Key CARES Act Provisions for Individuals
(UPDATE: On June 23, the IRS issued a notice that allows individuals to avoid paying income taxes on a required minimum distribution taken from an IRA in 2020, as long as the amount is returned to an IRA by August 31, 2020. Additionally, you are no longer limited to one return, or “rollover,” in 2020. As the rules are complex and nuanced, speak with your financial advisor before acting.)
During this time of unprecedented uncertainty, our elected officials came together and passed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27. This legislation intends to provide economic relief for both individuals and businesses that have been negatively impacted by the COVID-19 pandemic.
Here’s a summary of seven key provisions designed to help individuals:
Required Minimum Distributions
The CARES Act suspends Required Minimum Distributions (RMDs) for 2020 for all plan participants, IRA owners and beneficiaries, not just those affected financially by coronavirus illnesses. As such, taxable distributions that would typically be based on the fair market value of retirement accounts on December 31, 2019, (when values were likely much higher than today) can be avoided and retirement savings preserved.
The suspension applies to a distribution for calendar year 2020 that would be due by April 1, 2021 (for those who turn 72 in 2020), as well as a distribution due on April 1, 2020, to an individual who reached age 70½ during 2019.
For those who have already taken an RMD for 2020, you may be able to avoid taxable income this year if you return or “rollover” the funds within 60 days. If 60 days has already passed, don’t despair. You might still be able to roll it over; we’re waiting for additional IRS guidance on this point. It’s very important to keep in mind that the rules surrounding rollovers are complex and nuanced. So we encourage you to speak with your financial advisor regarding this planning opportunity before acting.
Penalty-free early access to retirement plan funds
The CARES Act permits people affected by the coronavirus to withdraw up to $100,000 from employer-sponsored retirement plans and IRAs in 2020. These distributions (referred to as “cononavirus distributions”) are exempt from the 10% early distribution penalty if taken prior to age 59½ and are not subject to mandatory tax withholding. The distribution may also be pro-rated as gross income over three years beginning in 2020 or can be repaid at any time over a three-year period and not counted as income, if the taxpayer makes a special election to do so.
Unlike the suspension of the RMDs provision that applies to everyone, to qualify as a coronavirus distribution, the recipient must either:
- Be diagnosed with coronavirus
- Have a spouse or a dependent who is diagnosed with coronavirus
- Have experienced financial consequences as a result of being quarantined or laid off, reduced work hours, lack of childcare, or, in the case of a business owner, having to close or reduce hours of the business
Increased limits on retirement plan loans
The CARES Act increases the maximum dollar limit on plan loans to $100,000 and allows a loan to be issued for up to 100% of the participant’s vested accrued benefit for those affected by the coronavirus (up from the lesser of $50,000 or 50% of the present value of the employee’s vested accrued benefit).
In addition, the CARES Act relaxes repayment rules for participants affected by coronavirus. New loans issued to an individual affected by the coronavirus can be issued for a maximum of six years (loans for other reasons are limited to a maximum of five years). Also, the CARES Act permits an employer to suspend repayment of existing loans for up to one year and extend the repayment term for existing loans by one additional year.
The CARES Act also provides charitable giving incentives, thereby encouraging Americans to donate during this unprecedented time.
For taxpayers who itemize deductions the bill temporarily increases the adjusted gross income (AGI) limit on cash contributions made to public charities (excluding private foundations, supporting organizations and donor advised funds). For cash contributions made to public charities, taxpayers can elect to deduct up to 100% of their AGI remaining after factoring in all other charitable contributions subject to limitations.
For example, an individual with a $300,000 AGI could contribute $90,000 of appreciated stock to a Donor Advised Fund (limited to 30% of AGI) and then contribute $210,000 of cash to public charities. In so doing, this taxpayer would completely eliminate their tax liability in 2020. If an individual is inclined to give beyond deductibility limits, any excess contributions not deducted in 2020 can be carried forward, subject to the 60% AGI limit for cash or 30% for appreciated securities, in the succeeding five years.
Also, for 2020 only, taxpayers who do not itemize will be allowed to deduct up to $300 for cash contributions to public charities.
To assist low and middle-income individuals and families in affording what they need as we work our way through this public health crisis, the CARES Act includes a recovery rebate in the form of a direct, non-taxable payment.
Eligible individuals are entitled to $1,200 for a single person or $2,400 for married couples filing jointly, to be paid in the 2020 tax year. Qualifying children under the age of 17 will generate an additional $500 each. An eligible individual cannot be a nonresident alien, claimed as a dependent on another taxpayer’s return, or an estate or trust.
The amount of the cumulative credit (sum of credits for each member of the taxpayer family) is phased out by 5% of the taxpayer’s AGI in excess of the AGI Phase-Out Threshold below. For example, a married couple with an AGI of $160,000 would see their payment reduced by $500 (5% of $10,000). The recovery rebate is not available to taxpayers with AGI more than the maximum amounts shown.
|CARES Act Recovery Rebate Income Threshold|
|Filing Status||AGI Phase-Out Threshold||Maximum AGI to Qualify|
|Married Filing Jointly||$150,000||$198,000|
|Head of Household||$112,500||$146,500|
While the payments will ultimately be based on the taxpayer’s 2020 AGI, 2019 AGI is initially being used to determine eligibility. If the 2019 return has not yet been filed, 2018 will be used.
The CARES Act requires that Recovery Rebate payments be made as soon as possible.
Student loan breaks
The CARES Act includes the temporary suspension of payments and accrual of interest for federal student loans until September 30, 2020.
Also, the law provides that loan payments made by employers are tax-free to the employee for the remainder of the year. Normally, if an employer makes student loan payments on behalf of an employee, the employee must claim the payments as taxable income. Under the CARES Act, employers can contribute up to $5,250 before January 1, 2021, toward student loans and other current education assistance (tuition, fees and books) and the payments are not included in the employee’s income.
Expanded Unemployment Insurance
Nationwide, over 3.2 million unemployment claims were filed for the week ending March 21 alone. The CARES Act includes several provisions to assist unemployed workers.
First, the act aids workers who are not usually eligible for unemployment insurance, such as the self-employed, independent contractors and those with limited work history. These people may now qualify for assistance if they can certify to their state agency that they are available but unable to work as a direct result of the pandemic crisis.
Also, displaced employees who are already receiving unemployment from their states will now be eligible for an additional $600 per week for up to four months. This provision could dramatically increase the amount of money individuals are entitled to temporarily receive via unemployment compensation benefits, as the average weekly unemployment benefit nationwide is below $400. Accordingly, many people’s unemployment checks will increase by 150% or more.
Finally, the new law also provides a 13-week extension of unemployment insurance.
With additional, significant business tax and nontax provisions to help us cope financially through the coronavirus pandemic, the CARES Act brings many changes beyond the individual provisions discussed in this article. Therefore, we recommend seeking professional financial guidance if you have specific questions regarding how the act applies to you.