With the recent passing of the CARES Act in response to the COVID-19 virus, we wanted to take the time to bring you a detailed overview of the Act and what this could mean for you!
What is the CARES Act?
The CARES Act is a 2 trillion-dollar coronavirus economic stimulus bill that President Trump signed into law on March 27, 2020. It is designed to offer relief for businesses, families, and individuals who have been negatively impacted by COVID-19.
From direct payments to unemployment to student loan relief and more, the bill is aimed at combating the economic ramifications of the coronavirus. Let’s take a closer look at some of the highlights.
An Overview of CARES Act Provisions
There are many provisions associated with the CARES Act. Below is a list of the top 10 changes that could impact you.
1. Direct Payments to Americans
Probably the most widespread aspect of this bill is its stipulation to make direct payments to American citizens. The recovery rebate is set to reach 90% of taxpayers who will receive $1,200 if they filed single or $2,400 for married couples with an additional $500 per child (under the age of 17). There is an income threshold for direct payments which is $150,000 for married filing joint, $112,500 for head of household, and $75,000 for single and all other filers. If your AGI is above those numbers, the payments begin to phase out. The credit will be a 2020 refundable tax credit and will be based on your 2019 tax return (2018 return will be used if 2019 is not filed). Phaseouts start at $5 per $100 of additional income over the threshold. The chart below illustrates the income phase-out.
The CARES Act provides an additional $250 billion for extended unemployment insurance programs. It expands eligibility while also providing qualified workers with an additional $600 per week for 4 months. Unemployment benefits will also be extended through December 31, 2020. Usually, there is a waiting period to receive benefits, but this act eliminates the waiting period and the Federal Government will cover the first week of unemployment.
Who does this apply to? W2, self-employed, contractors, and gig economy workers.
3. Tax/Retirement Provisions
For an individual, spouse, or dependent diagnosed with COVID-19 or experienced financial consequences from being quarantined, being laid off, or having work hours reduced because of the virus this bill waives the 10% early withdrawal penalty for distributions from IRAs and employer sponsored plans up to $100,000. The employer plan loans are limited to the lesser of $100,000 or 100% of the vested account balance and rollovers are not subject to mandatory withholding requirements. This $100,000 maximum distribution includes combinations of IRAs and employer plans made in 2020. This applies retroactively to distributions as early as January 1, 2020. Withdrawals from your IRA are still taxed, but taxes paid have the option to be spread out evenly over three years, then the taxpayer has the three-year period to re-contribute the funds withdrawn. You have up to 5 years to repay a loan on employer sponsored plan.
Lastly, the tax filing deadline of April 15th has been extended to July 15th.
4. Required Minimum Distributions (RMDs) are Waived for 2020
RMD’s are suspended for 2020. This includes IRAs, and employer retirement plans (such as 401k, 403b, and 457). This also suspends RMDs that may have otherwise needed to be taken such as distributions from a Stretch IRA or inherited IRA. For those who are turning 72 this year you get to delay your 2019 RMD as well as your 2020 RMD! If you have already taken your 2020 RMD you are eligible (if applicable) for a 60-day rollover back into the account. There is no option to roll back for beneficiary RMDs from inherited accounts.
5. New Above-the-Line Deduction for Qualified Charitable Contributions
To further incentivize charitable contributions, the CARES Act establishes a new above-the-line deduction for cash contributions up to $300 made in 2020. This is eligible to be put on next year’s filing for those taking the standard deduction. For those who can itemize, cash charitable contributions deductions have been increased from 60% of AGI to 100% of AGI.
6. Key Provisions for Business Owners
Business owners have had a difficult time navigating the changes to their business in light of the coronavirus. The bill allows employers to delay the payment of their portion of 2020 payroll taxes. 50% will be due on 12/31 of 2021 and the remaining 50% will be due on 12/31 of 2022.
The bill also provides $350 billion dollars to help prevent layoffs and business closures. Companies with 500 employees or less who remain in business are eligible for a 4% max interest rate on loans guaranteed by the Small Business Administration for up to 2 years. Loan amounts can be forgiven up to 100% of amounts spent on payroll cost, salaries, utilities, business interest, mortgage, and group health insurance for the first 8-week period following the issuance of the loan.
Net operating loss (NOL) rules have loosened. Previously, NOL could only be indefinitely carried forward. CARES Act allows NOL to be carried back up to 5 years. This applies for 2018, 2019, or 2020 NOLs. This accelerates a tax refund for current/immediate use and allows NOLs to offset 100% of taxable income.
7. Relief for Student Borrowers
Federal student loan payments have been deferred. No payments required until September 30th of 2020. No interest will accrue during this period and will still count toward public service loan forgiveness (if applicable). It’s important to note, that you must call to stop payments, they will not automatically be stopped for you.
8. Hospitals and Healthcare
With the overwhelm of our healthcare system, the bill provides $140 billion in appropriations to the US Health System. Approximately $100 billion will go directly to the hospitals while the remaining amount will be allotted for providing equipment, testing, Medicare, and other health initiatives.
9. Coronavirus Testing
All coronavirus testing and potential vaccines will be covered to patients at no cost.
10. State and Local Government
These branches of government, including tribal, will receive $150 billion. Education institutions will receive 30 billion, disaster relief will receive 45 billion, transit will receive 25 billion, and agriculture can increase spend on its bailout program from $30 billion to $50 billion.