Mar 30, 2020 Coronavirus Aid and Economic Security (CARES) Act Passes

The Coronavirus Aid and Economic Security (CARES) Act was signed into law on March 27th.  While there are many details to work out in implementation, we wanted to run through a couple of the highlights with you.  We start with a few of the provisions that apply to everyone, including the rebate checks.  We follow up by organizing sections directed towards specific groups like retirees, employees, business owners, and students.

Applicable to All-Free Money

The CARES ACT includes direct checks similar to the checks sent under George Bush in 2008-2009.  Every non-dependent adult will receive a check for $1200.  Any dependent child under the age of 17 will receive an additional $500.  These are one time checks and have no minimum income number.  The checks will reduce based on income from your most recently filed tax return (2018 or 2019).  If your income is significantly lower in 2020, you may still qualify for checks, but won’t receive them until you file your 2020 return.  The phase-outs are based on filing status and begin with $75,000/year single, $112,000 Head of Household, and $150,000 if married filing joint.  They decrease by $5 for every $100 worth of income above the phase-out figure.

These checks will go out via direct deposit based on the account used to deposit your social security benefit if you are collecting social security.  If not, they will use the most recent Bank information from your tax return.  If they don’t have either of those, they will send the check to your address.

**Planning Note:  If you recently moved and didn’t have any of the direct deposit features set up, you may want to notify the IRS that you moved.  You can do this with Form 8822**
**Planning Note:  If your 2018 return has income high enough to start crossing over the rebate phase-out numbers, but your 2019 return won’t, you may want to file ASAP to have the most accurate numbers used to calculate your check.**

Applicable to all $100,000 Coronavirus related distributions from IRAs and Qualified Plans.

Anyone affected by the coronavirus may take a distribution of up to $100,000 from an IRA or Qualified plan without paying the 10% penalty tax usually due when under the age of 59 ½. The rules are similar to distribution relief often used in response to natural disasters like hurricanes or flooding.  The distributions are taxable but will not be subject to mandatory withholding.  The taxable income can be taken all at once or spread over three years.  The individual also has three years to put the funds back in the retirement account and continue to defer the taxes.

Retirees

You don’t need earned income to receive checks.  The checks will go to all adults with no minimum income (Only a maximum income).

Required Minimum Distributions (RMDs) have been suspended for 2020.  There is no minimum amount that needs to be taken out.  We are in the process of reviewing all of our RMDs and will be contacting clients that may want to reduce the distribution from their retirement accounts.  This can lower taxable income to reduce the overall tax bill or leave more potential room for a Roth conversion if appropriate.  The suspension of RMDs includes beneficiary IRAs as well.

There were changes to healthcare-related rules as well.  Access to Covid-19 testing is available without cost, and there will be an expansion to the telehealth services available.  You may also now request 90 days worth of prescription medication when covered by Medicare.

A couple of provisions allow for increased charitable deductions.  If you don’t itemize, there is a new deduction “above the line” that lets you deduct a $300 cash contribution to a 501c3 charity.  Another provision increases the AGI limitations on itemizable charitable deductions from 60% of your AGI to 100% of AGI.

Employees

In addition to the coronavirus related distributions from qualified plans, the CARES ACT increases loan amounts available from qualified plans.  The maximum loan available has been increased to lower of $100,000 or 100% of your vested balance.  In addition, payments may be deferred for up to one year.

If you have already lost your job, or fear you might, there have been massive benefits that are going to be delivered through unemployment insurance at the state level.  Highlights include:

  1.  Coverage includes the first week of unemployment.
  2. Coverage is increased by $600/week.  The national average of weekly unemployment compensation is $385/wk.  The maximum benefit in Washington State is $790, and the minimum benefit is $188.  This $600/wk is in addition to the current state benefits making the range of available unemployment benefits in Washington range from $788/wk to 1390/wk.  Using 52 weeks in a year, this translates into a monthly benefit ranging from $3,414-$6,023.  The additional benefits will apply for up to 4 months.
  3. There is an extension of primary benefits for up to 13 weeks.
  4. The federal government is paying for up to 50% of Short term compensation programs.  You may be eligible if you have had your income decline or had your hours cut.
**Planning Note:  If you have lost your job, I encourage you to apply for unemployment as soon as possible.  There has been an incredible demand and the processing times may be affected, so start the process as quickly as possible.**

Key Business Provisions.

A new unemployment classification has been enacted called Federal Pandemic Unemployment insurance.  It appears that this classification extends to people that would not ordinarily be covered like the self-employed.  Unemployment benefits may be an option that you didn’t have in the past.

There is a new class of loans that are being offered through the Paycheck Protection Provision and administered by the Small Business Administration (SBA) and approved lenders.  We will be monitoring the situation as these loans are made available.  The loans are being fully guaranteed by the federal government and available to employers with less than 500 employees.  Key provisions include:

  1.  The application deadline is June 30th
  2. Maximum duration is 10 years
  3. Maximum interest rate is 4%
  4. Must sign a good faith certification the loan is needed due to the coronavirus.
  5. The maximum loan available is the lesser of $10M or 2.5 times the average monthly payroll cost of the previous year, excluding employees with compensation over $100K.
  6. Proceeds may be used to cover payroll, health care, salaries, rent, mortgage, utilities.
These loans may also be forgiven under certain circumstances, and the forgiveness is not taxable.  Expenses that may be forgiven include up to 100% of the amounts spent during the eight weeks following the issuance of the loan, including:
  1.  Payroll costs excluding employees with compensation over $100K
  2. Rent (But not mortgage)
  3. Utilities
  4. Health insurance premiums
As long as the employer meets the following conditions.
  1. They have the same number of employees from February 15, 2020, to June 30, 2020, as the period during either the same period in 2019 or the period between January 1, 2020, and February 15, 2020.
  2. No employees with compensation under $100,000 have had reductions of greater than 25% compared to the most recent quarter.
If you have already laid-off employees before the provision, there is a mechanism to bring them back and have them still qualify under the legislation.
A new employee retention payroll tax credit is available if you have your operations suspended or shut down due to government-required suspensions.  The credit against payroll tax applies up to 50% of wages paid to each employee up to the maximum of $10K of wages per person.  The business must also have a quarter with less than 50% of the revenue from the same quarter in 2019.  If you are experiencing big swings in revenue (Not Profit), this may be worth pursuing.A provision that will be accessible to more businesses includes the ability to defer payment of payroll taxes due in 2020

  1.  50% will be due on 12/31 of 2021
  2. The remaining 50% will be due on 12/31 of 2022

Students

For federal student loans, there are no payments, and no interest will accrue until 9/30 2020.  This is effectively a 0% interest loan.
**Planning note- Just because there is no payment due doesn’t mean the payments will automatically stop.  If you have a federal student loan, you need to call them to make sure then suspend payments over this period.  This is especially true if your loans may count towards one of the federal loan forgiveness programs since the period of deferral will still count towards the time in the program.** Employers have been able to provide a tax-free benefit to pay for the education of employees up the $5,250 per year.  For 2020 the employer may also use the funds to pay down employee student loans as well.

Finally, there is relief for Pell grants and subsidized federal loans for students that were forced to leave school as a result of the coronavirus.  The CARE Act would eliminate the term if the student had to drop out.

The date of enactment is today March 27th.  I’m sure there will be many details emerge over the coming weeks.  We will continue to provide information and review your plans for opportunities as a result of this legislation.

This is informational and should not be relied upon for advice.  Please discuss your situation with your advisor. 

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