How The CARES Act Affects You
Today, President Trump signed into law the historic Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is an attempt to lessen the economic impact of the extreme measures that we here in the US and others around the world have been taking to try to slow the spread of the global coronavirus pandemic.
The CARES Act provides $2 trillion to help individuals, businesses, healthcare entities, and state and local governments meet short-term cash flow needs. It is the largest economic stimulus package our country has ever seen and contains a combination of loans, rebate payments, and tax credits. Nearly $500 billion will go towards rebate checks for American workers, another $500 billion is allocated to support severely damaged industries, nearly $400 billion dollars will provide tax credits for wages and payroll tax relief, over $300 billion will go to state and local governments, and almost $150 billion is designated to support hospitals and the healthcare system. These are the aspects that are likely to impact the most individuals and families:
Recovery Rebates For Individuals
About 90% of American workers are expected to receive a check from the government. Technically, it is a refundable income tax credit against 2020 income. However, we don’t have to wait until the 2020 tax season to get the money. The Act specifies that the checks should be distributed as soon as possible, but the Treasury Department has indicated that it will likely be May before they start to arrive.
Rebate checks will be calculated based on adjusted gross income from either 2019 tax returns, if they have been filed, or 2018 tax returns. Married couples will be entitled to up to $2,400 and singles will be entitled to up to $1,200 each. The rebate will be increased by $500 for each child under the age of 17 in a household.
Not all taxpayers will be eligible to receive the rebate checks. You must have a Social Security number and meet certain income restrictions. For a single person, the rebate begins to phase out at $75,000 of adjusted gross income, for a head of household the threshold is $112,500, and for a married couple, it is $150,000. Beyond those amounts, the rebate decreases by $5 for every $100 of earned income a person has, or 5% of income.
For example, a married couple with two children would be eligible for a maximum of $3,400. ($2,400 + $500 + $500) If their adjusted gross income is $175,000, they exceed the phaseout threshold by $25,000. Five percent of $25,000 is $1,250, so their rebate will be reduced by that much for a total rebate of $2,150. ($3,400 - $1,250)
Here is a graph from the Tax Foundation showing the different rebate amounts and phase-out periods for different family structures:
Even if your 2019 or 2018 income is too high to get a rebate, you may still benefit (just not right now). If your 2020 income makes you eligible for a rebate, then you will be entitled to it when you file your 2020 taxes. If you are eligible for a rebate based on your 2018 or 2019 income but exceed the limitations in 2020, then there will be no negative consequences and you will not have to pay any of the money back to the government.
If you are near the phaseout limits and had a higher income in 2018 than 2019, then it would behoove you to get your 2019 taxes filed as soon as possible so that your rebate is calculated based on your most recent income numbers.
Retirement Account Distributions
The CARES Act provides special treatment for coronavirus-related distributions from IRAs and employer-sponsored retirement plans. To be considered coronavirus-related, the distribution must be made in 2020 by people who:
Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
Are unable to work because they lack childcare as a result of the disease;
Own a business that has closed or been forced to operate under reduced hours because of the disease; or
Meet other criteria that the IRS approves.
Coronavirus-related distributions are limited to $100,000 and receive these special benefits:
They are not subject to the 10% penalty for distributions made before age 59 ½.
They are not subject to mandatory tax withholding, which is usually 20%.
Distributions can be repaid to the retirement account for a 3-year period beginning the day after the distribution was made.
Related income taxes can be spread over a 3-year period. You can also choose to pay them all in 2020 if it is beneficial to you.
Increased 401(k) Loans
The CARES Act also makes it easier to take a larger loan from an employer-sponsored retirement plan, such as a 401(k) or 403(b). The same eligibility criteria apply for the loan to be coronavirus-related as for the retirement account distributions.
The maximum loan amount is doubled to $100,000. Also, 100% of the vested account value can now be taken as a loan, instead of the usual 50%. Finally, any payments that would usually be due on the plan loan during 2020 can be delayed for up to one year.
Required Minimum Distributions Waived
Required minimum distributions have been waived for 2020 for all retirement accounts, including beneficiary accounts. Account owners (though not beneficiary account owners) who have already taken their 2020 required minimum distributions are permitted to return them to their accounts as if they had not been taken.
Charitable Contribution Deduction
Usually, the only way to receive a tax benefit for charitable contributions is by itemizing deductions. The CARES Act includes a $300 deduction for charitable giving that can be claimed by those who take the standard deduction. Such charitable contributions must be made in cash and cannot be used to fund a donor-advised fund. This deduction applies for the 2020 tax year, not the 2019 taxes that are being filed right now.
Student Loan Deferment
The CARES Act suspends required payments on federal student loans until September 30, 2020. Interest will not accrue during that time either. In order to take advantage of this, borrowers will have to proactively contact their loan servicer to pause payments, otherwise, they will continue.
This period of time will also continue to count towards loan forgiveness programs. Thus, those working towards loan forgiveness can pause their payments and it will still count towards their forgiveness program as if they had made them.
Changes To Qualified Medical Expenses
The definition of qualified medical expenses for Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Healthcare Flexible Spending Accounts (FSAs) has been expanded. Beginning in 2020, qualified medical expenses will include over-the-counter medications and menstrual care products.
Other Medical Provisions
There are a number of other healthcare-related provisions that may affect you:
Medicare beneficiaries will be eligible to receive the COVID-19 vaccine (when available) at no cost;
During the COVID-19 emergency period, Medicare Part D recipients must be given the ability to have, upon request, up to a 90-day supply of medication prescribed and filled;
Telehealth services may be temporarily covered (through plan years beginning in 2020) by an HSA-Eligible HDHP before a participant has met their deductible; and
Rules for providing telehealth services are relaxed during the COVID-19 emergency period for Medicare, Federally Qualified Health Centers (FQHCs) and Rural Health Clinics (RHCs), Home Dialysis, and Hospice Care Recertification.
Unemployment Compensation Benefits
The COVID-19 pandemic has brought with it unprecedented levels of unemployment, with weekly job loss claims hitting a record high of 3.3 million last week. As such, there are a number of provisions in the CARES Act relating to unemployment benefits. They include:
Self-employed individuals and others who are usually not eligible for regular unemployment insurance will be eligible for pandemic unemployment assistance for up to 39 weeks.
There is usually a one-week waiting period before an individual is eligible for unemployment benefits. However, the federal government is going to cover that cost so that unemployment benefits can begin immediately when someone loses their job.
The federal government will provide up to an additional $600 per week in unemployment benefits for up to four months.
Unemployment benefits are extended for 13 weeks past the usual state-mandated cut-off.
How We Can Help
As you can see, this is a major piece of legislation that will affect nearly every single American. As you process the effects of COVID-19 in your own life, if you have any questions or you want help developing a plan for your finances moving forward, we are here to help. To learn more about how we can guide you during this time, schedule a complimentary phone call.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.