Planning matters

CARES Act Highlights

On Friday, March 27, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act to help stimulate the US economy because of COVID-19. We unpack some of the highlights of the CARES Act and provide answers to some commonly asked questions.

Direct Payments

Perhaps the biggest headline of the Act are the payments being sent directly to individuals. The base amounts are $1,200 per taxpayer ($2,400 for a married couple filing a joint tax return) and $500 per child. The credit begins to phase out for taxpayers with adjusted gross income (AGI) above $75,000, $122,500, and $150,000.

 

What AGI are they using to determine eligibility?

If your 2019 return  has not yet been filed, 2018 will be used.

What if you don’t file taxes at all but collect social security?

Don’t worry, the IRS will determine your eligibility by looking at your social security benefits.

Do children born in 2020 get the payment?

Parents of children born in 2020 won’t get a payment for that child now. However, assuming they qualify based on their 2020 income, they will get $500 added to their tax refund or subtracted from their income-tax bill when they file their 2020 tax return in 2021.

Are the payments taxable income?

No. They won’t be considered as income.

What about child support?

The normal IRS rules for child support and tax refunds will apply, which means that refunds for people who are behind on those payments may be smaller.

 

Minimum Required Distributions Not Required in 2020

The law includes a waiver of required minimum distributions (RMD) for certain retirement plans in 2020.

 

What retirement accounts are eligible?

Eligible accounts include certain defined contribution plans, IRAs (both traditional and inherited) and inherited Roth IRAs.

How much will I need to withdraw in 2020?

Zero! If you own an account that would normally require a taxable distribution, you may skip your withdrawal entirely this year.

I already withdrew some/part of my RMD in 2020 – can I “undo” my withdrawal?

We are still waiting for IRS guidance on this issue. It might be possible to undo a distribution if taken less than 60 days ago. If you are a non-spouse beneficiary and you already took out your RMD this year, you cannot undo your withdrawal at all.

What happens to the RMDs in 2021?

At this writing, RMDs are expected to resume using the normal calculation formula next year. The skipped amount from 2020 will not be added to your 2021 distribution.

 

401k Withdrawals

The CARES Act provides additional ways for Americans to access cash by allowing people to withdraw up to $100,000 from their retirement savings without the typical 10% withdrawal penalty.

What retirement accounts are eligible?

Eligible accounts include IRAs, 401(k)s and other qualified trusts, certain deferred compensation plans and qualified annuities.

How are the withdrawals taxed?

The withdrawals are taxable over three years, and taxpayers are allowed to contribute the withdrawals back into the retirement account within three years, without impacting other contribution limits.

 

Charitable Tax Break

The law includes an above the line $300 charitable contribution deduction for filers taking the standard deduction, and expanded limits on charitable contributions for those who do itemize.

What does this mean to me? If you aren’t already doing so, 2020 is a great time to start with charitable giving and receive a tax benefit you might otherwise not receive.

 

We look forward to working with you to take advantage of the provisions that impact you and your financial situation.

Written By Rachel Gorretta