The CARES Act: Individual Provisions

By |2020-05-20T09:37:20-04:00May 19th, 2020|Blog, Financial Planning|

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was the first law passed by Congress to relieve some of the financial distress caused by the coronavirus. The guidance and clarification provided by the IRS is ever-changing. Simply put, this bill was written quickly and left many items open to interpretation. I recommend that you review the date of any articles you read, as some of the information could be outdated. With these caveats in mind, we’ll briefly explore some of the items below related to Individual Provisions:

  • Rebates for Individuals
  • Distributions from Retirement Accounts
  • Retirement Plan Loan Provisions
  • 2020 Waiver of RMDs
  • Charitable Deductions Change
  • Expanded Unemployment Assistance
  • Homeowner’s & Renter’s Assistance
  • Healthcare Changes
  • Relief for Student Loan Borrowers

Recovery Rebates

This part of the CARES Act is expected to cover over 90 percent of taxpayers. While many individuals and couples may assume it does not apply to them, it is worth confirming to see if you qualify. The IRS website includes a feature to help you easily check your eligibility.

The legislation provides payments to taxpayers (subject to income limits) via a credit of $1,200 per individual and $2,400 per married couple filing jointly. There is also a $500 credit per qualifying child under the age of 17. The payment is reduced by five percent of the individual’s adjusted gross income over $75,000 ($112,500 for head of household; $150,000 for joint filers). The payment will fully phase out when income reaches $99,000 for single filers, $146,500 for head of households with one child, and $198,000 for joint filers. The eligibility for payment is based on the taxpayer’s 2019 tax return. Also, if your 2020 income is affected, you may be eligible for a future credit.

Coronavirus-Related Distributions From IRAs or Employer Plans

A distribution up to $100,000 (in total) can be made from IRAs or employer-sponsored retirement plans. A qualifying coronavirus-related distribution includes one of the following circumstances:

  • Diagnosed with COVID-19.
  • Spouse/dependent diagnosed with COVID-19.
  • Experience adverse financial consequences due to being quarantined, furloughed, laid off, or having work hours reduced because of the disease.
  • Are unable to work because they lack childcare due to the disease.
  • Own a business that closed or operated under reduced hours because of the disease.
  • Meet other factors as determined by the IRS.

The IRS will tax any distribution as ordinary income but will not assess a 10 percent early withdrawal penalty. You can elect to include all the income from a coronavirus-related distribution in your 2020 income or spread the income over three years (2020, 2021, and 2022). In addition, the affected individual has up to three years after the day of the distribution to roll over all or a portion of the amount back into the retirement account.

Loan Provisions From Retirement Plans

The CARES Act expands the loan provisions for employer-sponsored plans, but the employer is not obligated to change the loan provisions of their plan. Note, as this is not a hardship loan, those provisions are still intact in addition to this option. Some of the main points to consider (same qualifying conditions as Coronavirus-Related Distributions):

  • Maximum loan amount to $100,000, typically capped at $50,000.
  • 100 percent of any vested balance may be used, typically limited to greater of $10,000 or 50 percent of vested balance.
  • New or existing payments through year end may be delayed one year.

RMDs Waived For 2020

Required minimum distributions (RMDs) for qualified account holders are waived for 2020. I wrote about this portion of the law last week. This provides flexibility and planning options for those who can take advantage of it.

Charitable Contribution Enhancements

For 2020, there are two charitable contribution benefits included in the Act. They are:

New above-the-line deduction of $300:

  • Available to those who do not itemize and claim the standard deduction.
  • Limited to $300 total, not adjusted for married couples.
  • Must be made in cash.
  • Must go directly to a 501(c)(3) charity and not to a donor-advised fund or a 509(a)(3) supporting organization.

AGI limit for charitable contributions temporarily repealed:

  • Only applies to cash contributions.
  • Effectively increases AGI limit from 60 percent to 100 percent of AGI.
  • Must go directly to a 501(c)(3) charity and not to a donor-advised fund or a 509(a)(3) supporting organization.

Unemployment Benefit Enhancements

The CARES Act provides unemployment protections above and beyond what each state provides. Anyone who can’t work because of the coronavirus may receive benefits, including those who were furloughed, laid off, became ill, or had to care for someone else infected with the virus. Furthermore, the Act:

  • Extends benefits to the self-employed and independent contractors, two groups that don’t normally qualify for unemployment.
  • Provides an additional $600 on top of the weekly benefit rate for up to four months.
  • Extends the length of regular benefits for an additional 13 weeks.

Homeowner’s And Renter’s Assistance

If your mortgage is backed by the federal government and you are experiencing hardships related to the COVID-19 pandemic, this provision allows you to suspend payments for up to 12 months. During this period, you may not be charged penalties, interests, or fees that would not have been charged if you had made your payments on time and in full. Additionally, you will not be reported to credit bureaus for late or missed payments if you are in a program.

You should be aware of all the repayment details, including potential balloon payments and impacts to your escrow accounts. Further, no foreclosures are allowed for 60 days after March 18, 2020. There are similar protections for renters, which prevents eviction for tenants or the charging of fees or penalties for late payments. The federal guidelines pertain to certain properties, so be sure to check the details.

Healthcare-Related Expenses

The CARES Act expands the definition of medical expenses:

  • Specifically, for HSAs, Archer MSAs, and FSAs.
  • Eligible medical expenses will now include over-the-counter (OTC) medication and other items.

Other notable changes:

  • Medicare beneficiaries can receive no-cost COVID-19 vaccine (when available).
  • Part D recipients can request up to 90-day supplies of medication.
  • Telehealth services temporarily covered by HSA-eligible HDHP.

Student Borrowers

There are several provisions for individuals affected by COVID-19, including:

  • Financial aid repayments.
  • Work study grants.
  • Temporary relief for student loan borrowers.
  • Exclusions of federal direct loans and Pell Grants for student who can’t complete the semester due to qualifying emergency.
  • Modification of institutional grants.

Federal student loan payments are deferred:

  • No payments required until September 30, 2020.
  • No interest will accrue during the interim.
  • Will still count towards loan forgiveness programs (e.g., PSLF).
  • Required payments are suspended, but voluntary payments can be made.

Be proactive to stop payments if desired:

  • Involuntary debt collections on Federal student loans are also suspended.
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How The CARES Act Might Affect You

The CARES Act is a complex piece of legislation that continues to evolve as the IRS further clarifies certain provisions. Before making any important decisions based on the Act, be sure to contact us to understand how it might apply to your individual situation.
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By |2020-05-20T09:37:20-04:00May 19th, 2020|Blog, Financial Planning|

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