Understanding the Impact of the CARES Act on You

Our country, desperate for positive news, got exactly that today with the passage of the CARES Act.

The $2 trillion Coronavirus Aid, Relief, and Economic Security Act stimulus bill, or CARES Act, will provide relief and assistance for millions of Americans impacted by the coronavirus pandemic. This will include (but is not limited to):

direct cash payments
temporary changes to the rules governing retirement accounts
a suspension of RMDs for 2020
a change to tax laws regarding charitable contribution limits
mortgage forbearance for up to 360 days
enhanced unemployment coverage
and changes to student loan debt requirements, just to name a few.

Here is a breakdown of some of the key elements of the CARES Act that you need to be aware of.

Direct Payments to Individuals

With exceptions, cash rebates are on the way to most Americans in the amount of $1,200 per individual and $2,400 for couples (with an additional $500 for each child under the age of 17). But not everyone will qualify. Payment amounts begin to phase out for individuals with adjusted gross incomes (AGI) over $75,000 (stopping entirely once an individual’s AGI passes $99,000).

For married couples filing jointly, the “phase out” begins once your AGI reaches $150,000, with payments eliminated entirely for couples whose AGI exceeds $198,000. For people who utilize the “head of household” filing status, your payment progressively decreases once your adjusted gross income surpasses $112,500 and is eliminated entirely once your AGI passes $136,500.

For those who are eligible, payments should arrive within three weeks. If the IRS has your bank account information, you do not need to apply.

The money will be directly deposited into your account.

Penalty-free Withdrawals from Pre-tax Retirement Accounts

The CARES Act loosens the rules pertaining to defined contribution plans (401(k)s, 403(b)s and 457s) and IRAs.

This year (2020), you can withdraw up to $100,000 with no 10 percent early withdrawal penalty.

While you’ll still have to pay income tax on the withdrawals, you’ll be able to spread the payment of those taxes over three years. And, if you decide to repay the withdrawal back into your account? If you do so within three years, not only will you owe no income tax, the repayment will not be counted against your yearly contribution limits.

*Please speak with your advisor before tapping into your retirement accounts.

No Required Minimum Distributions (RMDs) for 2020

The new bill temporarily waives required minimum distributions (RMDs) from IRAs and employer sponsored retirement plans (401(k)s) for 2020.

Typically, neglecting to take an RMD results in a penalty equal to 50% of the required distribution. If you need the money to live on, you likely don’t have a choice (and need to take a distribution). But for those who don’t need the money, with the market hammered by volatility, it might be a good time to skip your RMDs and hope for a market rebound before the end of 2021.

No Charitable Contribution Limits for 2020

To motivate benevolent giving during the pandemic, and to lower individual tax burdens, for those who itemize deductions, the CARES Act suspends charitable contribution limits for 2020.

To benefit from the change in the law, you’ll need to donate to a qualified charity and not a donor-advised fund.

Typically, tax-deductible cash contributions are capped at 60% of your AGI, but the new bill allows you to deduct 100% of the contribution. (This is exclusively for cash donations to qualified charities.)

For example, if you have $500,000 in income, you can give $500,000 to a qualified charity and deduct the full amount for this year (2020).

But most tax filers don’t itemize.

For that majority, there’s an added bit of relief for you, as well.

For 2020, and beyond, the CARES Act allows you to make a $300 donation to a qualified charity. This above-the-line donation simply means you can make a qualified $300 contribution and deduct it from your AGI in addition to your standard deduction.

*Speak to both your advisor and your accountant to learn which is the best tax strategy for you.

Mortgage Forbearance for Up to 360 Days

The new bill includes far-reaching relief for homeowners with federally insured mortgages in the form of loan forbearance. People who are unable to make their mortgage payments should contact their lenders directly. You should be granted an initial payment waiver of 180 days, with the possibility of an additional 180-day extension.

The bill also has clear provisions for stopping foreclosures.

Enhanced Unemployment Benefits

The CARES Act goes to previously unseen lengths to cover all unemployed persons (and not just people who have recently lost their jobs).

This includes self-employed individuals and even part-time and ‘gig’ employees.

Benefit amounts vary by state, but while typical payments replace roughly 40 to 45 percent of pre-unemployment income, the new bill attempts to close that gap by increasing (by roughly $600 per week) and extending payment amounts.

Student Loan Debt Relief

For 2020, employers can now pay up to $5,250 in student loan payments for an employee without that employee being required to report that payment amount as income. (This is an enhancement to an existing tax provision which allowed employers to pay certain qualified educational expenses (such as sending an employee to college for a degree)).

Additionally, the CARES Act not only allows persons with federal student loan debt to pause loan repayments until September 30, 2020, no interest will be added to the loan over that period. (However, loan recipients can still apply those six months toward most loan forgiveness agreement programs.)

Speak to Your Advisor and Your Accountant

The information provided here is intended to alert you to some of the aspects of the CARES Act which are most likely to impact either you or a family member. Also known as the Coronavirus Stimulus Bill, or the COVID-19 Act, this sweeping, emergency legislation is 883 pages long and very likely has other provisions that could financially benefit (or impact) you or a loved one.

We at Allworth Financial have been monitoring the progress and developments of this legislation since word that a stimulus bill was in the works first became public.

Our advisors and staff have worked diligently to quickly get up to speed on the specifics of the bill.

If you have any questions about the impact of the CARES Act on you, your family or your financial situation, as always, we encourage you to immediately call our offices.