How the CARES Act Impacts You & Your Family
On March 27, 2020, President Donald Trump signed into law the largest economic stimulus bill in U.S. history. The $2 Trillion Coronavirus Aid, Relief and Economic Security (CARES) Act is the third round of federal government support to address the coronavirus public health crisis and the associated economic consequences. The CARES Act providesa tremendous amount of financial support for individuals and businesses.
You may be asking yourself how the CARES Act may impact you and your family. Below we have summarized some of the ways you may see some benefit from this legislation.
Recovery Rebate for Taxpayers
The CARES Act will provide a refundable $1,200 tax rebate to “eligible individual” taxpayers ($2,400 for joint taxpayers). In addition, taxpayers with children will receive an additional $500 per child. The rebate will not be treated as taxable income and will have specific income qualifications. Individual taxpayers with a federal Adjusted Gross Income (AGI) of $75,000 or less will receive the full $1,200 rebate. Taxpayers with an income over $75,000 will receive a reduced rebate until the rebate completely phases out at $99,000. Joint taxpayers will receive the full $2,400 rebate up to a joint AGI of $150,000 with the rebate phasing out up to an income of $198,000.
The federal government intends to use the AGI from the 2019 federal tax return, if filed. If a 2019 federal tax return has not been filed (the due date was extended to July 15, 2020) the government will use the AGI from the 2018 federal income tax return. Please note that to be eligible for the rebate a taxpayer must have a social security number andcannot be a dependent of another taxpayer.
It is expected that the rebates will be paid out to taxpayers in several weeks.
Tax Payment and Filing Due Date Extended to July 15, 2020
Individual taxpayers normally have a deadline of April 15th to file their federal tax return or tax extension and pay all taxes due. The CARES Act has extended the deadline for both filing federal tax returns and paying federal taxes due until July 15, 2020. Please note that no tax extension form needs to be filed in order to take advantage of this extended tax deadline.
This extension also applied to contributions to IRAs, Roth IRAs and Health Savings Accounts (HSAs). You can make a contribution for 2019 up until July 15, 2020.
Expanded Unemployment Benefits
The CARES Act expands unemployment insurance benefits to include $600 per week in addition to the normal unemployment payments for up to 4 months. This legislation also provides federal funding to provide unemployment insurance benefits to people who are not normally eligible for unemployment payments, such as self-employed, independent contractors, gig economy workers and those with a limited work history. Additionally, through December 31, 2020 the federal government will provide funding for an additional 13 weeks of unemployment benefits after the state unemployment benefits run out.
Non-Itemized Charitable Contribution Deduction
For many taxpayers the 2018 tax law changes that increased the standard deduction eliminated the tax benefit of itemized deductions, such as charitable donations. The CARES Act has established a $300 “above-the-line” deduction for taxpayers that use the standard deduction. This allows taxpayers that normally do not receive a tax benefit from making a cash donation to a charitable organization the ability to deduct up to $300 against their taxable income. This special above-the-line deduction is only for 2020 and is limited to donations of cash to a qualified charity.
Charitable Cash Donations AGI Limit Eliminated
The CARES Act also expands the deductibility of cash charitable donations for taxpayers that itemize their tax deductions. Under the current tax code the deduction for cash contributions to charities is limited to 60% of a taxpayer’s adjusted gross income (AGI). For 2020, taxpayers can deduct gifts of cash to both public charities and private foundations up to 100% of their AGI. This means that taxpayers could potentially completely eliminate their taxable income with cash gifts to charity or private foundations. Unfortunately this provision does not apply to Donor Advised Funds (DAFs). Any deductions for charitable donations that cannot be taken this year can be carried forward for up to five years.
10% Early Withdrawal Penalty Waived
Taxpayers typically face a 10% early withdrawal penalty is funds are withdrawn from a retirement account before the age of 59½. The CARES Act waives the early withdrawal penalty for up to $100,000 withdrawn from a retirement account for virus-related challenges. The funds withdrawn will still be taxable as ordinary income and will be taxable over the next three years or the taxpayer has the ability to contribute the withdrawn funds back into their retirement account within the three years without affecting the retirement account contribution limits. This provision includes IRAs, 401(k)sand other retirement accounts.
2020 Required Minimum Distribution (RMD) Requirement Suspended
For taxpayers who turned 70½ before December 31, 2019 or will turn 72 in 2020, the requirement to take out a required minimum distribution from their retirement accounts (IRAs and 401(k)s) is waived for the 2020 calendar year. Taxpayers can skip taking a distribution while the financial markets are down and resume their annual RMD requirement in 2021.
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About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.