This post was updated on May 13, 2020, to include information about the CARES Act financial aid provision for college students.
The CARES (Coronavirus Aid, Relief, and Economic Security) Act is the coronavirus relief bill that has been making major headlines and includes the stimulus payments you’ve likely heard about. While the CARES Act worked its way through Congress, there was a lot of media coverage and speculation about what would be included. Now that President Trump has signed the bill into law, we’re able to dive in and find out what’s included. Below is a summary of provisions most likely to affect individuals. We’ve covered the provisions intended for small business relief in another post.
Direct cash payments to American citizens
The majority of American families will receive a stimulus payment, the amount of which is based on income and household composition. In brief, each taxpayer will receive $1,200 if their income is below certain thresholds. Single filers earning less than $75,000 annually will receive $1,200, and married couples filing jointly will receive $2,400 and begin to phase out if they earn more than $150,000. Families with children under the age of 17 will receive $500 per child. Social security recipients are eligible provided they fall below the income thresholds.
Example: A married couple with two children who files a joint tax return and earned $100,000 in 2019 will receive a payment of $3,400 ($1,200 for each spouse and $500 for each child).
These payments are considered a pre-payment of a new refundable income tax credit in 2020. This means that you will not count the amount you receive toward your total income on your 2020 tax return. It also means that if you exceeded the income threshold on your last tax return but expect to earn below the threshold in 2020, you will be able to claim the credit on your 2020 tax return. What we don’t yet know is whether you will be required to repay the credit should you exceed the income threshold in 2020. The income calculations used to send payments will be pulled from your 2019 tax return (or 2018 if you haven’t yet filed for 2019). Social security statements will also be used to verify income for people who don’t file a tax return.
If you gave the IRS your banking information for direct deposit of a refund on your last tax return, you will likely be among the first to receive your payment as a direct deposit into that account. Sending paper checks to taxpayers will take more time. The IRS is still working out the details of distributing the funds with the understanding that time is of the essence. Treasury Secretary Steven Mnuchin has set an ambitious goal to send the first payments the week of April 6.
The IRS has created a coronavirus page on its website where you can check the status of stimulus payment checks.
Aid for students
The CARES Act Higher Education Emergency Relief Fund-IHE/Student Aid has provided funding to universities, enabling them to make emergency financial aid grants to students who are facing financial challenges. Each institution will administer these grants, which are not intended to be loans that must be repaid. Students should contact the financial aid offices at their universities in order to learn more. Learn more from the U.S. Department of Education.
Tax deduction for charitable contributions
In the past couple of years, many taxpayers haven’t deducted their charitable contributions on their tax returns because they take the standard deduction (itemizers, on the other hand, do deduct those contributions). For 2020, taxpayers who take the standard deduction can deduct up to $300 in charitable contributions—on top of the standard deduction.
Expanded unemployment benefits
One of the biggest changes to unemployment is that people who are self-employed and/or independent contractors are now eligible to claim benefits. Unemployment is typically paid out by the state; the federal government is adding $600 per week per worker on top of the state benefits.
Florida residents can apply for Florida Reemployment Assistance online.
Retirement plan and student loan provisions
For individuals who are financially impacted by the coronavirus, the CARES Act suspends required minimum distributions (RMDs) for 2020, regardless of whether those RMDs were age-based or from an inherited IRA. We strongly recommend consulting with your financial advisor if the suspension of RMDs applies to you, even if you have already taken an RMD this year. There may be tax benefits to returning the distribution or taking your RMD anyway.
People who require early distributions from their retirement plans during this time are able to take up to $100,000 out of their plans without penalty in 2020. Taxes on these distributions can be spread out over three years; you can also take three years to return the distribution amount to your retirement account. Loans from retirement accounts are also available. Anyone using these benefits must self-certify that they are adversely impacted by the coronavirus—whether that’s because of a lost job, reduced work hours, or being unable to work due to lack of childcare.
On the other end of the spectrum, the CARES Act allows employers to make tax-free contributions toward student loan payments, up to $5,250 per employee per year. The Act also put a temporary halt on student loan interest charges, making this an even more attractive option for businesses that can help their employees reduce their student loan debt.
Borrowers can also pause their federal student loan payments through September 30, 2020, without any penalty or interest accrual. This should be automatic, but it’s a good idea to log in to your student loan account and ensure these changes are reflected.
Remember, these significant changes will take some time for the federal government regulators to enact. The good news is that relief is on the way. Obviously, there are numerous provisions impacting virtually every taxpayer. Don’t hesitate to seek advice from your trusted strategic advisor. Call us at any time to schedule a consultation.