CARES Act highlight for individuals
The recently passed and signed into law CARES Act (Coronavirus Aid, Relief, and Economic Security Act) has several initiatives meant to ease the current struggle Americans are experiencing during the Covid-19 pandemic. This article will highlight the provisions that are aimed at helping individuals. For more detailed information on how the act will directly impact you, please contact us.
Individual Rebate/Credit
The individual rebate/credit has been the most reported part of the act. Qualifying individuals will receive $1200 ($2400 for those filing jointly) and $500 for each qualifying dependent child who has not attained the age of 17. Individuals with no income and those on Social Security Income will also qualify. The rebate or credit begins to phase out at an adjusted gross income (AGI) of $150,000 (joint), $112,500 (head of household), or $75,000 (all other taxpayers). The rebate or credit is completely phased out at an AGI of $198,000 (joint), $146,500 (head of household) and $99,000 (all other taxpayers).
The purpose of this stimulus is to provide some financial relief during the quarantine period and the slow down in national and local economies.
Waiver of 10% tax penalty for coronavirus-related retirement plan distributions
For 2020, individuals under the age of 59 ½ can potentially withdraw up to $100,000 from a qualified account (401k, 457, 403b, traditional IRA, etc.) without the normally applicable 10% tax-penalty, but the withdrawal must be for corona-related distributions. In order to qualify a person must have experienced one of the following:
- An individual, their spouse, or a dependent has been diagnosed with corona virus (Covid-19) by a test approved by the CDC (Center for Disease and Control)
- An individual experienced adverse financial consequences as a result of being quarantined, furloughed, laid-off, having work hours reduced due to such a virus or disease.
a. This includes being unable to work due to a lack of childcare due to the virus or disease.
b. Also includes closing or reducing hours of a business owned or operated by the individual due to the virus or disease.
If you do not qualify under the guidelines above the 10% additional penalty for withdrawing from qualified accounts would apply.
The $100,000 dollar withdrawal limit is an aggregate total. A qualifying individual would not be able to take $100,000 from their IRA and an additional amount from their 401(k). They would be allowed to take $50,000 from an IRA and $50,000 from their 401(k) for the aggregate total of $100,000.
Ordinary income tax is assessed on qualified corona-related withdrawals. However, the income tax will be ratable over a three-year period unless the individual opts to not spread the taxes over that time period. Additionally, any corona-related distributions from a qualified plan can be contributed back into a retirement plan during the three-year period. The recontribution amount cannot exceed the amount of the corona-related distribution. The recontribution can be made as one contribution or in multiple contributions over the three years.
Required Minimum Distribution waiver for 2020
The CARES Act has eliminated the need to take Required Minimum Distributions (RMDs) for 2020. This allows investors to let their portfolios rebound prior to taking their next RMD in 2021. If part or all of an RMD has been taken in 2020 it can be rolled back into the retirement plan. If an IRA is subject to the 5-year withdrawal period, the 5-year period will be calculated without regard for 2020. Effectively, 2020 never happened for the purpose of the 5-year withdrawal period.
Charitable Donation changes
$300 above-the-line deduction
For 2020 all “eligible individuals” will have the ability to deduct up to $300 of charitable contributions even if they do not itemize.