What You Need to Know About the CARES Act

The CARES Act is a massive $2.2 trillion fiscal stimulus package providing relief to both individuals and businesses affected by the economic fallout from the coronavirus. The bill is over 600 pages, so we’re highlighting the three sections of the bill that are most applicable to our clients.

The CARES (Coronavirus Aid, Relief, and Economic Security) Act was signed into law on Friday, March 27, 2020, by President Trump. The CARES Act is a massive $2.1 trillion fiscal stimulus package providing relief to both individuals and businesses affected by the economic fallout from the coronavirus.

The bill is over 600 pages, so we’re highlighting the three sections of the bill that are most applicable to our clients:

How to Calculate the Recovery Rebate:

This section has received the most attention. Who will receive checks and how much? Let’s break it down. The payments are considered refundable income tax credits against 2020 income. The amounts are based on tax filing status from 2018 or 2019 (last return filed) adjusted gross income (AGI).

To determine your rebate amount, start with your AGI versus your filing AGI threshold limit. If your 2019 return has been filed, your 2019 AGI will be used, otherwise the IRS will look to your 2018 AGI.

Filing AGI threshold limits:

  • Married filing jointly (MFJ): $150,000
  • Head of household: $112,500
  • All other filers: $75,000

Married filing jointly rebates begin at $2,400 with all other tax filers starting at $1,200. For every child under the age of 17 (note under, the rebate is not available to children who have already turned 17) add an additional $500.

If your AGI exceeds your filing threshold, the rebate begins to phase out. For every $100 over the limit, the rebate is reduced by $5 or 5% of the amount over the AGI limit.

Let’s look at few examples:

  • Joe and Tina White have not filed 2019. Their 2018 AGI was $125,000. They have four children under the age of 17. The Whites will receive a rebate of $4,400 ($2,400 + ($500*4)).
  • Bob and Jill Smith’s 2019 AGI was $220,000. They also have four children under the age of 17. They are eligible for a rebate of $4,400. However, their AGI is $70,000 over the MFJ limit, which reduces their eligible rebate by $3,500 ($70,000*5%). The Smiths will receive a rebate of $900.
  • John is a single filer. His AGI was $120,000 in 2018. He has no children. He will not be eligible for a rebate now. He anticipates that his income will drop significantly in 2020 to below $75,000. When Joe files his 2020 return, he will then be eligible for a full refund of $1,200.

As previously mentioned, recovery rebates are based on 2018/2019 AGI but are for 2020 income. For taxpayers with fluctuating income, rebates may be phased out if income was too high on the most recent tax return. As in Joe’s example above, his income will be “trued” up but not until 2021 when he files his 2020 return. The timing of the rebate may not be ideal for some taxpayers!

The Act requires that payments be made “as soon as possible.” The Treasury department has indicated payments may not go out until May. Bank accounts that are on file to receive income tax refunds and Social Security deposits will be used or checks will be mailed to the taxpayer’s most recent address on record.

Required Minimum Distributions (RMDs) Waived for 2020:

The CARES Act waives 2020 RMDs for all IRAs (including inherited IRAs) and tax deferred accounts (SEP IRAs, SIMPLE IRAs, 401k, 403b and Government 457b plans). This is good news (i.e. tax relief) for those who do not need their RMD for living expenses.

For those taxpayers who turned 70 ½ in 2019 and elected to delay their first RMD until April 1, 2020, and who would have been required to take a second RMD by the end of this year, both RMDS are waived.

If an RMD has already been withdrawn, the RMD can most likely be returned and not taxed. The best way to do this is to simply return dollar-for-dollar the amount that has been withdrawn to the tax deferred account within 60 days (1x year rollover rule).

If the withdrawal is outside the 60-day window, the taxpayer can look to the “Coronavirus-Related Distributions” part of the bill which allows distributions up to $100,000 (lump sum or over three years) for the following reasons:

  • Taxpayer, spouse or dependent diagnosed with COVID-19
  • Experienced adverse financial consequences from being quarantined, furloughed, or laid off or who has had his/her work hours reduced or who is unable to work due to lack of childcare
  • Own a business that has closed or is operating under reduced hours or
  • Meet some other reason that the IRS decides to say is OK (as of the time of this article, these exact reasons are unclear).

For those meeting any of the above criteria, withdrawals are exempt from the 10% penalty (if under age 59 ½), are not subject to mandatory withholding requirements and are eligible to be repaid (i.e. rolled back into the tax-deferred account) over three years.

The waiver of RMDs for 2020 creates an opportunity for Roth conversions that otherwise would not be available. Especially for those clients who have a large IRA that at some point, will have to be distributed by their children within 10 years (as a result of the recent SECURE Act).

Additional Charitable Contribution Deduction:

The CARES Act allows up to $300 in charitable contributions to be included as an “above the line” deduction. This small amount of tax relief is available to clients taking the standard deduction (most likely as a result of the 2017 Tax Cuts and Job Act). The gifts must be made in cash and are not eligible for cash transfers into a donor advised fund.

Note that in most cases, if you’re over 70 ½ and taking the standard deduction, the qualified charitable distribution (QCD) is the most tax efficient method for charitable gifting. Now, the $300 can also be claimed for those cash contributions that are too small for QCDs.

Additionally, for those who itemize, the AGI limit on cash contributions has been temporarily increased from 60% to 100%. So effectively, charitable contributions could eliminate an individual’s 2020 tax liability.

The CARES Act addresses many other areas that provide relief to taxpayers as a result of the hardships brought on by COVID-19. Please reach out to your advisor with any questions. In the meantime, we’re identifying planning opportunities available to many clients during this tough time.

Betsy Cunagin, CFP®, CRPC®Senior Financial Advisor


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