By Matthew Gaude & Shawn McGuire
For the last couple of weeks, Americans have waited with bated breath to see if Congress would pull through to provide economic relief from the effects of the COVID-19 pandemic. Friday afternoon, they finally succeeded. The House of Representatives passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act that the Senate had passed earlier in the week, and President Trump signed it into law that afternoon.
The 900-plus-page Act provides $2 trillion in the largest economic stimulus package that our country has ever seen. It provides loans, rebate payments, and tax credits to help individuals, businesses, healthcare entities, and state and local governments meet short-term cash flow needs. Nearly $500 billion will go toward rebate checks for American workers, another $500 billion is allocated to support severely damaged industries, nearly $400 billion dollars will provide tax credits for wages and payroll tax relief, over $300 billion will go to state and local governments, and almost $150 billion is designated to support hospitals and the healthcare system. These are the provisions in the bill most likely to affect you:
Recovery Rebates For Individuals
The part of the bill most anticipated by American workers is the recovery rebates, or checks issued by the government. About 90% of American workers are expected to receive them (1) and the amounts will be based on income and family size. Every adult with a Social Security number who meets the income restrictions is eligible to receive a rebate.
The money will be deposited directly into the bank accounts of those that the IRS has direct deposit information for, otherwise, they will be delivered by mail. They may start being sent out as early as three weeks from now, but many believe May is a more realistic timeline.
Rebate checks will be calculated based on adjusted gross income from either 2019 tax returns, if they have been filed, or 2018 tax returns. Married couples will be entitled to up to $2,400 and singles will be entitled to up to $1,200 each. The rebate will be increased by $500 for each child under the age of 17 in a household.
You must meet income requirements to be eligible for a rebate check. For a single person, the rebate begins to phase out at $75,000 of adjusted gross income, for a head of household it is $112,500, and for a married couple, the threshold is $150,000. Beyond those amounts, the rebate decreases by $5 for every $100 of earned income a person has, or 5% of income.
For example, a married couple with two children would be eligible for a maximum of $3,400 ($2,400 + $500 + $500). If their adjusted gross income is $180,000, they exceed the phaseout threshold by $30,000. Five percent of $30,000 is $1,500, so their rebate will be reduced by that much for a total rebate of $1,900 ($3,400 — $1,500).
Even if your 2019 or 2018 income is too high to get a rebate, you may still benefit. If your 2020 income makes you eligible for a rebate, then you will be entitled to it when you file your 2020 taxes. If you are eligible for a rebate based on your 2018 or 2019 income but exceed the limitations in 2020, then there will be no negative consequences and you will not have to pay any of the money back to the government.
If you are near the phaseout limits and had a higher income in 2018 than 2019, then you should get your 2019 taxes filed as soon as possible so that your rebate is calculated based on your most recent income numbers. Also, if you have not been required to file a tax return recently, you should consider doing it so that the IRS has your current information and can easily calculate your check and get it to you.
Retirement Account Distributions
There are special treatments in the CARES Act for coronavirus-related distributions from IRAs and employer-sponsored retirement plans up to $100,000. To be considered coronavirus-related, the distribution must be made in the year 2020 by people who:
- Have been diagnosed with COVID-19
- Have a spouse or dependent who has been diagnosed with COVID-19
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
- Are unable to work because they lack childcare as a result of the disease
- Own a business that has closed or been forced to operate under reduced hours because of the disease
- Or if you meet other criteria that the IRS approves
Such coronavirus-related distributions are not subject to the 10% penalty for distributions made before age 59½. Neither are they subject to mandatory tax withholding, which is normally 20%. You will have a 3-year window in which you can replace any distributions that you take. Also, any income taxes due on the distribution can be spread over a 3-year period or paid immediately.
The CARES Act also has provisions for loans from employer-sponsored retirement plans, such as a 401(k) or 403(b). The loans must be coronavirus-related, following the same criteria as distributions discussed above. Instead of the usual $50,000, you can now borrow up to $100,000 from your retirement account. Also, 100% of the vested account value can now be taken as a loan up to the maximum, instead of the usual 50%. In addition, any loan payments that would normally be due on the plan loan during 2020 can be delayed for up to one year without penalty.
Required Minimum Distributions
There will be no required minimum distributions for 2020 for any retirement accounts, including inherited accounts. Original account owners who have already taken their 2020 required minimum distributions are permitted to return them to their accounts as if they had not been taken. This is not an option for owners of inherited accounts.
Charitable Contribution Deduction
Normally, you have to itemize deductions to receive a tax benefit for charitable contributions. The CARES Act includes a $300 deduction for charitable giving that can be claimed by those who take the standard deduction, as an above-the-line deduction. To be eligible, charitable contributions must be made in cash and cannot be used to fund a donor-advised fund.
Required payments on federal student loans are suspended until September 30, 2020, and interest will not accrue during that time. This is not an automatic benefit. Borrowers must proactively contact their loan servicer to pause payments, otherwise, they will continue. This deferment period will also count toward loan forgiveness programs. So, if you are working toward loan forgiveness, you can pause your payments and it will still count toward your forgiveness program as if you had made them.
Qualified Medical Expenses
The CARES Act expands the definition of qualified medical expenses for Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs). Beginning in 2020, qualified medical expenses will include over-the-counter medications and menstrual care products.
Other Medical Provisions
Several other healthcare-related provisions may affect you:
- When available, Medicare beneficiaries will be eligible to receive the COVID-19 vaccine at no cost.
- Medicare Part D recipients must be given the ability to have up to a 90-day supply of medication prescribed and filled during the COVID-19 emergency period.
- Telehealth services may be temporarily covered (through plan years beginning in 2020) by an HSA-Eligible HDHP before a participant has met their deductible.
- Rules for providing telehealth services are relaxed during the COVID-19 emergency period for Medicare, Federally Qualified Health Centers (FQHCs) and Rural Health Clinics (RHCs), Home Dialysis, and Hospice Care Recertification.
Unemployment is one of the major concerns of the COVID-19 pandemic, with weekly job loss claims hitting a record high of 3.3 million last week. (2) Because of this, there are a number of provisions in the CARES Act relating to unemployment benefits, such as:
- Self-employed individuals and independent contractors will be eligible for pandemic unemployment assistance for up to 39 weeks.
- The federal government is going to cover the cost of waiving the usual one-week waiting period before an individual is eligible for unemployment benefits so that they can begin immediately when someone loses their job.
- The federal government will provide up to an additional $600 per week in unemployment benefits for up to four months.
- Unemployment benefits are extended for 13 weeks past the usual state-determined cutoff.
How We Can Help
You will likely be affected by at least one of the provisions of the CARES Act, if not more. In uncertain times like this, it is important to have a solid financial plan and a trusted advisor to turn to. If you don’t already have an advisor and want help putting together a plan for your finances to weather this storm and also help you reach your goals, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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