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 that specifically impact taxpayers and small employers.
Probably the most widespread aspect of this bill is its stipulation to make direct payments to American citizens. All taxpayers will receive $1,200 if they filed single or $2,400 for married couples with an additional $500 per child (to qualify, your children must also qualify for the child tax credit).
There is an income threshold for direct payments which is $75,000 or under for those who filed single and $150,000 or under for those who are married and filed jointly. If your Adjusted Gross Income (AGI) is above those numbers, the payments begin to phase out.
Phaseouts for these payments are $5 of every $100 of income above the respective $75,000 and $150,000 thresholds. The “upper limit” of the phaseout is $99,000 for individuals, $198,000 for married couples filing jointly, and $136,500 for heads of household, which means no payment for incomes above these levels. As long as they meet the criteria, retirees will also qualify.
These payments could be deposited directly (if you have direct deposit set up with the IRS from past tax payments) as soon as April, but possibly within two months. Taxpayers should keep in mind that these are refundable tax credits. The Treasury will advance your check based on your most recently filed tax returns. The check received is not taxable income. Those who receive Social Security and don’t file tax returns will also be eligible for a check based on their income from information provided by the Social Security Administration.
The CARES Act will have a notable impact on retirees, and retirement accounts. First and foremost, the 10% early withdrawal penalty on distributions of up to $100,000 from retirement accounts for “Coronavirus-Related Distributions” will be waived, with the option to spread the normal taxation of these funds over three years, and distributions may be contributed back to those same accounts to make up in the future. Additionally, 401(k) Loan limits increased from $50,000 to $100,000.
For individuals who will be unable to make ends meet due to job loss or reduced salary, this option may help you bridge the gap. Of course, before taking funds out of your retirement account, it’s critical that you consult a financial advisor to ensure you understand the full impact of this decision.
Required Minimum Distributions will be suspended in 2020 for all retirement accounts - both for account owners and beneficiaries. This includes the ability to return any current year distributions already taken. RMD waivers are beneficial for those who may have to sell investments at lower values and pay taxes on income based on the balance of their retirement plans on 12/31/19.
Telehealth and other remote care services for High Deductible Health Plans established prior to 12/31/2021 are available without cost-sharing or a deductible. “Qualified Medical Expenses” have been expanded to cover certain over-the-counter medications without prescriptions. All testing and preventive services related to COVID-19 are covered without cost-sharing, including a vaccine at no charge.
The CARES Act is partially intended to help stimulate the economy and assist small businesses during these challenging and uncertain times. For example, certain small businesses with 500 employees or less will now have access to loans of up to $10 million at a maximum of 4% interest. These loans may be forgiven (as long as strict usage requirements are met) if used to cover payroll, utilities or rent, group insurance premiums, and similar expenses.
There is also an Employee Retention Payroll Tax Credit available for up to $5,000 for wages and health benefits paid between March 12, 2020, and January 1, 2021. Additionally, there is a delay in the employer’s portion of the Social Security Payroll Tax (6.2%) until January 1, 2021. If you choose to delay, you’ll need to pay your portion of the Social Security Payroll Tax in both 2021 and 2022. Remember, make sure you check your eligibility, as there are specific requirements in order to qualify.
Finally, employers may be eligible to obtain immediate refunds for Net Operating Losses. These losses can be carried back to losses arising in 2018, 2019, and 2020 - up to the five preceding years.
If you are currently receiving, or are newly eligible for, unemployment benefits, you’ll receive a $600/week increase in addition to your regular benefits for up to four months. The timeline for unemployment benefit eligibility has also been shortened. Historically, there has been a one-week waiting period for unemployment benefits to kick in. Now, benefits will be available in the first week of unemployment. There has also been an expansion of benefits to cover those who wouldn’t typically qualify. This includes self-employed individuals and independent contractors.
Payments (both toward principal and interest) on federal student loans are deferred through September 30, 2020. All interest that would have accrued on federal student loans has been reduced to 0% through September 30, 2020.
Taxpayers may deduct up to $300 “Above-the-Line” in 2020 whether or not they itemize deductions. The 2020 limitations on deductions for charitable cash contributions will be curtailed.
The CARES Act has numerous other benefits that will impact state and local governments, airlines, corporations, US National security, hospitals, and the US healthcare system. Emergency loans and additional funds are being made available to help these groups recoup the costs of responding to the pandemic.
The CARES Act is incredibly comprehensive, and it can be tricky to navigate. If you have questions, I encourage you to reach out. A fee-only, fiduciary financial planner can help walk you through how the CARES Act will impact you, and help you to build a strategy that can get you through these trying times.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.