Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This sweeping $2 trillion coronavirus aid package offers relief to individuals and large and small businesses with direct payments to households, increases in unemployment benefits, relief for student loan borrowers, loans and grants to severely damaged industries, small business loans (in some cases forgivable), and aid to states, municipalities and healthcare organizations.
This legislation also offers some temporary provisions related to personal finance which may allow for some strategic tax and financial planning opportunities.
The CARES Act provides for up to $2,400 direct payments for those married filing jointly (up to $1,200 for others) and up to $500 for each child under the age of 17. As your adjusted gross income begins to exceed the applicable threshold ($150,000 married; $75,000 single), the direct payment begins to phase out and is completely phased-out at $200,000 for married and $100,000 for singles. The payment amount will be determined based on your most recent filed tax return. Depending on your 2018 and 2019 income levels, there could be an incentive to defer filing your return or to file your return as soon as possible.
Required Minimum Distributions
The legislation waives the Required Minimum Distributions (RMDs) for 401(k)s, 403(b)s, Traditional IRAs (including inherited IRAs), and SEP IRAs for calendar year 2020. For individuals who have started taking RMDs and do not need all or any of their required minimum distribution for 2020 cash flow, reconsider your distribution strategy for this year. Taking distributions can trigger sales of securities when asset prices are depressed. This provision allows individuals to stay invested during this period of turbulence.
If you have already taken some or all of your RMD for 2020, you can return it either under the standard 60-day rollover rules or under the Coronavirus-Related Distribution rules created with the CARES Act.
The RMDs increase your taxable income. So this 2020 RMD holiday could have positive tax implications, as taxable income thresholds determine Medicare premiums, the amount of Social Security which is subject to tax (0%, 50% or 85%), and other tax benefits.
Another financial planning method to consider: With the stock market down substantially from its high and under certain personal circumstances, it may make sense to convert some of your traditional IRA to a Roth IRA. This creates a taxable event now, but allows for tax-free growth and no RMDs going forward on money converted.
The bill includes another benefit that incentivizes Americans who are in a position to help others in need: a new above-the-line charitable deduction. Starting in 2020, taxpayers will be able to claim up to $300 in cash contributions made to a nonprofit (excludes donations to Donor Advised Funds) as a deduction from their gross income if they take the standard deduction.
Usually taxpayers who want to claim charitable deductions need to itemize. However, since the standard deduction amounts were increased under the 2017 Tax Cuts and Jobs Act (TCJA), there has been a dramatic reduction in the number of people able to itemize deductions. So for folks who take the standard deduction, if you give $300 to charity, you would get the $300 tax break in addition to the standard deduction.
The legislation also includes a provision that encourages the most generous individual and corporate donors to give by eliminating the percent of AGI limits for charitable deductions. For individuals, the 50% of adjusted gross income limitation would be suspended for 2020. For corporations, the 10% limitation would be increased to 25% of taxable income.
If you are already making RMDs, Qualified Charitable Distributions are still allowed under the Act. However, giving strategies may have changed based on the new provisions and are best reviewed on an individual basis.
Small Business Rescue Plan
The CARES Act also provides relief to small businesses with the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) program.
Under PPP, businesses (including self-employed workers) and nonprofits with fewer than 500 employees are generally eligible for small business loans. These loans are available through qualifying banks and backed by the Small Business Administration; are capped at $10 million; and cover wages up to $100,000/year/employee.
PPP includes a loan forgiveness component for businesses that retain their workers or rehire ones that were laid off. Those businesses would be eligible for forgiveness on amounts of their loans used for certain costs-including payroll, rent payment, mortgage obligations and utilities-that are incurred during an 8-week period starting on the loan's origination date. Additional benefits include: any debt forgiven under these provisions is not taxable, the max interest rate on these loans is 4% on the unforgivable portion, and borrowers have the option to defer initial payments 6-12 months.
The legislation also expands access to the EIDL program. These loans are available directly from the Small Business Administration (https://disasterloan.sba.gov/ela/); are capped at $2 million and based on actual economic injury; and cover payroll, fixed debts and accounts payable. Unlike the PPP, EIDL does not offer loan forgiveness but the max interest rate is 3.75% amortized over up to 30 years and the program does provide up to $10,000 emergency grants.
Clearly, the CARES Act marks the single largest economic stimulus package in American history and provides desperately needed financial assistance to those affected by COVID-19 and the resulting economic impairment. It includes several changes that can provide planning opportunities for you. As you can imagine, these provisions require careful consideration of many personal tax and budgeting nuances. If you are interested in learning more about the stimulus bill details, please contact us and we are happy to advise on your personal circumstances.
This information is not intended to be a substitute for individualized tax advice. As always, we encourage you to include your CPA in tax-related decisions.
To be eligible for a rollover under these rules, you must have been impacted by Coronavirus. We are happy to review your personal circumstances as it relates to this provision.