The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted into law on March 27, 2020. As the Act describes, its purpose is to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” This Act provides an approximate $2 trillion stimulus package in response to the COVID-19 crisis.
While the Act covers many aspects for individuals, businesses, and the health care workforce, this note highlights only a few of those relief measures, which we think will be most applicable and relatable to our clients.
For 2020, there has been a temporary waiver of required minimum distributions (RMDs), allowing individuals who would otherwise be required to take a distribution from their IRA or retirement plan to forgo taking a distribution this year. This allows individuals to defer distributions from their IRA or retirement plan due to current equity market conditions. This waiver applies to inherited IRAs as well. We will be in touch with you to discuss how this waiver specifically applies to you and whether you should consider deferring your RMD for 2020.
What if I have already taken my RMD for 2020?
If you have already taken your RMD for this year, you may be permitted to roll your RMD back into your retirement account using the 60-day rollover rule. To use this rule, you must put the funds back into your retirement account within 60 days of the distribution, provided you have not otherwise used the 60-day rollover rule in the last 365 days, as the rule can only be used once a year.
The Act permits IRA and retirement plan participants to receive Coronavirus-Related Distributions (CRDs) up to $100,000 in 2020 without incurring the 10% early distribution penalty that would generally apply to distributions made prior to age 59 ½.
CRDs are permitted to be made only to a “qualified individual,” who is someone:
(I) who is diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention,
(II) whose spouse or dependent is diagnosed with such virus or disease by such a test, or
(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease or other factors determined by the Secretary of the Treasury.
Eligible retirement plans include 401(k), 403(b), governmental 457(b) plans, and IRAs. In order to be considered CRDs, the distributions must be made from eligible plans between January 1, 2020 – December 31, 2020.
Am I able to put the money back into the retirement plan?
You can repay the amount of your CRD to an eligible retirement plan or IRA that would otherwise qualify for a 60-day rollover contribution. You can make the repayment during a three-year period beginning the day after your distribution date. You may make this repayment by one or more contributions that in the aggregate do not exceed the amount of your eligible CRD. If paid within the three-year period, the CRDs will be treated as having met the general 60-day rollover requirement.
How are CRDs treated for income tax purposes?
Any amount of your CRD that is required to be included in your gross income will be included in your income equally over a three-year period. You may also elect, if appropriate, to have the entire CRD included in your 2020 income.
For tax year 2020, a taxpayer may make qualified charitable contributions up to $300 and take a deduction for this contribution, without having to itemize deductions on his or her tax return (referred to as above the line deductions). This above-the-line deduction cannot be used if the contribution is made to a donor-advised fund or non-operating private foundation.
Under current law, a taxpayer who makes cash contributions to an eligible charity may take a deduction of up to 60% of his or her adjusted gross income (AGI). Any contribution in excess of the 60% limitation is carried forward for five years. Now, under the CARES Act, the 60% limitation is removed, allowing individuals to fully deduct charitable cash contributions made in 2020, to the extent their contribution does not otherwise exceed their AGI. If the contribution made exceeds their AGI, the excess is carried forward for five years.
This provision removing the AGI limit cannot be used if the contribution is made to a donor-advised fund or non-operating private foundation.
In order to take advantage of this increased deduction limit, you must make an affirmative election on your 2020 income tax return.
The CARES Act provides eligible taxpayers with a rebate for financial support during this pandemic. Taxpayers will receive this rebate as a tax credit against income taxes they will owe for 2020. This rebate will equal the lesser of their 2020 income tax liability or $1,200 ($2,400 for joint taxpayers), plus $500 per qualifying child, who is generally a child that the taxpayer can claim as a dependent. Although this is a tax credit against 2020 income, the rebate is being advanced and paid to taxpayers now.
Individuals excluded from receiving the rebate include non-resident aliens and individuals who can be claimed as a dependent by another taxpayer. The rebate is also not available to trusts or estates.
How is my eligibility determined?
The rebate, although based on 2020 income, will be advanced to taxpayers who have filed their 2019 income tax return and meet the eligibility income requirements. If you have not yet filed a 2019 tax return, then the rebate will be determined based on your 2018 income tax return.
The rebate, however, is phased out as income increases. The phaseout begins when adjusted gross income reaches $75,000 for single taxpayers, $112,500 for heads of household and $150,000 for joint taxpayers. The phaseout is 5% for each dollar over these thresholds, or $5 for each $100 over. The rebate is completely phased out for individuals without qualifying children once adjusted gross income reaches $99,000 for single taxpayers, $136,500 for heads of households, and $198,000 for joint taxpayers. The phaseout range is higher for taxpayers who have a qualifying child or children.
How will I receive the tax credit?
The IRS is required under the Act to automatically pay you your rebate “as rapidly as possible.” If you meet the income eligibility requirements, the IRS will issue your rebate by direct deposit or check using the same payment or address information already on file with the IRS per your 2018 or 2019 tax return.
Do I need to repay the rebate?
You do not need to repay your rebate. This is true even though you receive the rebate based on your 2019 income (or 2018 income, if you haven’t filed your 2019 tax return yet), but your actual 2020 income ends up being over the income eligibility limit.
The reverse is also taxpayer favorable. If you are not eligible (or only partially eligible due to the phase out) based on your 2019 income (or 2018 income, if you haven’t filed your 2019 tax return yet), but you experience lower income in 2020, you can claim the rebate when you file your 2020 tax return next year. This is also true if you have an increase in family size and now would be able to claim an additional child as a dependent.
For income tax returns for tax year 2019, the Act extended the federal income tax filing deadline for individuals, trusts and estates from April 15th to July 15th. The extension also applies to gift and generation-skipping transfer tax returns.
In addition, the payments otherwise due on April 15th have also been extended to July 15th. This would include your 2019 tax due payment, as well as your 1st quarterly estimated tax payment since that was also due on April 15th. Now both payments will be extended to July 15th. However, your 2nd quarterly estimated tax payment, which is due June 15, 2020, continues to be due on that day. This means you will make your 2nd quarterly estimated tax payment for 2020 prior to your payments for your tax due for 2019 and your 1st quarter estimated tax payment for 2020.
This extension provision does not apply to any tax returns due on dates other than April 15th. The filing deadline for those returns have not been postponed.
This extension also only applies to federal income tax returns and payments. In order to determine whether a state has also extended their deadlines, inquiry must be made at the state level. The State of Maine has also extended its filing and payment deadline to July 15th, but not all states have done so yet so it’s important to confirm the exact filing requirements with your accountant.
Please note for clients whom we assist in paying federal or Maine tax due or 1st quarter estimated payments, we will now be making those payments by the July 15th due date. If a client otherwise wants the payments to be made by April 15th, the client will need to specifically make this request of our office.
The federal tax return filing extension also provides additional time to make your IRA contribution for 2019. Normally you can make your prior year contribution by April 15th of the following year (e.g. your 2019 IRA contribution is due by April 15, 2020). This has also been extended so you now have until July 15th to make your 2019 IRA contribution.
Just as with IRA contributions, you now have until July 15th to make your 2019 HSA contribution.
While this note includes some of the provisions that affect individuals, there are several provisions that affect businesses as well. As always, everyone’s situation is different, so it is important to discuss how the CARES Act applies to your specific circumstances. Please don’t hesitate to contact us if we can be helpful in further discussing these issues with you.
This newsletter is intended for educational purposes only. For financial planning advice specific to your needs or for further information, please consult your portfolio manager.
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