On March 27, 2020, the largest relief package in recent United States history, called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was signed into law. Distributing $2 trillion amongst businesses, hospitals, families and individuals, this economic stimulus package is designed to bring relief to those experiencing the ever-increasing threat of economic turmoil from the COVID-19 pandemic, and to blunt the harm the virus has brought to the economy as a whole.
As with any long, complex legislation that was hurriedly passed, we expect there will be unintended results to iron out, and details that will take time to come to light and to understand. But if you’re wondering how this new law may affect you, here are some details.
Most American taxpayers will be receiving direct stimulus payments of $1,200 as part of the new bill.
- Single taxpayers with Adjusted Gross Income (AGI) up to $75,000 will receive the full $1,200, with the amount phasing out as AGI reaches $99,000.
- Married couples filing jointly will receive $2,400 if their AGI is $150,000 or less, with the amount phasing out at AGI of $198,000.
- Families with children can expect to receive an additional $500 per qualifying child. These payments are likely subject to phase out as well.
The amount will be based on 2018 tax returns unless you have already filed your 2019 return. Remember, the filing due date for 2019 federal returns has been extended to July 15, 2020. To date, most states have followed suit.
Payments will be made by direct deposit so long as the IRS has your banking information. If not, they will mail it to the address on your return. You should receive a hard-copy mailing confirming your payment within the following few weeks.
Required Minimum Distributions and Other Plan Withdrawals
The law suspends Required Minimum Distributions (RMDs) from retirement accounts (like IRAs, 401(k)s, 457 deferred compensation plans, etc.) for the year 2020. It also eases restrictions on those taking distributions before they reach age 59½, provided the withdrawal is because of the COVID-19 pandemic.
- The usual 10% penalty is waived for a distribution of up to $100,000.
- The income tax on the distribution can be spread over three years.
- You can replace the distributed amount into your account during the three-year period.
- You might be eligible for a larger 401(k) loan than usual, up to $100,000. For existing loans, repayments that were due during 2020 can be extended for one year.
The law extends unemployment benefits to many who have previously not been eligible, like part-time employees, freelancers, self-employed individuals, and gig workers (like Uber or Lyft drivers). Eligible Americans receiving unemployment compensation will get an additional $600 per week for four months. Many others affected by the pandemic—such as those who are experiencing symptoms and can’t work, or who are caring for a family member who’s received a diagnosis—can also receive benefits.
The law suspends interest accrual and loan payment for six months, through September 30 for any loans held by the US government (direct loans). There are many other lenders not covered under the suspension, but borrowers should investigate whether these lenders have their own relief programs. Each month of the six-month suspension counts toward loan forgiveness or rehabilitation programs such as public service loan forgiveness.
Taxpayers are usually able to take a deduction for charitable contributions if they itemize deductions on Form 1040’s Schedule A. The law creates a new deduction for up to $300 of charitable deduction for those who do not itemize. (Contributions to Donor Advised Funds are not eligible for this deduction.)
In 2020, taxpayers will be able to deduct 100% of their eligible charitable contributions against their income, instead of being limited to the 60%-of-AGI limit that applies to most situations.
Numerous other measures are found in the hundreds of pages of the CARES Act. Here are some of the most notable:
- $500 billion to businesses and municipalities, with $29 billion earmarked for aviation and another $17 billion for businesses in national security. Companies must agree to employee retention requirements and cannot use these funds for stock buyback programs. An inspector general and a five-person panel appointed by Congress will oversee distributions.
- Around $117 billion in aid to hospitals, and a 20% increase in Medicare payments for treating COVID-19 patients on Medicare.
- $32 billion in grants to cover the wages and benefits of aviation employees, plus $29 billion in loans and loan guarantees. Airlines may not furlough employees, cut pay, buy back stock, or issue shareholder dividends through September.
- $30 billion in emergency education funding.
- $150 billion for state and local governments that have been working locally to combat the effects of COVID-19.
- Food assistance programs, including $350 million for purchasing food for those in need, $100 million for food distribution, an additional $200 million for food aid to Puerto Rico and other U.S. territories, and $100 million for food distribution on Native American reservations.
- About $350 billion will go to small business and not-for-profits to help retain employees throughout the crisis. This will mostly be in the form of loans that have the potential of being partly or entirely forgiven.
It looks like the next several months will bring us ever-changing news on COVID-19 and responses to it, both in America and around the world. The CARES Act comes at a time when families and business owners alike are fearful of their financial future. If you still have questions about how this stimulus package may affect you, get in touch with your financial advisor. Together, you can sort through expectations of what’s to come and the right next steps to take.