CARES Act Summary

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is meant to support our economy during these unprecedented times.  The bill provides over $2.2 trillion in relief and is clearly the most expensive piece of legislation ever passed. Below we summarize the most significant provisions affecting our clients.  However, as with any new legislation, details and interpretations will be issued as questions arise and we will keep you informed as we learn more.

Recovery Rebates – these stimulus payments are a refundable income tax credit against 2020 income.  Payments will be $1,200 per individual plus $500 per dependent child under age 17.  Full payments will be provided to those singles under $75,000 of Adjusted Gross Income “AGI” or married couples making under $150,000 AGI.  For every $100 a taxpayer’s income exceeds this limit, their payment will be reduced by $5.  Thus, for a family of four, the payments will completely phase out at $218,000 of AGI. Payments will be based on the most recent income tax return filed which makes things interesting as we are right in the middle of tax filing season.  For many that have already filed their 2019, that will be the basis to determine whether a payment will be made.  For those that have not filed their 2019 return, they will use 2018 AGI as the basis.

For taxpayers whose income has gone up or down substantially from 2018 to 2019, you may want to consider the timing of filing the 2019 tax return and whether you will or will not qualify under 2019 income vs. 2018 income. If you don’t qualify for a payment based on 2018 or 2019 income, but you would qualify based on 2020 income, don’t worry.  You will eventually receive the benefit of the CARES Act when you file your 2020 tax return.  This creates tax planning opportunities to manage your 2020 income to the level that qualifies for the Recovery Rebates.  Obviously, it would be nice to have the cash now, but better late than never.

These rules and calculations can be very confusing for taxpayers with variable incomes so please reach out to your financial advisor if you have questions on your specific situation.

Early IRA/401(k) Withdrawals – for individuals under 59 ½ that are financially impacted by COVID-19 an opportunity now exists to withdraw up to $100,000 from an IRA or 401(k) plan and have the normal 10% penalty waived.  While the withdrawal would be taxable, that income can be spread over three years (or taken all in 2020). There are additional provisions to repay the withdrawal over the three years and recoup any tax paid on the withdrawal. If you are considering an early withdrawal, we highly recommend contacting your financial advisor to insure it’s done in the most tax efficient manner possible.

401(k) Loans – restrictions on loans from 401(k) plans have been eased to allow up to $100,000 (vs. $50,000) and in maximum loans and allow up to 100% (vs. 50%) of vested balance to be loan eligible.  Additionally, for those with loans currently outstanding, an optional 12-month deferral of payments is available.  Of course, we continue to believe that 401(k) loans are truly the last option for those desperate for cash.  Please contact your financial advisor if you are considering a 401(k) loan.  IRAs do not allow for loans.

Required Minimum Distributions (RMDs) – for 2020, all RMDs will be waived.  This includes IRA/401(k) owners as well as owners of Beneficiary IRAs.  If you already took your RMD and now would rather have it waived, there are provisions that may allow you to repay the RMD to the account.  Please contact your financial advisor to further discuss these options.

Charitable Contributions – CARES made a change to the tax law to allow up to $300 of charitable contributions to be deducted “above the line”.  This means that even taxpayers that do not itemize will be allowed to deduct up to $300 per year.  Please note that contributions must be in cash and not used to fund a Donor Advised Fund.  This simply provides a great reason, for all of us that are able to, make a cash contribution now to our favorite charity and help those so desperately in need.

Student Loans – all student loan payments and interest are suspended until September 30th.  This certainly will provide some welcome relief to many.  However, if your cash flow is not significantly affected, we encourage you to continue making payments as you will make a bigger dent into the principal during these six months of no interest.  Another possibility is to use the six months of suspended payments to pay down other higher interest debt you may have like credit cards, auto loans, HELOCs, etc.

Health Savings & Flexible Spending Accounts (HSAs/FSAs) – CARES allow over-the-counter (OTC) medications to once again be eligible for reimbursement.  This is especially useful for those with FSAs that need to use funds before they are forfeited.

Paycheck Protection Program – the most significant provisions of CARES for small business owners is the possibility of a forgivable loan offered through the Small Business Administration (SBA).  Loans must be applied for by June 30th.  Loans are available for businesses with less than 500 employees, including sole proprietors, with a maximum amount of 2.5 times average monthly payroll costs.

The most powerful element of this loan is the potential for forgiveness if you retain your workforce.  The amount forgiven equals the amount spent over an 8-week period after the loan origination date for amounts spent on payroll, rent, interest on mortgages, and utility payments. Payroll must be 75% of the expenses paid, and if you did not retain your entire workforce, the amount forgiven will be reduced.  Additionally, any debt forgiven will not be considered taxable income.

Even for those loans not forgiven, the maximum interest rate is 4% over a maximum term of 10 years. Additionally, payments will be deferred for no less than 6 months and potentially up to one year.

There are other SBA loans/grants available, including Emergency Economic Injury Loans (EIDL), through banks and other financial institutions.  The demand for the Paycheck Protection Program will be intense and the funds are limited so we highly recommend you contact your banker and financial advisor immediately to determine what loan program is best for your situation.

Employee Retention Credit – this payroll tax credit of up to $5,000 per employee may be available for businesses who do NOT take a loan under the Paycheck Protection Program.  To be eligible, a business must have been fully or partially suspended or have had its quarterly revenue drop by 50% from the same quarter in 2019.

Deferral of Payment of Payroll Taxes – employers may defer the payment of their portion of payroll taxes through the end of year to 50% owed on 12/31/2021 and the remaining 50% owed on 12/31/2022.  This also applies to self-employed individuals, at least with respect to the employer equivalent portion of their self-employment taxes.  This deferral is not allowed for those businesses that have a loan forgiven under the Paycheck Protection Program.

As we learn about different ways to work, communicate, and gather information, know that each of us are doing all that we can to understand the investment and tax world in which we now live. Information as the result of legislative and tax changes, as well as investment data is changing rapidly. We are involved in conversations, podcasts, and written research in order to keep pace with the changes. We are here for you. Please call if you have questions.

Blue Ash – 513.791.9258
Fairfield – 513.829.4500
Hamilton – 513.863.4015

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