On March 27, 2020, Congress approved and President Trump signed into law the CARES Act, a $2 trillion stimulus package in response to the COVID-19 (coronavirus) pandemic. This bill is the largest relief package in American history. It comes at a time when the national and global economies are suffering a screeching slowdown. The coronavirus is restraining peoples’ confidence and normal consumption patterns, especially for services. Sadly, businesses are reducing staff or shutting down at a rate not seen for many generations.
Nearly 3.3 million Americans filed a claim for jobless aid in the week ending March 21, 2020. This was a nearly fivefold increase over the previous weekly record back in 1982. By way of comparison, in the worst single week after the financial crash of 2008, jobless claims stood at 665,000.
The stimulus package, called the CARES Act, aims to help Americans, especially those who are negatively affected by losing a job or having their income slashed. It also aims to support businesses who are struggling amidst the economic slowdown. The bill provides direct payments to most Americans, expands unemployment benefits, and includes hundreds of billions of dollars in loans and grants to corporations, hospitals, state and local governments, and more.
The whole 883-page bill will be impossible to cover in this article (or many articles!), but here are the highlights. We list first and discuss at more length the provisions that pertain to personal financial planning.
Direct Payments to Many Americans
The direct cash stimulus will be distributed as $1,200 to individuals making up to $75,000/year or as $2,400 to couples making up to $150,000/year. Additionally, $500 will be distributed per each dependent child in the household. Taxpayers filing as head of household would get the full payment if they earned $112,500 or less. Above those income figures, the payment decreases until it stops altogether for single people earning $99,000; married people who have no children and earn $198,000; or head of household who earn $136,500.
The government will go by taxpayers’ 2018 or 2019 (if 2019 was already filed) tax returns when determining the payment amounts. The government suggests that payments could begin around the third week of April but might take months to arrive, depending on how the payments are sent. This will be determined by whether a taxpayer had used direct deposit to file their 2018 or 2019 income tax return. Paper checks will be mailed to those for whom the IRS does not have current bank account info. Payments by check likely will take longer to receive than direct deposit payments.
Required Minimum Distribution (RMD) Requirements Waived for 2020
Generally, individuals over age 70 1/2 or 72 must withdraw a certain amount from their tax-deferred IRAs, 401(k)s, and the like. However, the bill waives RMD requirements for 2020. This relief is broad and applies to IRAs (including SEP and SIMPLE IRAs) and 401(k), 403(b), and 457(b) plans.
Individuals who already took their 2020 RMD earlier this year will not be able to “undo” it unless certain conditions are met. According to Financial Planning magazine, those conditions are likely to be the following: (1.) If the IRS confirms that RMDs taken already this year are not actually “RMDs” per this bill; (2.) the 60-day rule; and (3.) the once per year rollover rule. The IRS will likely issue guidance on this topic.
Other Temporary Changes to IRA Rules
The Treasury recently extended the 2019 tax return filing date to July 15, 2020, from April 15, 2020. As a result, the date for making 2019 IRA and Roth IRA contributions is also extended to July 15, 2020. Normally, IRA contributions for a prior year must be made by April 15th of the following year. There have never been extensions to the IRA contribution deadline, even if the taxpayer filed for a tax filing extension. The extended deadline also applies to 2019 Health Savings Account, Archer Medical Savings Account, and Coverdell Education Savings Account contributions.
The CARES Act waives the 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for individuals affected by the coronavirus. These distributions would avoid the 10% early withdrawal penalty regardless of whether a person is under age 59 1/2 or not. Tax would still be due. But it could be optionally spread evenly over three years, and the funds could be repaid over the three-year period. “Affected individuals” are people diagnosed with COVID-19 or have a spouse or dependent similarly diagnosed; or experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced hours, unable to work because of childcare needs, and other similar reasons.
Up to $300 Tax Deduction for Charitable Donations
The bill includes a new tax deduction up to $300 for certain taxpayers who make qualified charitable contributions. This provision will positively impact (albeit modestly due to the low dollar amount) taxpayers who use the standard deduction instead of itemizing on their federal return. The Tax Cuts & Jobs Act of 2017 roughly doubled the standard deduction, leading most taxpayers not to itemize. There is no tax benefit for making charitable gifts unless itemizing. Now, taxpayers who take the standard deduction will be able to deduct up to $300 as an above-the-line deduction, effective for 2020.
Unemployment Benefits Expanded
The new bill wraps in far more workers than are usually eligible for unemployment benefits, including self-employed people and part-time workers. Those who are unemployed, are partly unemployed, or cannot work for a wide variety of coronavirus-related reasons would be more likely to receive benefits. Under the CARES Act, eligible workers would get an extra $600 per week on top of their state benefit (max of $275 per week in TN) for up to four months. It provides an extra 13 weeks of benefits.
The measure allows for employers and self-employed individuals to defer payroll tax, requiring half to be paid by the end of 2021 and the other half by 2022. This portion of the package applies specifically to Social Security taxes, representing 6.2% of payroll for eligible employers.
Small Business Loans
$350 billion in loans for small businesses impacted by the virus. Companies with 500 or fewer employees could tap up to $10 million each in forgivable small business loans to keep paychecks flowing.
Federally Guaranteed Loans
This provision will provide eight weeks of assistance for qualifying employers who maintain payroll. Those who meet requirements would have costs such as utilities, mortgage interest, and rent forgiven.
Hospitals and Health Care Funding
$240 billion would be set aside in additional emergency appropriations to fight the virus and shore up safety net programs.
There is a $500 billion proposal to provide loans to distressed companies, with $50 billion in loans for passenger air carriers. Limitations on executive pay and retirement have been placed on businesses who accept the loans and loan guarantees.
State and Local Funding
The CARES Act includes $150 billion to address spending shortages related to the coronavirus outbreak.
Looking at the CARES Act from a macroeconomic perspective, the $2 trillion stimulus bill is roughly 10% of U.S. GDP. We reiterate how historically large and unprecedented this recovery package is. It should be a decent offset to many of the dismal forecasts for second quarter U.S. GDP. Together, the new lending facilities recently announced by the Fed and the stimulus from this Congressional package could channel up to $6 trillion in temporary financing to consumers and firms over the coming months. This should help to support an eventual recovery once the coronavirus outbreak has been brought under control.
We are hopeful the spread of the virus subsides so that life and business everywhere may return to a normal pattern sooner rather than later. Meanwhile, we hope you and your families are keeping well. Your team at BCS Wealth Management is here to help however we can.