The Coronavirus Aid, Relief and Economic Security (CARES) Act is designed to boost the U.S. economy by providing economic relief ranging from individual rebates to increased unemployment benefits to tax breaks. You may wonder what this means for you and your financial plan. We’ve highlighted three key aspects of the CARES Act here.
Economic Impact Payments: Recovery Rebates
Perhaps the most talked about aspect of the CARES Act provides for payments to individual taxpayers, also called “recovery rebates”. The payments will not be counted as taxable income because the rebate is a credit against tax liability. Tax filers with adjusted gross income up to $75,000 for individuals, and up to $150,000 for married couples filing joint returns, will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.
Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child under age 17. An individual who is claimed as a dependent on another individual’s tax return is not eligible for the payment. Read more at the IRS website.
Special Rules Regarding Retirement Funds
These special rules apply to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. Furthermore, the relief applies to retirement account owners as well as to beneficiaries taking stretch distributions from plans inherited due to a plan holder’s death prior to 1/1/2020.
- Required Minimum Distributions (RMDs): The CARES Act waives RMDs for 2020 as well as any RMD that otherwise needed to be taken in 2020. The waiver includes RMDs that were to be taken by April 1, 2020 due to the account owner turning 70 ½ in 2019.Distributions from inherited IRAs are included in the waiver and beneficiaries have the option to not take their inherited IRA RMD for 2020.
What does this mean if you already took some of or all your 2020 RMD, but you don’t want or need it?
- Those who already took 2020 RMD distributions may be eligible to rollover a single distribution back into the IRA, if done within 60 calendar days of receipt of the distribution, provided that no other rollover was done within the 12 prior months.
- If you are close to the expiration of the 60-day rollover window, act quickly if you choose to rollover a 2020 RMD to avoid the requirement to qualify with a Coronavirus-Related Distributions (CRD) exception (see below).
- EXCLUSION: Inherited IRA distributions cannot be rolled back in (with the rare exception of a spouse beneficiary who chose to remain a beneficiary rather than take as own IRA – then eligible for a spousal rollover into own IRA).
- Hardship Distributions from IRAs and Employer Sponsored Retirement Plans: People under the age of 59 ½ affected by the coronavirus can access up to $100,000 of their retirement savings without being subject to the 10% penalty that normally applies to early distributions. If the account owner or spouse or dependent has been diagnosed with the coronavirus, or lost income due to a business closure, layoff, quarantine, reduction in hours, or inability to work due to lack of childcare, then this option becomes available. These “hardship withdrawals” are taxable, but the tax can be paid over three years under this health crisis qualification. Alternatively, the owner can repay the entire distribution to the retirement plan within three years and avoid paying the tax.
- Loans from Employee Sponsored Retirement Plans: Participants in 401(k) or similar plans who have been diagnosed with or affected by economic losses related to the virus can take a loan from their retirement plan over the next six months, for up to $100,000 or 100% of the vested account balance (whichever is lower). Also, individuals with existing 401(k) loans can delay loans payments due in 2020 for one year.
Changes to Charitable Contributions
The CARES Act added a deduction of up to $300 for charitable contributions made in cash by individuals who do not itemize deductions, in addition to the standard deduction. This provision is applicable for the tax year 2020 and beyond.
For taxpayers who itemize deductions, cash contributions made during 2020 will not be subject to Adjusted Gross Income (AGI) limitations. Prior to tax year 2020, an individual’s charitable contributions made in cash were limited to 60% of their AGI. Corporate taxpayers’ charitable contributions also see benefits under the CARES Act.
Your portfolio management and financial planning teams are here to help review your current cash needs and long- and short-term goals, and to work with you and your tax professional to help you make the best choices during this time of uncertainty.
The information provided herein is not intended to be, and should not be construed as, legal or tax advice or a legal opinion. Haverford does not provide legal or tax advice. You should contact your legal or tax advisor regarding your specific tax situation prior to taking any action based upon this information.
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