Last Friday, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. It is a MASSIVE bill, ($2 Trillion+) causing president Trump to remark that he had never signed anything with a “T” on it before.
What the heck? A trillion here, a trillion there–soon we’re talking about real money. I remember the days when we were tossing around billions as if it was real money. Those were the days!
The bill contains many stimulus measures and tax benefits for families, workers, small businesses and governmental agencies. In this post, I will highlight and briefly explain some of the benefits, with the understanding that I too am learning as I write, and much more guidance on certain provisions is sorely needed and likely will be forthcoming.
Direct Payments to Individuals
The most notable provision in the bill is the direct payments to taxpayers. Specifically, individuals who had up to $75,000 in adjusted gross income or AGI (essentially any gross taxable income for most people) in 2019 will receive a one-time payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, while individuals and families with income above their respective thresholds will see their relief payments reduced by $50 for every $1,000 in AGI.
Notably, while individuals must have a work-eligible Social Security number (and not be claimed as a dependent), they don’t need to have had reportable income in 2019 and can be eligible for other income-benefit programs as well.
If you have not yet filed your 2019 return (which is now due on July 15, 2020), the IRS will estimate your payment based on your 2018 return. If the IRS has your banking information from your tax return, your payment will be directly deposited into the same account used for your tax refunds or payments. Otherwise, they’ll mail you a check. If you’re not required to file a return due to your income, the IRS may still find you to send you your payment, but forthcoming guidance on how to get your payment will help those not required to file a tax return.
Keep in mind that this payment is an advance on this year’s (2020) tax credit, so you’ll have to “true-up” this payment with your overall 2020 taxable income (and potentially receive a higher or lower credit amount). Tax planning, to reduce your overall AGI, becomes essential. For example, increasing deductible IRA or 401(k) contributions can help if you’re anywhere near the phaseout limits.
Retirement Distribution Provisions
From a retirement planning perspective, notable provisions of the CARES Act include the elimination of the 10% early withdrawal penalty on distributions from retirement accounts for so-called “Coronavirus-Related Distributions” (with the option to spread income taxation over three years, and the ability to re-contribute back to those same accounts to make up in the future). The Act also suspends the required minimum distributions (RMDs) in 2020 for a wide variety of retirement accounts (for both account owners as well as beneficiaries), as well as the ability to return current year already-made distributions to your retirement plan.
401(k) loan maximums are expanded from $50K to $100K. Obviously, I highly recommend against taking 401(k) loans or pre-retirement distributions unless you have no reasonable alternative. Remember, while the 10% penalty for early distribution is waived, you still have to pay taxes on the taxable portion of the distribution.
Unemployment Benefits Expansion
In addition to the above cash payment, unemployment benefits became much more generous. While what you get in unemployment benefits vary by state, for at least the next four months, the benefit will go up by $600 a week, and more people will qualify for unemployment benefits for a longer period of time (13 weeks longer).
There is also an expansion of benefits for those who would otherwise not normally qualify (like self-employed individuals and independent contractors). Here the rules can get a bit complicated, and more guidance for self-employed individuals is definitely needed.
Normally, the self-employed don’t qualify for unemployment benefits. However, the legislation starts a new program called the Pandemic Unemployment Assistance Program. You’ll get the $600 per week, plus half the average unemployment benefit in your state. So if you’re an independent contractor out of work, you may be in luck! Remember though that all unemployment benefits are taxable income.
College Student Provisions
The Act provides for the deferral of Federal student loan payments (principal and interest waived) through September 30, 2020. This deferral is not necessarily automatic–you should contact your loan servicer to make arrangements for deferral. If you were thinking about converting/refinancing from federal student loans to private loans, you will probably want to hold off a few months or discuss this with your financial advisor. Those of you on track for Public Service Loan Forgiveness (mostly physicians) basically get six free payments toward your 120 qualifying payments.
Other student benefits including work-study payments are now just grants (possibly non-taxable). Undergraduates who dropped out of school due to the pandemic won’t lose eligibility time for Pell Grants or subsidized loans. Arts programs, universities, and other institutions of higher learning are also getting their share of stimulus payments.
Small Business Provisions
With respect to small businesses that have been impacted by COVID-19, certain small businesses with up to 500 employees will be able to take out loans (up to $10M depending on payroll costs and other factors-see next paragraph), which will be eligible for forgiveness if used to cover payroll and other expenses (like rent and utilities), along with other ‘employee retention’ tax credit opportunities. Other benefits for businesses include a delay in the employer’s portion of Social Security payroll tax until January 1, 2021 (with half of the deferred amounts due at the end of 2021, and the other half due at the end of 2022), and more flexible Net Operating Loss rules to obtain immediate refunds, among other provisions.
As part of the benefits to small businesses, there is $10 billion set aside for “emergency grants” to cover immediate operating costs, up to $10,000 per business. However, to get it, you have to apply for a Small Business Administration (SBA) Economic Injury Disaster Loan. Each small business can borrow 2.5X average monthly payroll expenses over the last year up to $10 million, at an interest rate no higher than 4%, without any personal collateral or guarantee. Fees, principal, and interest is expected to be deferred for 6-12 months. The amount of that loan that is used for payroll, rent, utilities, and loan interest (including mortgage) for the first 8 weeks could be forgiven tax-free, provided workers stay employed through the end of June. This is more generous than anything I’ve ever seen, at least in my lifetime.
There is another $17 billion set aside to cover payments on previously existing SBA loans. Also, there is currently a limitation on how much interest a business can deduct. The CARES Act raises it to 50% from 30%. Net operating losses from 2018-2020 can also be carried back five years, allowing you to refile your taxes for those years immediately to get a refund.
Other Miscellaneous Provisions
The legislation does a few other things, such as delaying your tax return and tax payment due date for 2019 income tax returns to July 15, 2020. First-quarter 2020 estimated income tax payments are also due July 15th, but oddly, second-quarter 2020 estimated tax payments are still due on June 15 2020. I suspect that will be corrected in a technical corrections bill. Many states are also going to be pushing their tax due dates to coordinate with the new federal deadlines. This is changing rapidly, so check with your own state taxing authorities.
Per Section 3702 of the CARES Act, beginning in 2020, the definition of qualified medical expenses, for purposes of Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs) is expanded to include over-the-counter medications.
Qualified medical expenses for such accounts are further expanded to include amounts paid for “menstrual care products”, which are defined as “a tampon, pad, liner, cup, sponge, or similar product used by individuals with respect to menstruation or other genital tract secretions.’’
To help you support your favorite charity, you now have a new tax benefit too. If you don’t itemize your deductions, you can take up to $300 in charitable donations as an above-the-line deduction. The limitation on how much of your income that you can deduct (normally 50%) is eliminated as well, but just for 2020 (I personally don’t know anyone who gives away 50% of their income to charity, let alone more, but for this year, you can!)
If you’re one of the brave (or one who has no choice), the Act waives airplane ticket excise taxes for any trips taken during the rest of 2020.
The bill spans over 800 pages, so I can’t possibly detail all of the provisions. Therefore, I’ve only provided the highlights that I thought were most relevant for my readers (I admit that I have not read all 247 pages). Some of the provisions will require a bit of planning by individuals and small businesses, and on that, I will detail in future posts. And it’s very possible or likely that more stimulus is coming, depending on how long the effect of COVID-19 lasts, so I don’t believe that this is the last we’ve heard on this topic.
If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.