Last Friday, President Trump approved a $2 trillion emergency fiscal stimulus package called the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The new law includes a wide range of provisions for both loans and outright rebate payments or tax credits aimed at helping individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Nearly 900 pages in length, the CARES Act will undoubtedly be poured over for weeks and months to come, but contained below are the most notable provisions relevant to the families we serve. Many of these provisions may not impact you directly, but may be relevant to adult children or parents. Please feel free to forward this email to family or friends who may benefit. We have listed below our “Paracle Perspective” under each of the key provisions:
Required Minimum Distributions Are Waived In 2020 and May Be ‘Returned’ Within 60 Days
Those subject to Required Minimum Distributions are no longer required to take an RMD during 2020. This applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), and 457(b) plans, as well as Inherited IRAs. If you have already taken your RMD for 2020, you have a limited amount of time to ‘return’ unwanted and no longer necessary RMDs. If you are still within a 60-day window from the date of withdrawal, you can simply write a check, or otherwise transfer an amount equal to the ‘RMD’ back into a retirement account before the end of the 60-day rollover window. (Please note that the 60 day rollover is not an option for Inherited IRAs. There is no opportunity to replace RMDs already taken from Inherited IRAs).
For retirement account owners who took their RMD very early in the year, and for whom the 60-day rollover window has already expired, there is another potential approach. If you are impacted by the COVID-19 crisis enough to qualify under the liberal guidelines outlined for a Coronavirus-Related Distribution, then the rollover can still be completed. For now, the CARES Act defines eligibility as those who:
- Have been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed with COVID-19;
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
- Are unable to work because they lack childcare as a result of the disease;
- Own a business that has closed or operate under reduced hours because of the disease; or
- Have experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.
Rebate Checks Will Be Determined either by your 2018 or 2019 Tax Return
The CARES Act also includes a $1,200 per taxpayer (plus additional $500 per dependent child under age 17) rebate check for those with Adjusted Gross Income below $75K (for single taxpayers) and $150K (for married taxpayers). This includes retirees. The check amount is phased-out for taxpayers with income over $99K (single) and $198K (married). The IRS will use your most recently filed tax return to issue checks in April, so if 2019 is in the range but 2018 income was not (due to, for example, capital gains, a change in employment, or divorce), then one would want file their 2019 tax return as soon as possible to be eligible for the rebate check. If your 2018 and 2019 income levels are similar, then there is no rush to file. Note that even if you do not end up filing in time, you could still be eligible to earn the rebate when you file your 2020 return. Interestingly, there appears to be no ‘claw-back provision’, so if your 2018 income would be eligible for the $1,200 rebate check, but your 2019 income would not, then consider delaying your 2019 return until checks are issued then file after that date.
Expanded Unemployment Benefits
The CARES Act expands help to those who usually don’t qualify for unemployment benefits – like self-employed workers and those who don’t have the typically required 680 hours. It also includes an additional $600 per week of unemployment benefits for up to four months, and an extension of benefits by 13 weeks to total 39 weeks.
Small Business Loans
Small business loans (for those with less than 500 employees): Business owners can borrow up to $10M at 4%. The maximum loan amount is equal to two months of your average monthly payroll costs plus an additional 25% of that amount. Payroll costs will be capped at $100,000 annualized for each employee. The loan can be used to cover payroll, rent, utilities and health care costs, and may be forgiven as long as the employer maintains the same number of employees through 6/30/20.
If a business does not take the small business loan, they could be eligible for: An employee retention credit if business is suspended due to COVID or revenue falls by over 50% quarter over quarter (this credit would be equal to 50% of wages paid to employees with compensation less than $100K), or a deferral of payroll taxes (up to 50% of payroll taxes for 2020) until the end of 2021 (when 50% would be due) and the end of 2022 (when remaining 50% would be due); applies to self-employed businesses too.
Other Notable Tax Law Changes Included in the CARES Act that may be helpful:
- Extension of time to pay and file 2019 tax returns: The 2019 income tax filing and payment deadlines have been automatically extended for all taxpayers to July 15, 2020. This also includes estimated tax payments for tax year 2020 that are due on April 15, 2020. (Note currently Q2 estimated payments are still due on June 15th). Most states have also pushed back their filing deadlines, and many counties have pushed back the date real estate taxes are due. (For example, King County in Washington, has extended its April 30 real estate tax payment deadline to June 1 for those who pay directly.) The IRS has also moved the IRA and HSA contribution deadlines from April 15 to July 15.
- Changes to 401k/IRA distributions rules: For those eligible for a Coronavirus-Related Distribution, you can withdraw up to $100K from IRAs and employer sponsored plans, and these distributions will be exempt from the typical 10% penalty. Withdrawals are eligible to be repaid over 3 years. By default, income related to the distribution is spread evenly over 2020, 2021 and 2022 (or you could elect to include it all in 2020 income).
- Increased access to 401k loans: You can now take loans up to $100K and the amount can be up to 100% of vested balance.
- New “above the line” charitable deduction: Taxpayers can take a $300 charitable donation deduction for cash donations if they do not itemize.
- Student loans: No payments are due on federal student loans until 9/30/20; no interest will accrue during this time.
- Expanded definition of “qualified withdrawals” from FSA and HSA: Now includes over the counter medications and other basics.
- Net operating losses (including NOL’s from 2018): Ability to carry back NOLs and suspension of taxable income limitation. Under the Tax Cuts and Jobs Act, an NOL could only be carried forward and only used on up to 80% of taxable income.
- Technical correction of an issue with the 2018 Tax Cut and Jobs Act regarding qualified improvement property. Businesses can now write off improvements to facilities immediately vs. having to depreciate over 39 years.
Changes in tax laws present great planning opportunities. Your Paracle advisor would be happy to discuss how these changes may impact your tax planning and explore the best options for helping optimize your tax bill with your CPA.
Many thanks to Don Archiable, CPA for his contributions to this summary.
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.