What does the CARES Act mean for Me? 8 Key Areas that Could Affect You in 2020
On March 27, 2020, President Trump signed into law the CARES Act (Senate Amendment to H.R. 748) following House passage via voice vote earlier in the day. The Senate unanimously cleared the package on Wednesday, March 25. Passage in both chambers resulted from intense negotiations among Congressional leaders and White House officials, led by Secretary Mnuchin.
The nearly $2 trillion relief package is the boldest action to date in response to the COVID-19 pandemic and is the single largest relief bill in U.S. history. As detailed herein, the CARES Act includes direct financial assistance to Americans; aid to small businesses and employees; efforts to stabilize the economy and keep people employed; and additional support for health care professionals, patients, and hospitals.
The CARES Act, also known as “Phase III,” follows a $104 billion response package signed into law on March 18 (H.R. 6201, “Phase II”), which aimed to expand benefits for workers and provide nutritional assistance to families, and a smaller $8 billion package (H.R. 6074, “Phase I”) earlier this month to boost funding for medical treatments and testing.
1. TAX DEADLINES Prior to addressing the CARES Act’s tax benefits, taxpayers should be comforted to know that on March 21, 2020, the Treasury Department and Internal Revenue Service (IRS) announced it had extended that the federal income tax filing due date 90 days, from April 15, 2020, to July 15, 2020. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax who ordinarily have an April 15 due date. (As of this date, certain information returns have not been extended beyond the due date of April 15, 2020.)
2. CONTRIBUTION DEADLINES FOR IRA, ROTH PLANS IRA contributions must be made by the due date for filing your tax return each year. The due date for filing federal income tax returns has been postponed until July, so the deadline for IRA contributions for tax year 2019 has been extended to July 15, 2020.
3. WITHDRAWAL AND LOAN PROVISIONS FOR IRA’S, EMPLOYER SPONSORED PLANS. Withdraw Up to $100,000 From a 401(k) or IRA for Coronavirus Expenses.
Retirement savers who have been negatively impacted by the coronavirus crisis can now withdraw up to $100,000 from a 401(k) IRA or similar type of retirement account until Dec. 31, 2020, without being charged the usual 10% early withdrawal penalty. Those who are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or who have a spouse or dependent who tests positive for the coronavirus can take emergency retirement account withdrawals. Those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or being unable to work because of a lack of childcare due to the coronavirus pandemic are also eligible for the emergency withdrawals.
Pay the Income Tax Due on Retirement Account Withdrawals Over Three Years
Income tax will be charged on emergency retirement account withdrawals from tax-deferred accounts. However, the CARES Act allows you to spread the income tax bill over a three-year period, beginning in the year the distribution is taken.
In the event you do not use or need the funds withdrawn you are able to return the funds to your tax-deferred accounts, let’s take a look at an example below:
Let’s say you’re in the 22% tax bracket — you’ll owe 22% on the amount you’ve withdrawn ($22,000 on a $100,000 withdrawal) but, and this is a big but, you’ll have three years to pay the taxes off.
So, you can split it up equally between 2020, 2021 and 2022. Additionally, you can return cash to your IRA from this early withdrawal whenever you want over the next three years to avoid owing the taxes pro-rata.
401(k) accounts work a little different. When you take money from an IRA, you’re taking your own money back, minus the taxes you owe. In order to take money from a 401(k), 403(b) or 457(b), it’s either a distribution or a loan against those assets. So, taxpayers with 401(k) plans have a choice.
The CARES Act has expanded the size of the loan you can take from your 401(k) plan or similar retirement plan. Now, the borrowing limit has been raised from $50,000 to $100,000. The 10% penalty has been waived, just like for IRA owners.
If you choose to take a distribution from a 401(k), you also have three years to repay the loan to minimize what you owe in income tax, the limit is $100,000 for this, as well, matching the IRA limit. You cannot take a loan against your IRA and use those assets as collateral. This would be seen as a “non-qualified distribution” in the eyes of the IRS.
4. REQUIRED MINIMUM DISTRIBUTIONS RMDs have been waived for 2020. This will be a huge help because 2020 RMDs would generally be based on the substantially higher account values at December 31, 2019. Here’s how: The Dow closed at 28,462 on December 31. As of March 26, the Dow was hovering around 22,000. If not for this relief, IRA owners would be forced to withdraw and pay tax on a much higher percentage of their IRA balance.
The RMD waiver also applies to 2019 RMDs that are normally due by April 1, 2020. In another bit of positive news, the waiver applies to IRA owners who turned 70 1⁄2 in 2019. This could be a surprise to some because the Secure Act had increased the RMD age to 72 for those who turn 70 1⁄2 in 2020 or later. Those who turned age 70 1⁄2 in 2019 were still required to take their first RMD by April 1, 2020. Now, that RMD is waived. Beneficiary IRA’s are subject to relief if the distributions have not occurred for 2020. However, for those that have taken distribution for 2020 cannot undo those distribution.
IRA Beneficiaries subject to the 5-year rule A less-obvious group that can benefit from this waiver are beneficiaries who inherited in 2015 or later and who are subject to the 5-year payout rule. Generally, this only applies to non-designated beneficiaries who inherited before the deceased IRA owner reached his required beginning date (April 1st following the age 70 1⁄2 year).
These beneficiaries may have inherited through a will or were a beneficiary of a trust that did not qualify as a designated beneficiary. For example, for IRAs inherited in 2015, under the 5-year rule any balance remaining in the inherited IRA would normally have to be withdrawn as the RMD for 2020. Under the just-passed act, beneficiaries now have one more year, until December 31, 2021, to empty the account. For beneficiaries who inherited from 2015 to 2020, the 5-year rule becomes a 6-year rule.
5. GIFTING PROVISIONS Section 2205 of the CARES Act temporarily modifies charitable contribution limitations for individuals. The Act modifies the limitation from a maximum of 60% to 100% of adjusted gross income. If an individual’s contributions exceed the 100% limitation, the excess contributions may be carried over for the next five tax years.
6. STIMULUS CHECKS The bill provides a $1,200 refundable tax credit for individuals ($2,400 for taxpayers filing jointly). In addition, taxpayers with children will receive $500 for each child. The rebate starts to phase out at adjusted gross income of $75,000 for singles, $112,500 for heads of household, and $150,000 for taxpayers filing joint returns at the rate of $50 per $1,000 of income in excess of the phase-out amount. It phases out entirely at $99,000 for single taxpayers with no children and $198,000 for taxpayers filing joint returns with no children.
A taxpayer generally does not need to do anything to claim the rebate. The IRS will calculate the amount of the rebate based on a taxpayer’s 2019 federal income tax return, or the 2018 tax return if the taxpayer has not filed the 2019 tax return and send the payment to the taxpayer. Taxpayers receiving rebates do not have to pay income tax on the rebates.
7. STUDENT LOANS Loan Payment Suspension: Suspends payments automatically for federal student loans through Sept. 30, 2020, with no interest accruing or penalties during the period of suspension. Additional Provisions: Contains a variety of other emergency-relief provisions related to education, and specifically the impact of many students being sent home mid-semester. For example, it allows universities to make payments to students who were unable to complete work-study programs
8. MORTGAGES Mortgage Relief for Homeowners: Requires the servicers of federally backed mortgages to postpone mortgage payments at the request of the borrower, provided the borrower affirms financial hardship due to COVID-19. The postponement must be granted for up to 180 days and extended for an additional period of up to 180 days at the request of the borrower. Foreclosure Moratorium: Prevents the servicer of a federally backed mortgage loan to initiate any foreclosure process for at least 60 days beginning on March 18, 2020.
Eviction Relief for Renters: For 120 days after the CARES Act date of enactment, landlords with mortgages backed by the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, and other federal entities cannot pursue eviction for their tenants. Landlords also can't charge any fees or penalties related to nonpayment of rent.
https://www.financial-planning.com/news/new-cares-act-would-bring-tax-relief-for-retirement-accounts
https://www.irahelp.com/search/ft/cares%2520act
https://www.foley.com/en/insights/publications/2020/03/cares-act-summary-of-tax-provision
https://www.napa-net.org/coronavirus-aid-relief-and-economic-security-cares-act-faqs
https://401kspecialistmag.com/cares-act-rmd-early-withdrawal-waivers-a-closer-look/
https://www.venable.com/insights/publications/2020/03/the-cares-act-what-you-need-to-know-about
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