Many provisions in the CARES Act are specifically designed to help those working in corporate America today. This relief can be particularly important if their job is eliminated due to the sharp downturn in the economy. The following is a summary of the major provisions impacting those in professional working roles today. Please reach out to one of our Wealth Advisors to discuss any questions related to your specific circumstances.
Recovery Rebates For Individuals
According to estimates by the Tax Foundation, over 90% of taxpayers should receive some amount of Recovery Rebate. Payments of up to $2,400 for married couples filing a joint return, or $1,200 for single filers will be made. Additional payments of up to $500 will be given for each child a taxpayer has under the age of 17. However, the credits are reduced for taxpayers with Adjusted Gross Income (AGI) above:
- Married filing joint: $150,000, phasing out entirely above $198,000
- Single filers: $75,000, complete phase out above $99,000
The initial amount paid will be based the taxpayer’s 2018 or 2019 income tax return (whichever is the latest return that the IRS has on file), but will ultimately be increased if a taxpayer is owed money based on their actual 2020 income.
Unfortunately, this provision will not help taxpayers who had AGI above the threshold in 2018/2019, or those who have since been furloughed or laid off in 2020 and had high income last year. Those individuals could ultimately receive a payment based on their 2020 AGI, but that won’t be much help right now.
One tip to discuss with your tax preparer: the federal filing deadline for 2019 income tax returns has been extended to July 15, 2020. If your income was below the threshold in 2019, but not low enough in 2018, consider filing your 2019 tax return as soon as possible.
The CARES Act requires that these payments be made as soon as possible, but early indications from the Treasury Department are that “as soon as possible” may not be until sometime in May.
Distributions from Retirement Accounts
The Act provides for Coronavirus-Related Distributions of up to $100,000, made from IRAs or employer-sponsored retirement plans such as 401(k) plans. The distributions must be made in 2020 and the individual must have been impacted by the Coronavirus because they:
- Have been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed;
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of COVID-19;
- Are unable to work because they lack childcare as a result of the disease; or,
- Own a business that has closed or operate under reduced hours because of the disease.
Individuals under the age of 59 ½ may access retirement funds up to the $100,000 limit without the normal 10% penalty that would otherwise apply.
These distributions may be made without any tax withholding, however, these withdrawals are still subject to income tax. Under the CARES Act, the taxable income can be spread over three years (2020, 2021 and 2022). If your income is significantly lower in any one of those years, you may choose to claim all the distribution in that year on your tax return.
Beginning on the day after an individual takes a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. If you do this, you should consult with your tax preparer, as it may make sense to amend your tax return in the year(s) you roll the funds back into your retirement account.
Finally, before you take a withdrawal from your retirement account, think twice about the long-term financial impact this could have on your ability to retire and the foregone tax deferral benefits of taking a withdrawal now. If you have other sources of income or assets to draw from during a temporary financial setback, it may make sense to tap into non-retirement accounts funds first.
Loans From Employer-Sponsored Retirement Plans
If your employer allows loans from your company-sponsored retirement plan, the Act enhances the ‘regular’ plan loan rules in the following three ways:
- The maximum loan amount is increased to $100,000 (the normal limit is $50,000).
- 100% of your vested balance may be borrowed (normally this generally limited to 50%).
- Delay of payments on loans for up to one year.
A 401(k) loan is not considered taxable income, however, the amount you pay back is made with after-tax dollars whereas your annual contributions were likely made with pre-tax dollars. Therefore, by taking a loan you forfeit the advantages of pre-tax savings you built up over the years. Put this loan option towards the bottom of your list of available resources too.
New $300 ‘Above-The-Line’ Charitable Deduction
The Act provides for an ‘above-the-line’ tax deduction for qualified charitable cash contributions up to $300. For taxpayers who are no longer itemizing their deductions, due to the increase in the standard deduction from the tax law change in recent years, this can save a few tax dollars while benefitting charities who may be facing a revenue loss right now. A $300 contribution to a donor advised fund does not qualify for this tax deduction.
AGI Limit For Cash Charitable Contributions Temporarily Repealed
The Act increases the AGI limit on cash contributions made to charities from a maximum of 60% of AGI, to a maximum of 100% of AGI for “qualified contributions”. In other words, it is possible for an individual to eliminate their entire 2020 tax liability with charitable contributions. Any contributions that exceed 100% of AGI can be carried forward for up to five years. These provisions do not apply to contributions made to a donor advised fund.
Relief For Student Loan Borrowers
The CARES Act includes several provisions aimed at providing relief to student loan borrowers, including the following:
Required payments on Federal student loans are suspended though September 30, 2020. No interest will accrue during this period. While required payments are suspended, any recurring voluntary payments will continue, unless you take action to have them stopped.
Employers are already able to provide up to $5,250 annually tax-free to employees if used for current education. The Act also provides that this amount can be used by the employee to pay down student loan debt, and if so, it’s tax-free through the end of 2020.
Provisions Related to Individual Healthcare
The Act expands the definition of qualified medical expenses, for the purposes of Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs) to include over-the-counter medications. In addition telehealth services may be temporarily covered (through plan years beginning in 2020) by an HSA-Eligible High Deductible Health Plan before a participant has met their deductible. Check your healthcare coverage to see if telehealth services are part of your plan, which could enable you to receive important medical advice and treatment without leaving your home.
Unemployment Compensation Benefits
Pandemic Unemployment Assistance – Individuals who are ineligible for ‘regular’ unemployment, extended unemployment or pandemic unemployment insurance, or run out of such insurance, may be eligible for up to 39 weeks of benefits via this provision.
First Week Waiting Period Waived – Normally, individuals are ineligible to receive unemployment benefits the first week that they are unemployed. The CARES Act offers to pay states to provide unemployment compensation benefits immediately, without the traditional one-week waiting period.
Unemployment Compensation is Increased by $600 per Week – This provides states with the ability to increase their unemployment benefits by up to $600 per week with federally-funded dollars, for up to four months.
Unemployment Compensation is Extended by 13 Weeks – If individuals reach the maximum number of weeks of unemployment compensation provided under state law, the Act allows them to receive such benefits for an additional three months.
If you are a working professional today, we hope your job is secure. If you find yourself with a reduction in pay, furlough or job loss, the Corporate Professionals and Executives team at Brightworth has expertise in navigating employment changes and how to best position your finances resources during this interim period. Ultimately we know your goal is to get back on track, and continue to plan for your future. We have the tools and techniques to help our clients achieve their financial goals. Reach out to us if we can help you or your loved ones.
This information was derived from sources believed to be factual and reliable. It is being provided for informational purposes only and should not be construed as tax or legal advice. Please consult a tax or financial advisor with questions about your specific situation.