you should defer to your tax professional on how to best place yourself in a position to claim your tax credit.
You can easily estimate your stimulus payment with this TaxSlayer tool.
RMDs: Through the CARES Act, these are widely waived for 2020 including inherited IRAs, some qualified plans such as 401(k)s, and those who would take their first RMD this year, including first RMDs as a result of turning 70½ in 2019. The idea here is to not force you to take funds out of an account that is potentially down significantly due to the volatile markets. If you have taken your distribution from your inherited IRA already, odds are you cannot roll that back into the account. For other regular RMDs you may have already taken within the past 60 days, you can “roll” those funds back into your IRA (both the distribution AND taxes that may have been taken out). The 60-day rollover strategy may be unavailable to you, and you should consult a professional for advice on whether this is appropriate. If you have documented proof of a hardship distribution at the hands of COVID-19, you may have up to 3 years. Consulting a professional to explore which options are available and appropriate for you is advisable.
Withdrawal Penalties: If you have a COVID-19 related hardship distribution (these are outlined in the CARES Act Section 2202), you may take early distributions from retirement accounts without the 10% penalty. However, you will still owe income taxes due on the distributions. If needed, you can elect to spread out the income recognition for tax purpose over three years.
401(k) Loans: Employers are permitted to allow up to $100,000 in 401(k) loans (previously 50% or $50,000 whichever was less) and existing loan repayments may be extended. It would be best to contact your 401(k) or qualified retirement plan provider for specific details and how they may pertain to your situation.
$300 Charitable Deduction: If you claim the standard deduction on your tax return, then you can claim a $300 above-the-line deduction for cash donations as stated above. An above-the-line deduction represents a tax deduction from your gross income before calculating your adjusted gross income (AGI).
Unemployment: Always check with your state’s unemployment website. For those states that waive the one- week waiting period, the Federal government will reimburse the state for the first week of unemployment benefits. Furthermore, $600 will be added to the weekly payment amount currently effective until July 31, 2020.
Hardship Related Loans: For a high-level summary of SBA and COVID-19 aid available, please see the chart below or click here for a printable copy. Just remember, claiming certain benefits may restrict your ability to claim others so that you are not “double dipping” in tax benefits. The SBA is still rolling out resources in response to the new bill and not all options may be currently available. To stay up to date with how to apply, where to apply, and other pertinent information please visit the SBA website.
There are some loan forgiveness provisions contingent on specific criteria being met. Therefore, should you apply for such a loan be sure to understand the implications relative to other loan options and potential tax credits claimable for 2020. We, at Heritage Financial, are here as a reference.
NOLs: The provisions related to carry back Net Operating Losses (NOLs) five years is designed to create immediate operating cash flow in the form of tax refunds. There are a lot of moving parts to this that could affect other tax credits, deductions, retirement contributions, Social Security and other facets of your taxes over the observed time period. Therefore, an experienced tax professional will be best suited to advise on how to capitalize on this available option.
Student Loans: For those with Federal student loans, payments are not required and interest will not accrue through September 30, 2020. However, not all federal student loan providers will proactively suspend payments because voluntary principal payments are still allowed. It would be advisable to call the loan provider directly to inquire about payment suspension plans.
Furthermore, if you elect not to make any payments on your, temporarily, interest-free loan you will still receive a month’s worth of payment credit towards loan forgiveness calculations as they apply to you. For those who are in line for loan forgiveness after 120 payments this is VITAL. Not making a payment during this period will not reset your payment count, and if your loan will ultimately be forgiven then there is really no reason to make voluntary payments now. For those who may not receive favorable loan forgiveness, you are welcome to make principal payments, but you can also redirect your payments into credit card debt, investments, etc. while you have access to your interest-free loan through September 30.
Health Benefits: Some benefits and coverage options have been expanded. For example, for those with a Health Savings Account (HSA), eligible high-deductible health plans (HDHPs) now have telehealth services covered without having to reach the deductible. HSAs and Flexible Spending Accounts (FSAs) may now be used towards over-the-counter (OTC) drugs, menstrual products, and other items needed as part of quarantining and social distancing. Telehealth resources available to Medicare recipients are also expanded. The list of who is authorized to certify Medicare recipients for home health care has also been expanded to include individuals other than physicians. Higher benefits for Medicare recipients will be paid to those diagnosed with COVID-19 and require treatment. Those with Medicare Part B and Medicare Advantage will have no-cost access to COVID-19 vaccines once made available. Those with Medicare Part D can claim a drug supply up to 90 days (approximately 3 months). There are many other benefit provisions, and if you have questions start with the Medicare coronavirus website and reference health professionals as needed.
Mortgage relief: Only reach out to your mortgage provider regarding mortgage forbearance access if you are certain of inability to pay some or all of the amount due. Should you need the aid, they will work with you to put together a plan suited to your needs for the six-month period defined by the CARES Act. Remember, the CARES Act applies, generally, to federally backed loans, and the loan’s purpose may affect your aid options.
Tenant protection: For renters, the protection is a bit limited, but may still apply. Generally speaking, if your landlord or property owner has a federally backed mortgage, or has claimed federal aid, then they cannot evict you for missing rent payments. However, the rules vary depending on the type of building you live in (single family home vs multifamily apartment for example). If you are unsure if you are being treated fairly, seek legal counsel as soon as possible for guidance on how to handle the situation. Some online services also exist.
If you would like to explore how Heritage Financial may be a resource to you as we navigate these stormy seas, we encourage you to schedule a time to speak with us by calling us or visiting the contact page of the website. Below is an additional Q&A that may be helpful to you, a colleague or family member in understanding the CARES Act implications on retirement accounts. Furthermore, some of the specifics of the CARES Act, especially with regard to its implementation, are changing frequently as new information becomes available so keep current with federal websites and media channels. As spoken by Andy Puddicombe, the Headspace meditation app co-founder, “Remember the blue sky. It may at times be obscured by clouds, but it is always there.”
Updated June 18, 2020 — Click the photo to view a larger, printable version.
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