CARES Act Provides Immediate Financial Relief for Taxpayers
Financial Information that Impacts You
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) is a $2 trillion economic stimulus package that was crafted to provide economic relief to businesses and individuals that have been negatively impacted by the coronavirus outbreak. The bill passed through Congress with broad bipartisan support and was signed into law on March 27, 2020. Its provisions, including those that make it easier for people to access their retirement savings and give retirees options to defer required minimum distributions, take effect immediately.
Relief for individuals:
• Recovery rebates for individuals: Under the new law, eligible taxpayers will receive an immediately refundable credit for 2020 up to $1,200 (or $2,400 for couples filing jointly), subject to certain income limits. The amount of the credit increases by $500 per child. The credit begins to phase out after $75,000 in income ($112,500 for head of household filers and $150,000 for joint filers). The credit is fully phased out for single taxpayers whose income exceeds $99,000 ($198,000 for joint filers). The phase out could extend to $218,000 for a couple with two children. (Note: In this case, a child is defined consistently with a child who is eligible for child tax credit, which means that children under the age of 17 will be considered when determining the additional $500 credit amount.) The credit is calculated based on a taxpayer’s 2019 tax return (or 2018, if unfiled). Taxpayers with little or no income can still receive the benefit. The amounts are not taxable income.
• Penalty-free withdrawals: The law waives the 10% early withdrawal penalty for certain coronavirus-related distributions made in 2020, up to $100,000, from an eligible retirement plan. Additionally, any income inclusion attributable to such distributions would be eligible to be taxed ratably over a three-year period. The amount distributed may be recontributed to an eligible plan within 3 years, without regard to the annual cap on contributions. The law also provides an increase in the loan threshold from $50,000 to $100,0000 and provides additional flexibility for certain retirement plans for coronavirus-related relief. Individuals are eligible to receive this special treatment if they meet coronavirus-related eligibility including:
- The individual is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; The individual’s spouse or dependent is diagnosed with such virus or disease; or The individual experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
• RMD relief: The law also suspends required minimum distributions (RMDs) for 401(k)s and IRAs in 2020. This would include an RMD normally due by April 1 for individuals who turned age 70.5 in 2019, but only if the individual did not take their RMD in 2019. The relief applies both to lifetime and post-death RMDs. In that regard, the law provides that if the post-death five-year rule applies, the five-year period is determined without regard to calendar year 2020. The bill does not mention the new 10-year rule imposed by the SECURE Act.
• Student loans: The law suspends payments on federal student loans for approximately six months, through Sept. 30, 2020, during which time no interest or penalties will accrue. The law also allows employers to provide a student loan repayment benefit to their employees on a tax-free basis. Under this provision, an employer may contribute up to $5,250 toward an employee’s student loans, and such payment would be excluded from the employee’s income. The new student loan repayment benefit will count against the same $5,250 cap that exists under current law for other educational assistance (e.g., tuition, fees, books) provided by an employer. The new provision applies to any student loan payments made by an employer on behalf of an employee after the law’s enactment and before Jan. 1, 2021.
• Charitable contributions: The new law allows you to contribute to churches and charitable organizations in 2020 by permitting a $300 deduction for cash contributions if you do not itemize deductions. The law also changes certain limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals who itemize deductions, the 60% of adjusted gross income limitation for cash contributions is suspended for 2020. For corporations, the 10% limitation is changed to 25% of taxable income. This provision also changes the limitation on deductions for contributions of food inventory from 15% to 25%.
• Mortgage relief/ credit reports: The law also gives consumers the right to request a temporary forbearance on mortgage loan payments for federally backed loans. There are also provisions related to how these temporary forbearances are reported to credit rating agencies, having them reported as “current.”