Last week, the largest and most extensive economic relief effort in American history was signed into law: the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. This $2.2 trillion-dollar stimulus was designed and passed to provide economic relief to Americans financially impacted by the COVID-19 pandemic.
This legislation touches all areas of the economy, and we have summarized some of the key details below.
Relief for Individuals and Families
1. Recovery Rebates: Perhaps the most known provision of the CARES Act is Section 2201 which affords individuals and families under a certain income threshold with a “recovery rebate,” or direct payment from the IRS. Over 90% of taxpayers should receive some rebate, according to research conducted by the Tax Foundation.
How much can you expect to receive?
Individual “recovery rebates” of $1,200 will be issued to individuals earning $75,000 and below and $2,400 will be issued to married couples making $150,000 and below, with a $500 provision for each child.
The rebates begin to phase out at the rate of $5.00 for each $100.00 of income earned over the threshold, completely phasing out at $99,000 for single filers and $198,000 for joint filers.
These rebates will not count as taxable income, but they are being treated as an advance on your 2020 tax credit. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they receive from the stimulus plan. No interest is due, and no repayment is required if excess rebates are issued. As such, those whose 2020 income is lower than Year 2018 or 2019 may get an additional rebate.
No action is required on the part of the taxpayer to file for their stimulus check. Checks will be mailed by the IRS to the address on your last tax return or will be directly deposited based on bank information provided from past tax refunds. Payments are not expected until May 2020.
The CARES Act states that “not later than 15 days after the date on which the Secretary distributed any payment to an eligible taxpayer, notice shall be sent by mail to such taxpayer’s last known address. Such notice shall indicate the method by which such payment was made, the amount of such payment, and a phone number for the appropriate point of contact at the Internal Revenue Service to report any failure to receive such payment.”
2. Student Loan Payment Suspension and Tax Deadline: Student loan payments (principal and interest) will be suspended through September 30, 2020 without penalty to the borrower for federal student loans.
The IRS has announced a delayed tax filing deadline, moving it from April 15th to July 15th for Year 2019 tax returns. This delay is not explicitly part of the CARES Act but an important change to note. This is an automatic change, so no special forms or requests are necessary.
3. Charitable Giving Increases: The CARES Act creates a $300 charitable contribution deduction that is available to taxpayers that do not itemize deductions and suspends the individual charitable contribution limitation of 60% of adjusted gross income for the 2020 tax year. The Act also increases the charitable contribution limitation for corporations for the 2020 tax year from 10% to 25% of taxable income.
4. Prohibition of Evictions and Foreclosures: The CARES Act prohibits foreclosures on all federally backed mortgages for a 60-day period beginning March 18, 2020. A landlord is prohibited from initiating legal action to evict a tenant or to assess fees, penalties, or other charges for nonpayment of rent for a 120-day period after the enactment date where the landlord’s mortgage is federally backed.
5. Unemployment Insurance Benefits: Unemployment insurance benefits will increase by $600 per week for up to four months. The Act also creates a temporary Pandemic Unemployment Assistance (“PUA”) program for those not traditionally eligible for unemployment benefits (including self-employed, independent contractors, and individuals with limited employment history) that are unable to work due to the national health emergency.
6. Healthcare Provisions and Coronavirus Testing: All coronavirus testing and potential vaccines will be covered to patients at no cost. The definition of “qualified medical expenses” for eligible retirement accounts has been temporarily expanded to include certain over-the-counter medications.
Telehealth services will temporarily be covered by Health Savings Accounts (HSA) for those with eligible High Deductible Health Plans (HDHP). Medicare Part D recipients can request up to a 90-day supply of their medications.
Relief for Retirement Savers
7. Suspension of RMDs: Required Minimum Distributions from IRAs and 401(k) plans (at age 72) are suspended for Year 2020 to help retirees keep savings in their accounts while the markets are low. Likewise, RMDs from inherited IRAs have been waived. This allows investors to avoid selling stocks at low prices in order to fund the annual withdrawal requirement.
Furthermore, if withdrawals were already taken, less than 60 days ago, to satisfy the 2020 RMD, then the amount withdrawn can be redeposited (rolled back over) into the IRA.
8. Early 401 (k) Withdrawals and Loans: Individuals affected by COVID-19 are eligible to withdraw up to $100,000 from a qualified retirement plan without paying a 10% early withdrawal penalty through the end of Year 2020. Savers have three years to return the funds to their accounts. Contributions not repaid by that time will be taxable over a 3-year period. Loan thresholds on these accounts have also been increased to the lesser of 100% or the vested balance in the account.
Relief for Small Businesses
9. Paycheck Protection Program (PPP): With the CARES Act $350 billion dollars will be allocated to lending small business owners for necessary funds to cover operating expenses. The program will be available to businesses with 500 or fewer employees to help with payroll, rent, utilities, healthcare costs and more.
Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. Loans will be forgiven up to the loan amount for a borrower’s payroll, rent, mortgage, and utility costs incurred and paid during an eight-week period after a loan is originated.
10. Deferral of Payroll Taxes: The new law allows business owners to defer payroll taxes through the end of Year 2020. 50% of payroll taxes will be due at the end of Year 2021 and the other 50% at the end of Year 2022.
11. Employee Retention Tax Credit: This refundable tax credit is good for 50% of wages paid to each employee up to $10,000 max per person. Qualifying employers include (1) those whose business is fully or partially suspended by government order due to COVID-19 during the calendar quarter or (2) those whose gross receipts are below 50% of the comparable quarter in Year 2019. Once the employer’s gross receipts go above 80% of a comparable quarter from Year 2019, they no longer qualify after the end of that quarter.
12. Corporations, States, and Municipalities: The CARES Act includes $500 billion in loans which will be given to large corporations, states, and municipalities.
The changes passed into law under the CARES Act comprise a massive economic stimulus plan, almost triple in size when compared to the American Recovery and Reinvestment Act of 2009 (ARRA).
As your wealth manager, Aventine Financial Group makes it a priority to stay current on any changes that may affect our clients’ financial plans and make recommendations accordingly. We take our commitment to you and your personal finances very seriously. If, at any time, you would like to learn more about these changes, we are here to discuss them with you. Feel free to Contact Us to schedule your next call.
Frank J. Fiumecaldo, CFP
Founder & President