The CARES Act: Implications for Individuals

The CARES Act: Implications for Individuals

As I’ve written about on the blog and covered on the podcast recently, the CARES Act is a big piece of legislation.  (Remember….the total package is $2.2 trillion!).  We’ve covered several sections of the bill and how it might impact you on the blog recently, including a deep dive into the paycheck protection program.

There are also many provisions in the bill we haven’t covered.  Specifically, sections relating to stimulus checks, expanded unemployment insurance, mandatory distribution holidays, penalty free retirement account withdrawals, and student loan relief.  Coincidentally, all have been commanding a large number of questions from clients of Three Oaks recently.

Like all legislation there is a great deal of gray area in this piece of legislation, especially given the urgency with which it was passed.  The IRS, SBA, Department of Labor, and other government entities are scrambling to provide relevant guidance as soon as possible.  So while there may appear to be some planning opportunities with regard to the law, it’s entirely possible they’re just a temporary mirage.  Nevertheless, here’s what we know now about the CARES Act and how it might impact you as a taxpayer.


Stimulus Checks

The portion of the bill that’s made the most headlines is the recovery rebate section.  Recovery rebates = checks mailed to the door of U.S. taxpayers with adjusted gross income under certain amounts.  Married people filing jointly are eligible for rebates of up to $2,400, all other filers up to $1,200.  For those with dependent children under the age of 17, those amounts are increased by $500 per kid.

The adjusted gross income phaseout thresholds are:

  • $150,000 (married filing jointly)
  • $112,500 (head of household)
  • $75,000 (all other filers)

This means that if your AGI falls under the amounts listed above, you’re entitled to a full stimulus check of either $2,400 or $1,200.  This rebate check will be reduced by $5 for every $100 of adjusted gross income over the limit.


Rebate Checks Are Based on Your AGI

Recovery rebate credits will be based on either your 2018 or your 2019 tax returns – whatever the IRS has on file at the time they make the determination.  The IRS is currently making this determination, meaning that there is a planning opportunity here.  If you qualified for the credit in 2018, but won’t in 2019…..don’t file your tax return yet.  The tax return deadline has been extended to July 15th, so there’s no reason to increase the AGI the IRS will use when deciding whether to mail you a check.  On the other hand, if you wouldn’t have qualified in 2018, but did in 2019…..get your return in ASAP.  The idea here is to get the lowest numbers possible in front of the IRS when they run your Social Security number.


Tax Credits….Not Refund Advances

Interestingly, in the bill the recovery rebate credit is penned as a forgivable tax credit for 2020.  This means that many people who did well in 2018 and/or 2019 but have recently been laid off won’t get the cash they need until tax season next year.

For example, let’s say that a single filer has a high paying job in 2018 and 2019, with an adjusted gross income of $150,000 in both years.  Recently they were laid off, and only end up making $15,000 in 2020.  They wouldn’t qualify for a rebate check now.  Instead the credit would be attached to their 2020 return, which wouldn’t be filed until March or April of 2021.

On the other hand, some taxpayers will qualify for & receive a rebate credit based on their 2018 or 2019 returns.  If their 2020 AGI puts them over the thresholds above, they needn’t worry about getting the money back since it’s technically a forgivable credit.

Also remember that this tax credit has nothing to do with your refund.  If you are entitled to a tax refund for 2020 based on your income and deductions, you’ll be entitled to that refund regardless of whether you collect a rebate check.


When Will I Receive a Check?

The Treasury Department has communicated that for those eligible, they will deposit funds directly into the account on file that receives potential tax refunds.  This is the fastest way to receive your rebate check, and the first round of direct deposits are said to be available on April 15th.  The IRS has said that it plans to roll out a “track my payment” website sometime this week.  Here is the link.  When it goes live it should provide insight into when you might expect deposits to hit your account.


Expanded Unemployment Insurance

The New York Times did a very good job capturing the magnitude of the spike in jobless claims in a recent front page article.  Whereas new jobless claims never approached the 1,000,000 mark in the financial crisis of 2008 and 2009, estimated claims filed the week of March 15th totaled about 5.6 million.  With many economists forecasting the unemployment rate could hit 20% or more, an expansion of unemployment coverage was an important addition to the CARES Act.


Longer Benefit Period

To start, the bill expands the period of time that eligible unemployed workers may receive benefits.  Typically, unemployment benefits do not start until eligible applicants have been unemployed for at least a week.  This provides some incentive for people to find work on their own before collecting any benefits.  The CARES Act includes a provision where the federal government will step in to provide unemployment benefits immediately, without this one week waiting period.

Additionally, unemployment benefits are not offered forever.  I believe this limitation varies by state.  Section 2107 of the CARES Act extends the benefit period for up to 13 weeks, providing an extra quarter for those bumping up against the threshold.


Bigger Benefits

Second, the amount of unemployment benefits was increased.  In section 2104, weekly benefits are increased by up to $600 thanks to dollars from the federal government.  This is a big jump, as the nation’s average weekly benefit is about $400.  This increase is good for up to four months.


Wider Eligibility

Not only are larger unemployment benefits now available for a longer period of time, they are available to more people.  Self employed people, for example, are not ordinarily eligible for unemployment benefits.  The CARES Act makes self employed & others typically ineligible for benefits eligible for up to 39 weeks.

Additionally, many states sponsor “short time” compensation programs for workers who are underemployed.  These programs assist people who’ve had hours cut and are making less than full time wages, but are not necessarily unemployed.  Section 2108 of the CARES Act incentivizes states to establish such plans, by funding 50% of the start up costs with federal government grants.


RMD Holiday

Helpful to many retirees and soon-to-be-retirees, mandatory distributions from retirement accounts are waived for 2020 according to section 2203.  This includes distributions from accounts in your name, as well as from accounts you’ve inherited from others (beneficiary IRAs/Roth IRAs and 401(k)/Roth 401(k)s).

What’s more, this provision applies to all distributions due in 2020.  Meaning that for anyone who turned 70 1/2 last year and decided NOT to take their first distribution until April 1st of 2020, the distributions due on 4/1/20 and 12/31/20 are BOTH waived.

That doesn’t mean you can’t take distributions if you want to, of course.  It just means that you don’t need to if you don’t want to.


Penalty Free Retirement Account Withdrawal

Ordinarily, withdrawals from your 401(k), IRA, and other retirement accounts are subject to a 10% penalty if pulled prior to age 59 1/2.  The CARES Act includes relief from this penalty for those impacted by the virus.  In short, you will be free to pull up to $100,000 from any of your retirement accounts without penalty (in 2020) if any of the following apply to you:

  • You, a spouse, or a dependent has been diagnosed with COVID-19
  • You’ve experienced adverse financial consequences as a result of being furloughed, quarantined, laid off, or had work hours reduced
  • You are not able to work because of a lack of childcare as a result of the pandemic
  • Own a business that’s closed or has operated under reduced hours as a result of the pandemic
  • Any other reason the IRS decides is OK

There are two notable parts in addition to the above.  First, while withdrawals will come out penalty free, they’ll still be counted as taxable income.  BUT, that income may be spread evenly over a three year period.  So for anyone needing to withdraw the entire $100,000 limit as a result of the Coronavirus, you can elect to pay tax on only $33,333.33 per year for three years.  Which could be very helpful to many.

Additionally, you’re free to replace the funds in your retirement accounts within three years.  And since you may have paid taxes on the withdrawals already, you’re free to file an amended return for as many years as you need.


Student Loan Relief

The bill also provides broad relief for federal student loan borrowers.  Unfortunately, the relief only applies to borrowers in the federal system – meaning that anyone who’s refinanced privately does not qualify.  For those who do qualify, the relief is generous.

First, there is administrative forbearance in effect until 9-30-20, meaning you do not have to make payments until then if you don’t want to.  Most loan servicers I’ve heard about here are automatically enrolling borrowers.  This means that you likely don’t need to apply or take other action in order to take advantage – you can simply stop making payments until the end of September.  Clients we’ve heard from have received notice from their servicers as such.  If you haven’t heard anything from yours, I’d suggest checking with them before you pause your payments.

Alongside the payment holiday, interest rates on loans will fall to 0% until after the forbearance period ends.  Even better, the entire period gets counted toward any and all forgiveness programs!  This includes public service loan forgiveness, or the 20/25 year income driven repayment forgiveness programs.  Which means that if your payment strategy includes any kind of federal forgiveness, you should stop making monthly payments entirely!


As I mentioned, if the CARES ACt seems like a half-baked piece of legislation, that’s because it is.  There was a tremendous amount of urgency to get something passed and get economic relief in the hands of taxpayers and small businesses.  While there are a lot of holes in the bill, we are starting to get some guidance from the IRS, DOL, SBA, and other government entities.

Stay tuned.  There will surely be more to come.

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