Congress Approves, President Signs Into Law $2 Trillion Economic Aid Package

The Coronavirus Aid, Relief, and Economic Security Act ('CARES' Act)

On Friday, March 27 President Trump signed into law a sweeping $2 trillion economic stimulus package designed to support American households and businesses in the midst of the ongoing coronavirus pandemic. 

Naturally, a government program that provides over $2 trillion in financial aid does not make for light reading. Below are highlights from the 800+ page law which we believe are the most relevant for our readers. Please click each headline to expand the section. Be sure to consult a legal, financial, or tax advisor to review your personal situation in more detail. 

Direct Cash Payments to Individuals and Families
The most headline-grabbing part of the CARES Act is that the federal government will be sending cash money directly to the American people. The good news is roughly 90% of taxpayers are expected to benefit, per the Tax Foundation. The bad news is some people will unfortunately will get less or nothing at all (at least for now).
Who’s Eligible and How Much Will They Get? 

Every taxpayer who makes less than a certain income is eligible to receive a cash payment. The payment is $1,200 per person plus $500 for each dependent child under 17. For example, a married couple (who files a joint tax return) with two kids under 17 can receive up to $3,400 ($1,200 for each spouse, plus $500 for each kid).

The key phrase, however, is “up to”. Eligibility depends on your income; if it’s over a certain amount, you either get less or nothing at all (*assuming you don’t have kids – otherwise add $10,000 to the upper range for each qualifying child under 17)

Single:  payments reduced if income is over $75,000, and get nothing if over $99,000. 

Married couples:  payments reduced if joint income is over $150,000, and get nothing if over $198,000. 

Head of Household:  payments reduced if income is over $112,500, and get nothing if over $136,500. 

If your income is between these brackets, your cash payment is reduced by $5 for every $100 of income over the bottom tier. 

Here’s where it gets complicated: these cash payments are technically a tax credit for 2020. Obviously it’s too early to know what your income will be this year. So, it’s actually based on your income from your last tax return, which will be either 2019 if you’ve done your taxes this year, or 2018 if you haven’t. 

PLANNING OPPORTUNITY: if you haven’t filed your 2019 taxes yet then compare 2018 income to your 2019 income. The number you’ll need is Adjusted Gross Income (line 7 on your tax return). If your 2018 income was more than the phase-out limits, but your 2019 income IS NOT, then file your 2019 tax return ASAP! The IRS hasn’t yet said what the cutoff date is, so hurry up and file now before it’s too late.

The opposite is also true – if your 2018 income was under the limits, but your 2019 income is over, then don’t file your 2019 taxes yet. Wait until after the cutoff period is announced (you have up until 7/15/20 to file your taxes this year anyways). 

Another thing to pay attention to is if you had a baby in 2019. If haven’t filed your 2019 taxes yet, you will NOT get an extra $500 for the new child. File your taxes ASAP so the IRS has all your dependents on record.

What if I Don’t Qualify?

If you don’t qualify based on 2018 or 2019 income, you might still have some reprieve when you file your 2020 taxes next year. Recall, these cash payments are actually a credit for the 2020 tax year. So if you don’t qualify now but your 2020 income ends up being below the limits, then you will be eligible for the $1,200 + $500 per kid payment after you file your 2020 tax return. This begs the question of how much that will actually benefit people in the present, many of whom may have had high incomes in 2018 or 2019 but are now out of work or financially strapped.  

When Will I Get My Money?

The only timetable we have right now is that payments will go out “as soon as possible”. Consensus estimates seem to say that will be mid-April or as late as May.

How Will I Get It?

The payments are expected to be direct deposited to the bank account on your last tax return. If you’re on Social Security, it will be deposited to the same account. If neither of these are applicable, then the government is sending payment via check to the address on your last tax return.

PLANNING OPPORTUNITY: if any of the above has changed, i.e. you changed bank accounts or moved to a new address you should contact the IRS as soon as possible. It appears their will be a special hotline but as of this writing the phone number hasn’t been made public. 

Penalty-Free IRA Distributions
Normally there is a 10% penalty on IRA withdrawals if you’re younger than 59 1/2. The CARES Act eliminates this 10% penalty on up to $100,000 of IRA withdrawals for a “coronavirus-related reason”. A “coronavirus-related” distribution is one that arises due to you/your spouse/dependent being diagnosed with the virus, not being able to work, or your business being shut down, among other (fairly lenient) reasons. 

But that’s not all: within the next three years you can “roll” these withdrawals back into your IRA to continue tax-deferred retirement saving. The IRS will also let you divvy up the tax bill over three years, as opposed to paying tax on everything up front in the year you take the withdrawal (remember: only the 10% penalty is waived, you still owe income tax on the amount you withdraw).  

Waive all 2020 Required Minimum Distributions ('RMDs')
Effective immediately, all RMDs are canceled in 2020. That’s right, you do not have to take a required minimum distribution this year from a Traditional IRA, SIMPLE IRA, SEP IRA, 401(k), TSP, 403(b), Government 457, and even from inherited retirement accounts.

If you already took your 2020 RMD, and it has been less than 60 days since you did so, you are even allowed to reverse the RMD and roll it back in your account (*only for your own retirement account, can’t reverse inherited account RMDs). 

Increase Unemployment Benefits
A record 3.28 million people filed for unemployment benefits in mid-March. To put this into perspective, the next second-highest recording was 695,000 in 1982.   

The CARES Act provides an extra $600 per week for up to 4 months, on top of your state-level unemployment benefit. In Virginia, you can receive unemployment benefits for 12 to 26 weeks. Generally speaking, the amount of your unemployment benefit and how long it lasts are based on your past earnings. 

Importantly, these unemployment benefits are also extended to the self-employed and independent contractors. 

Aid for Small Businesses
The CARES Act also contains provisions to help out small businesses, many of whom are facing unprecedented hardship due to mandatory shut downs. 
Paycheck Protection Program

The CARES Act authorizes the federal Small Business Administration (‘SBA’) to back up to $349 billion in direct loans to small businesses to help cover payroll & other expenses during the ongoing COVID crisis.

PPP loans are available to the following entities: businesses with less than 500 employees (there are exceptions for certain industries), sole proprietors, independent contractors, self-employed persons, and non-profits. The loan is worth 2.5x of monthly payroll costs (up to $10 million). Most importantly, they are entirely forgivable if the entity uses the loan for payroll, mortgage/rent, and utilities within 8 weeks of receiving it, and does not lay off employees or cut pay. The forgivable amount is reduced if your full-time headcount and/or wages decrease. Any non-forgivable portion carries an interest rate of 1% and must be paid back within 2 years. 

Employee Retention Credit for Employers Subject to Closure

Countless businesses have shuttered their doors or cut back on hours as a result of COVID-19. This tax credit is designed to help businesses which have fully or partially suspended operations, or who have seen drastic declines in revenues. Specifically, businesses who don’t participate in the above Paycheck Protection Program, and who have realized >50% declines in revenues quarter-over-quarter, or have at least partially suspended operations, can apply for this tax credit. The credit is equal to 50% of wages for each employee (up to $10k in wages per employee). 

Deferral of Payroll Taxes

Employers will also be able to defer 50% of their 2020 payroll taxes until the end of 2021 and 2022. Again, this is only for employers who don’t participate in the Paycheck Protection Program.

Net Operating Loss Rules

Businesses will be allowed to carry back any net operating loss from 2018, 2019, or 2020 for up to five years. This basically means businesses can go back and re-calculate prior years’ tax bills and use a net operating loss to create a refund.

Increase Tax Write-Offs for Charitable Gifts
Taxpayers who DO NOT itemize expenses can write-off up to $300 in charitable contributions on their 2020 taxes. This deduction goes “above-the-line”, meaning you subtract it from your gross income to arrive at Adjusted Gross Income.

Taxpayers who DO itemize expenses will be allowed to write-off charitable contributions up to 100% of their Adjusted Gross Income. This is a drastic change because normally you can only write-off up to 60% worth of your AGI. What this means is that a taxpayer can effectively wipe out their entire tax bill by making charitable donations. One caveat is that the gift cannot be made to a donor advised fund or 509(a)(3) supporting organization. 

Student Loan Relief
Effective March 13 all payments on federal student loans are deferred until 9/30/2020, and no interest will accrue during this time. According to all payments on federal student loans will be stopped automatically (i.e. you don’t have to do anything). Also, these 6 months of deferment will still count towards loan forgiveness if you are participating in a loan-forgiveness program such as the Public Service Loan Forgiveness program.

PLANNING OPPORTUNITY: if you are in a loan-forgiveness program and you reasonably expect to otherwise meet all the requirements, you should strongly consider taking advantage of this opportunity and defer payments until 9/30/20. After all there’s not much point in paying a loan if you don’t have to and it’s eventually going to be wiped out anyways. This is especially beneficial if you’re otherwise strapped for cash flow right now. 

On the other hand if you still have steady income and are able to make payments, you could use this as an opportunity to pay down your student debt faster. Since the government is setting your loan at a 0% interest rate for the next 6 months, any payment you make will go entirely towards principal.

Students Leaving School – the government is also providing relief for college students who have received Pell Grants and/or subsidized federal student loans, but are leaving school due to this ongoing emergency. 

Expand Access to HSA Funds and Other Medical Services
Over-the-counter medications now count as qualifying Health Savings Account distributions. That means you won’t pay tax on HSA distributions to pay for such items.

Medicare recipients will receive COVID-19 vaccines for free once they are available.

Medicare Part D recipients can request 90-day refills for their medications.

Access to tele-health services are being expanded.