Learning About the CARES Act
“The more I learn, the more I realize how much I don’t know.” — Albert Einstein
“The more you know, the less you understand.” — Lao Tzu
If I didn’t know better, I would think these gentlemen were talking about the CARES Act, the recent legislation passed by Congress in response to the Covid-19 pandemic. The Act is a massive set of regulations that impact almost every taxpayer. With the media focusing on popular parts of the ruling such as stimulus payments and business loans, you may have missed some other important changes to the tax law. Here are a few highlights of the bill:
1) The much-publicized Economic Impact Payments, aka stimulus checks, were a part of the CARES Act. Single taxpayers with Adjusted Gross Incomes (AGIs) under $75,000 receive $1200; married couples filing jointly with AGIs under $150,000 get $2400. AGIs within phaseout ranges ($75,000 – $99,000 for singles, $150,000 – $198,000 for MFJ) receive a proportional amount. Taxpayers with dependents under the age of 17 get $500 per eligible dependent.
Many eligible taxpayers have already received their payments through direct deposit. Others are now beginning to get checks in the mail, and some will even receive their payments via debit cards. For more about the EIPs, including a great FAQ that gets updated regularly, see this IRS webpage.
Payments will be reported on the 2020 tax return, but the funds are not taxable. Anyone who did not receive the full amount they qualify for will have the funds added to their 2020 refund.
2) There is a new charitable donation deduction in 2020. This deduction allows single taxpayers to deduct up to $300 (MFJ up to $600) for cash donations to qualified charities even if they do not itemize. Tax law changes in 2018 caused most taxpayers to take the standard deduction instead of itemizing, so they lost the tax benefit of charity donations. This new ruling applies only to monetary donations; goods donated to thrift stores do not count.
3) Required Minimum Distributions (RMDs) from qualified retirement accounts have been suspended for 2020. Retirees who don’t need the funds can give the stock market a little longer to recover before being forced to take money out of their accounts. There are provisions in the law for RMDs already taken this year to be repaid, but you must act quickly since you only have sixty days to reverse the transaction.
4) Federal student loans were automatically put into forbearance with a 0% interest rate until September 30, 2020. While this means that you do not have to make payments during this time and that no interest will be accruing, it also means you’ll end up with a smaller than usual student loan interest deduction on your 2020 return. That’s a small trade off for the flexibility this ruling allows.
5) Early withdrawal penalties for traditional retirement plans such as a 401(k) or a traditional IRA have been eliminated for 2020. Generally, if you withdraw funds from qualified retirement plans before age 59 ½, you pay a 10% penalty in addition to any income taxes due. The CARES Act waives this penalty for withdrawals up to $100,000 if the withdrawal was Covid-19 related. You will still owe income taxes, but you can choose to report the income over the next three years (2020 – 2022). If you’re able to repay the funds that were withdrawn within three years, you will receive a refund for any taxes paid on the withdrawal.
The CARES Act is projected to cost nearly 2 trillion dollars, so we know to expect continuing changes and clarifications to the law. One provision of the law has already caused two sets of “interim final” regulations to be released, which is enough to make anyone say, “I know nothing!” However, we will continue to stay on top of changes and guidance from the IRS as we seek to understand a little more. If you’re finding yourself realizing that you don’t know much about CARES Act provisions, call us for help.