The CARES Act: What You Need to Know
Main takeaways:
- Many HCM and HG Clients will receive stimulus checks, with a base value of $1200. The check increases for couples who file taxes jointly and for each child in the household. Payments decrease for those with high AGIs, falling to zero after a designated threshold.
- Required Minimum Distributions (RMDs) have been suspended for calendar year 2020.
- You can borrow up to $100,000 from your retirement plan without incurring the 10% early distribution penalty, even if you aren’t 59 ½ yet.
- Rules limiting the amount of money you can borrow from a 401(k) or other workplace retirement plans are suspended. Existing loans receive a year of forbearance
- These tax law changes can have significant implications for your financial situation and present unique planning opportunities we’ll likely never see again. Contact your HCM Advisor to discuss how you might benefit from these changes to the law.
As our country is dealing with the growing coronavirus pandemic (the US has now surpassed China as the country with the most confirmed cases in the world), the federal government put in place a $2 trillion relief package to address the economic crisis resulting from the global economic slowdown. Here’s what you need to know about the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The most common questions we are receiving at of HCM Wealth Advisors and HG CPAs relate to the direct payments of benefits taxpayers will receive and how the rules relating to retirement distributions and unemployment have changed. We will focus on these changes now. We will provide details about other aspects of the bill in coming weeks.
Stimulus Checks
The number one item everyone is talking about is the payment most taxpayers will receive in the next few weeks. The base amount of the payment is $1,200, which may be adjusted up or down based on your circumstances. It’s based on your tax filing status and “qualified dependents”. For couples who file jointly, each person will receive $1,200, bringing the total to $2,400. Also, if you have children in your home who qualify for the child tax credit (16 years of age or less), you will receive an additional $500 per child. Those receiving Social Security and Disability payments will also be entitled to receive benefit payments.
However, your benefit will be reduced by 5% of your excess AGI over the designated threshold for your filing status, based on your most recently filed tax return. If you’re single, married filing separately, or a qualifying widow(er), your check will be reduced by $5 for every $100 (or 5%) your AGI exceeds $75,000. For married filing jointly households, your benefit will be reduced at the same rate beginning at an AGI of $150,000. For head-of-household filing status, your payments are reduced beginning at an AGI of $112,500. Single people with AGI of $99,000 or more and married people with no children whose AGI is above $198,000 will not receive any benefit. This calculator can help you see how much you might expect to receive from the CARES stimulus bill. Young adults who still live at home who can be claimed as a dependent will not get a payment, even if they aren’t actually claimed as such. You must have a Social Security number to receive a benefit, meaning that nonresident aliens, trusts, and estates will not receive benefits.
If you haven’t filed your 2019 return yet, your 2018 return information will be used. As a planning pointer, that means, if you haven’t filed your 2019 tax return yet, you should estimate your AGI for 2019, compare it to 2018, and see which will give you the higher stimulus payment. Remember that the filing date requirements regarding 2019 tax returns have changed.
Technically, the stimulus payment is a 2020 tax credit upon which you are receiving an advance payment based on your previous year’s return. The government is doing this in order to get stimulus money into taxpayers’ hands as soon as possible. If your AGI in 2018 or 2019 (depending upon which filing year is used to determine your benefit) results in a lower benefit than your 2020 return ultimately shows, you will receive the extra benefit when you file your 2020 return. Also, if you receive a benefit based on the returns that have already been filed and your 2020 return shows that you are not eligible, SURPRISE, you will get to keep the money!
Based on your previously filed returns and where your income will wind up in 2020, you may have an income-shifting planning opportunity to capture a larger stimulus payment. This will be a good topic to review with your HCM Advisor.
Changing facts like fluctuating income or new babies being born may change the ultimate benefit that you receive vs. what you might receive based on a previously filed tax return.
Your stimulus check will be tax free, as it’s technically an advance payment on a tax credit you’ll receive for the 2020 tax year.
When and Where Will I Get My Money?
The Treasury has indicated that payments will start to go out within three weeks. Senator Schumer and President Trump have said the payments could begin as early as early as next week. Last time the country sent stimulus checks to taxpayers, it took about three months to get the money to the people.
Social Security beneficiaries will receive their payments in the same account they receive their direct deposit Social Security benefits. If you receive an electronic refund on your tax return, the stimulus payment will go to that account. If you do not have either of those electronic options, a check will be mailed to your last known address. Obviously, delays could arise if accounts have been closed or you have moved since you last filed a tax return.
IRA and Retirement Plan Changes
Required Minimum Distributions (RMDs) have been suspended for calendar year 2020 for all retirement accounts, such as a Traditional IRAs, 403(b), Government 457(b), SIMPLE IRAs, SEP IRA or other workplace retirement plans. This provides a planning opportunity to reduce the current-year tax burden for taxpayers who do not need the RMD and allows account holders to avoid selling assets at depressed prices during a bear market.
This change will also create a planning opportunity for Roth conversions within lower tax brackets that would have otherwise been absorbed by the RMD. This is another topic to review with your Advisor.
I Really Need Money Now
The CARES act follows the lead of other Federally declared disasters (hurricanes, floods) in allowing distributions of up to $100,000 from IRAs and employer sponsored retirement plans, or a combination of both, which are made in 2020, by someone who has been impacted by COVID-19. There are rules, but it is Congress’ intent to make these benefits broadly available, so most people will likely qualify. Under this feature, you would be permitted to borrow from your retirement account even if you aren’t 59 ½ years old yet. You’re able to borrow up to $100,000 without incurring the 10% penalty. These distributions can come from multiple accounts. Additionally, you can pay any income tax due on that money over the next three years, taking advantage of lower tax brackets. Also, you may put the money back in the account up to three years after you take the distribution. The three-year recontribution period begins the day after the distribution is received. If the entire amount is recontributed within the three-year window, the whole ordeal is treated as a tax-free IRA rollover transaction or a series of tax-free IRA rollover transactions. If not repaid, the dollar amount may be taxed at ordinary income rates over the three-year period. This exception only applies to withdrawals related to the coronavirus; talk to your HCM Wealth Advisor to see if your situation qualifies.
This can present a planning opportunity to:
- manage the tax burden on a penalty-free distribution around unique income situations caused by the current recession,
- to postpone claiming social security and obtain deferred payment credits
- to access safety-net reserves housed inside deferred plans while the stock market recovers over the next three years.
Contact your HCM Advisor to discuss how these ideas might benefit you.
For 401(k)s or other workplace retirement plans, you can borrow double the usual amount. For the next 180 days, if you’ve been affected by the coronavirus, you may take out a loan of up to $100,000. The previous rule preventing you from withdrawing more than half your balance has been suspended. Also, any existing loans that were supposed to be paid before December 31st, 2020 receive an extra year of forbearance.
Unemployment benefits
The bill takes a very wide-reaching approach to providing unemployment assistance, including self-employed people, part-time workers, and other folks in the gig economy. Under the plan, eligible workers would receive an extra $600 per week on top of whatever state benefits are provided, with the goal to make up nearly 100% of lost wages. The bill would provide an extra 13 weeks of benefits on top of what the resident’s state provides, not to exceed 39 weeks.
Conclusion
The United States has just put in place the largest relief package in history with lightning speed. The goal is to help minimize the economic slowdown that will come as a result of the swift shutdown of global economic activity. The impact on the world’s economy and markets are yet unknowable. This turmoil creates both challenges and opportunities. At HCM we are doing our best to meet the first and take advantage of the second.
We will continue to update you with our calls, blogs and videos. Please reach out to your Advisor if you have any questions at all. And if you know someone who could use our help, please put us in touch, no strings attached.