In response to the global pandemic caused by COVID-19, the US government passed the CARES Act (Coronavirus Aid, Relief, and Economic Security). This bill provides $2 trillion to help support our healthcare system, unemployment insurance, and support US businesses along with many other provisions to generally support our economy. It is about 900 pages in length and contains many provisions related to healthcare and business. The purpose of this article is to focus on the aspects that will directly impact most of our clients and to provide some insight as to how this new law may affect the financial plans we have developed for our clients. As usual, we will be reaching out to each client individually to make plan adjustments as needed.
Recovery Rebates
Since so many people have either lost their job or have had a reduction in income, the US government is providing “refundable tax credits” to help put cash into the pockets of those who are most in need. The amount received will depend upon your tax filing status and the income reported on your prior tax return. The IRS will use your latest tax return filed, which could be either 2018 or 2019 (if you have filed already). The rebate is $1,200 per person plus $500 for each child under age 17. The amount you receive will be reduced or eliminated based on your income. These reductions start at $150,000 if you file your taxes as married filing joint, $112,500 for head of household, and $75,000 for all other filing types. If you qualify, the money will be sent to the bank account or address on file with the IRS. So, if you receive social security, it will be deposited into that account or if you received a tax refund, it will be deposited into that account. If there is no bank information on file, it will be mailed to the address they have on file for you. There will be a phone number established if you need to inquire about any issues if you qualify for payment.
Required Minimum Distributions
For 2020, there is no required minimum distribution from any type of retirement account. For those who are required to take these distributions, this rule change creates a planning opportunity because we may be able to reduce your income taxes due for 2020. We will be updating our tax projections and reconfiguring distribution strategies for our clients who are currently taking distributions from their IRAs.
This rule change also creates an opportunity to convert from Traditional to Roth IRAs. If your income will be much lower, due to no required minimum distributions, some of this income could be replaced with IRA conversions. This is especially useful since any stock investments could recover from the recent drop within the shelter of a Roth IRA, so the recovery gains would be tax free.
Charitable Giving
Non-profit organizations need help now more than ever. However, for those who elect the standard deduction on their tax returns, there is no tax benefit for making a charitable donation. This portion of the law allows for a $300 deduction regardless of whether you itemize or take the standard deduction. The gift must be a cash gift (contributions to donor advised funds do not qualify). While the number may sound like a small benefit, if it incentivizes millions of Americas to donate, then it can have a real impact. As the law is written right now, this is a permanent addition to the tax code.
Another change regarding charitable giving is there is no limitation on the amount of cash gifts you can deduct in 2020. In 2019, you could only deduct 60% of your adjusted gross income for cash gifts. Now, you could theoretically eliminate all your taxes if your cash charitable contributions are high enough.
Federal Student Loans
Federal student loan payments are deferred until September 30, 2020. No interest will accrue during this time. While payments are not required, voluntary payments can still be made. So, if you are experiencing cash flow difficulty and have loans automatically paid, you may need to take action to stop the payments.
Other Provisions
Unemployment benefits are increased by $600 per week and are available in the first week of unemployment (no one-week waiting period). The benefit period is also extended by 13 weeks.
Small businesses can qualify for loans up to $10 million- or 2.5-times average payroll to cover basic expenses. These loans have a maximum rate of 4% and are eligible to be fully or partially forgiven. These loans are designed to help small businesses keep employees on the payroll. There will also be tax credits available for companies who do not take out or qualify for a small business loan. Employers can also defer payroll taxes until the end of 2021 and 2022.
There are many other provisions of this act and we will continue to review it and will be reaching out to our clients with strategies specific to their financial situation. For now, we hope it will provide support to our healthcare system and some economic relief during one of the most difficult periods in our financial lives.