The CARES Act- How Does it Affect Me?

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act is the largest economic relief package in U.S. history. Signed into law on March 27th, the CARES Act is a broad, far-reaching bill that attempts to assist individuals, small businesses, and some large businesses too. In this article, we’ll focus on the sections that are relevant to individuals and their financial planning.

2020 Required Minimum Distributions (RMDs) Waived

The CARES Act suspends the 2020 Required Minimum Distribution (RMD) from IRAs inherited IRAs, and qualified retirement plans such as 401(k)s and 403(b)s.  This is a welcome provision for those that would rather not withdraw funds in a down market, or those that would simply prefer not to pay taxes on the distributions.

Some people depend on IRA withdrawals for their income, and so may still decide to withdraw the amount that was required before this relief provision suspended it. However, if you don’t need to withdraw from your IRA, you can strategically reduce or avoid withdrawals in order to reduce your tax bill. Or, you can take advantage of the tax planning opportunity and do a Roth IRA conversion.

Extended Due Dates for Tax Filing and Payments

The CARES Act pushes back the due date of the 2019 federal tax return filing to July 15th. The due date for paying 2019 taxes and the first quarter of 2020 estimated tax payments are also delayed until July 15th.  State tax filing and payment deadlines vary, but California and many other states have also pushed back the due dates to July 15th.

At this time, the second quarter estimated payment for 2020 is June 15th, meaning the second quarter payment is due before the first quarter payment. If the COVID-19 situation drags on, the due date of the second and perhaps the third quarter estimated tax payment could be pushed back. 

If you expect a refund for 2019, you should file promptly. However, if you will owe money for 2019 and/or you have an estimated payment to make for the first quarter of 2020, waiting until July to make those payments could benefit you.

Recovery Rebate Payments to Taxpayers

The CARES Act provides for taxpayers below certain income limits to receive “Recovery Rebates” of $1,200 per taxpayer or $2,400 per married couple, plus $500 per qualifying child. IRS states that “Distribution will begin in the next three weeks and will be distributed automatically, with no action required for most people.” However, there are some wrinkles that may make it hard for some people to know if, when and how they will receive a payment.

In determining who gets the rebate payments, IRS will look at the income on the last filed tax return: 2019 (or 2018 if 2019 hasn’t yet been filed.) Taxpayers whose Adjusted Gross Income is less than $75,000 (Single) or $150,000 (Married Filing Jointly) are eligible for the full payment. Payments are phased out for incomes over that, so taxpayers with income up to $99,000 (Single) or $198,000 (Married Filing Jointly) will receive partial rebates.   

The Treasury plans to deposit payments “Directly into the same banking account reflected on the return filed.” For Social Security recipients, the Treasury may send the rebate payments to the account the benefits come into. For taxpayers who don’t have direct deposit set up with the IRS or Social Security, the Treasury will send checks, but it may take them a while. 

IRA and Retirement Plan Distributions or Loans

The Act allows IRA account holders to take coronavirus-related IRA distributions of up to $100,000. Distributions may either be repaid to the IRA within three years or remain as taxable distributions and the taxable income spread over 3 years.

For active participants in retirement plans, Hardship distributions from 401(k)s can be taken up to $100,000, and rolled back into the plan within three years or remain as taxable income spread over 3 years. Loans from 401(k)s can be taken up to the lesser of $100,000 or the account balance.  Any new or existing 2020 loan repayment due can be delayed for a year. 

Charitable Giving Incentives

The Act brings several changes related to charitable giving.  The 2020 charitable contribution limitation for individuals has been temporarily increased to 100% of your AGI.  Contributions to Donor Advised Funds are not eligible for this increase. There will also be an allowable “above the line” deduction for charitable contributions up to $300.

The increased limits on charitable contributions presents a tax-planning opportunity for Individuals who have a significant taxable income event in 2020 to offset it with a substantial charitable contribution.

Other Provisions

The CARES Act has many other provisions for individuals including student loan relief, expanded unemployment benefits, a reprieve from negative credit reporting for borrowers, and a moratorium on foreclosures and evictions.  There are also many provisions for small businesses, including forgivable loans, grants, payroll tax deferrals and credits.

As with any law of this magnitude, there are a number of grey areas and unanswered questions. As time passes, details and clarifications will emerge. At Blankinship & Foster, we will continue to follow the developments and advise our clients on the best action based on their own individual situations. We hope that you and your loved ones will continue to be safe and healthy during this uncertain time.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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