The CARES Act

In late March, the senate and the President of the United States passed a $2 trillion stimulus package to help businesses and individuals that have been negatively affected financially by the COVID-19 pandemic.  This aid package is formally known as the “Coronavirus Aid, Relief and Economic Security Act”, but is more commonly referred to by its acronym, the “CARES Act”.  What is less well understood, is what exactly this massive stimulus package incudes, and how it relates to, and might possibly help the average person.  While there are dozens of provisions in the bill, all of which are important in their own right, we will focus here on what we believe are the provisions most relevant and useful to the average worker.

Delayed Tax-Filing and Tax-Payment Deadlines

The deadline to file and pay your 2019 taxes as has been extended by three months to July 15, 2020.  This includes both the payment of any taxes due for 2019, as well as payment of the first quarterly estimated tax payment for 2020, both of which are usually due on April 15th, if required.  This deferment applies to all types of tax-payers including: individuals, couples, trusts, estates and corporations.  In addition to the delayed tax-filing deadline, it is good to note that the deadline to contribute to an IRA or self-employed retirement account has also been extended to July 15, 2020.

These changes were enacted for two main reasons. First, to give tax-payers more time to come up with the money needed if they owe taxes, or want to contribute to their retirement plans.  Since so many people have lost their jobs, or at least had their hours significantly reduced, trying to come up with the money needed to pay taxes by April 15th was just not realistic for many of them.  The second reason for this change is to give tax preparers more time.  Like almost every other type of business, due to the shelter-in-place orders, tax preparers have had to make drastic changes to how they operate.  This three-month extension will give tax preparers more time to complete their crucial work and hopefully allow them time to do so without making unnecessary mistakes due to haste or systems failures.

Stimulus Payments

One of the most highly anticipated (and highly controversial) features of the CARES Act is the one-time stimulus payment of up to $1,200 for each eligible person.  The ability to qualify for this payment is based on your Adjusted Gross Income (AGI) for 2019, or on your 2018 tax-return if you have not yet filed your taxes for 2019.  In order to receive the full $1,200 payment your AGI must be at or below the following limits:

  • Single:                                 $75,000 or lower
  • Married Filing Jointly:        $150,000 or lower      
  • Head of Household:            $112,500 or lower

For those who had AGIs above these limits, you may still be eligible receive a smaller stimulus payment.  However, the payment will be phased out completely if your AGI was at or above the following limits:

  • Single:                                 $99,000 or higher
  • Married Filing Jointly:        $198,000 or higher     
  • Head of Household:            $136,500 or higher

As the name implies, these “stimulus” payments are intended to help stimulate the economy during these troubled financial times.  The government hopes that these payments will make people feel more financially secure and that they will go out and spend money more freely, which, in-turn, will stimulate the economy.  This spending should also help create more jobs (or at least reduce the number of jobs being lost), which will further stimulate the economy, continue to drive spending, and so-on.

Increased Retirement Account Accessibility

For people under age 59 ½ who need access to money from their retirement plans, the CARES Act also provides some relief. In many cases, you can now access up to $100,000 from your retirement plan (IRA, 401k, etc.) without having to pay the 10% federal penalty that would usually be assessed for premature distributions from these types of accounts.  In order to qualify for this special one-time distribution, an individual (or their spouse or dependent child) must either have been diagnosed with COVID-19, or be experiencing adverse financial consequences as a result of being quarantined.  However, it is important to note that while you will not have to pay any early-withdrawal penalties on these qualified distributions, you will still likely owe taxes.  That said, there is some good news on the tax front here as well.  While you will likely owe taxes, you will be able to choose to pay the taxes all at once, or pay them over a three-year period instead.  And although it may seem like a no-brainer to spread the payments over three years, if you are in a significantly lower tax-bracket in 2020 (because, for example, you have lost your job), and don’t anticipate that to be the case in 2021 and 2022, then paying all at once may be in your best interest.  As with all things tax related, each person and specific situation requires his or her own analysis as to what is “best”, so please discuss and confirm all tax matters with your tax consultant before making any final decisions.

Waiver of Required Minimum Distributions (RMDs)

For individuals who are no longer working and have turned 72 or older in 2020 (and for those who turned 70 ½ in 2019 or before), the United States tax law requires that you start to take money from your retirement accounts, such as IRAs, 401(k)s etc.  These mandatory withdrawals are called “Required Minimum Distributions (RMDs)”.  The amount you are required to take is based on two factors: the account balance as of December 31st of the prior year, and your estimated life expectancy. One notable exception to the RMD requirements is the Roth IRA, which does not have the same distribution requirements.

The reasoning behind RMDs is as follows. The government gave you a tax break when you contributed to the account.  Additionally, they allowed you tax deferral for all of the years you held the account.   And now that you are getting older, and are likely retired, they finally want their tax dollars.  The government does not care what you do with this money. You can spend it, save it, give it to charity, etc. All they require is that you take it out of your retirement account so that they can levy a tax on the distribution. 

With the passage of the CARES act, RMDs have been suspended for 2020.  The reasons for this are two-fold.  First, it is a way to keep more money in the consumer’s pocket, which, again, will hopefully help fuel spending and economic growth - basically, the same assumption as discussed above in regard to the stimulus payments.  In addition, by not requiring RMDs for 2020, fewer people are forced to sell stocks and bonds during a down market.  It is hoped that this will help these individuals avoid large losses and will help buoy the overall stock and bond markets.

Increased Payments and Access to Unemployment Benefits

Individuals who qualify for unemployment benefits are now eligible to receive an additional $600 per week in benefits, above and beyond what they would have received prior to implementation of the CARES Act.  In addition, unemployment benefits may now be payable to self-employed workers and independent contractors, who may not have been eligible prior to the stimulus package.  This is especially important in today’s world, with so many people working in the “Gig Economy”, who are not covered by traditional unemployment benefits. 

As of the writing of this article, another stimulus package is already working its way through to passage, the CARES Act 2. This will provide additional funding for many of the programs included in the first bill, as well as expanding aid to more areas of concern. Because of the fast-moving nature of both the daily COVID-19 news, and the government’s need to respond, it is important that you stay abreast of new legislation that may be available to help, if the need arises.

 

 

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